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samz
Joined: 19 Feb 2008
Posts: 102
Location: Medford, MA
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 Posted: Tue Feb 19, 2008 3:11 pm GMT Post subject: NAR commercial: House prices double every 10 years |
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Hello all,
I just saw a commercial from the National Association of Realtors claiming that "on average" house prices double every 10 years. They provide no other information about how this claim was determined. The message was pretty clear, though: houses are a great investment.
Playing around with a savings calculator, I figured that in order to double in value over 10 years an asset must increase in value by 7% annually. If you take into account inflation it must increase by something like 10% annually.
My guess is that this "average" does not take into account inflation and is highly biased by the years 1999-2005. It's probably not technically lying, but it seems pretty close.
-Sam |
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Shoeshine.
Guest
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| Posted: Wed Feb 20, 2008 12:41 am GMT Post subject: |
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House Prices historically rise 1/2 to 1% above the rate of inflation !
That's it
Type something like that statement into Google
and you will come up with numerous articles
stating the same thing 
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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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| Posted: Wed Feb 20, 2008 6:18 pm GMT Post subject: |
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Sam,
Is this the ad? The TV clip is a little over halfway down the page:
http://www.realtor.org/pac.nsf/pages/HomeValues
There is a little more information on how they arrived at their numbers at the top of the page:
| Quote: |
Over the past 30 years, the median price of existing homes has increased an average of more than 6 percent every year, and home values nearly double every 10 years, according to historical data from NAR’s existing home-sales series. Thanks to the power of leverage, a homeowner’s return on investment is even more impressive over time.
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I find it surprising that they state in the present tense that "home values nearly double every 10 years." Perhaps that is what happened over the last thirty years (though even that is a shaky claim), but they are stating that this is what happens typically and implying that it should be expected in the future. Practically all legitimate investment vehicles carry the disclaimer that "past performance does not indicate future results," and I wonder why this ad flirts with saying the opposite.
Using the past 30 years as a guide could also be improved upon. Why not go back further? 30 years only represents the time period for a single mortgage, and it would be better to have more non-overlapping time periods. Professor Shiller's famous chart goes back to 1890 and indicates that typical appreciation has been less than 1% above inflation, as Shoeshine mentioned, and that even that modest increase was largely caused by the enormous spike in prices during the first half of this decade. Given that 6-7% appreciation is atypical from a deeper historical view and that prices are now higher than the norm due to the very recent surge, I'm not sure why they expect the surge to continue rather than to correct via lower than normal appreciation.
You may also be interested in a similar discussion of some NAR/MAR ads from last fall which ran on the radio, TV, and in print:
http://www.bostonbubble.com/forums/viewtopic.php?t=514
- admin |
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samz
Joined: 19 Feb 2008
Posts: 102
Location: Medford, MA
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| Posted: Wed Feb 20, 2008 10:33 pm GMT Post subject: |
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Hi,
Yes, that's the ad campaign I saw. I had the same reaction, but I think you put it more crisply -- it seems *very* unlikely in this case that past returns will predict future performance.
This part very interesting as well:
| Quote: | | For example, over 10 years, a $10,000 investment in the stock market at a normal 10 percent market rate of return would yield $23,600. The same investment as a down payment on a $200,000 home at a normal appreciation rate of 5 percent would return nearly 5 times the stock market return, at $110,300. |
Here they describe the classic concept of leverage -- borrowing money to amplify gains. Under the NAR logic what I should do is borrow $200K and invest in the stock market. Of course they don't mention the downside of leverage -- amplifying losses. Consider the stupifying losses in hedge funds recently.
I find the whole campaign extremely distasteful, if not downright dishonest.
-Sam |
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steverino
Guest
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| Posted: Thu Feb 21, 2008 1:35 am GMT Post subject: |
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| samz wrote: |
I find the whole campaign extremely distasteful, if not downright dishonest.
-Sam |
If that were a mutual fund ad, somebody would be getting real cozy with Large Marge on Cellblock 18 right now.
I seriously suggest someone contact the Mass Attorney General's office and make a complaint re: misleading advertising. This is just the crew to do it. |
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john p
Joined: 10 Mar 2006
Posts: 1820
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