Houses are a risky retirement bet for at least 20 years. Assuming home values drop by 35% over the next 6 years, and then rise with inflation for 10 years, you haven’t made anything. It may take 20 years to get back to today’s values.
For those prices to be reached again without having a housing bubble, wages would have to double or triple by then also. If prices come back to today’s values without higher wages, we have another asset bubble. The median priced home should be 3.5 times the median wage. At that ratio, you can put down 20% and get a 30 year fixed loan with a mortgage that takes less than 28% of your income.
If housing prices and wages double, everything will cost more. We are going back to the days when you 1) buy a house you can afford, pay off the principal, and live in a free and clear home, or 2) are in a house whose mortgage you cannot afford after retirement so you must sell and downsize.
Anyone counting on the equity in their homes in 10 years is taking a huge risk. At that time, home values are likely just picking up again, and at the historic rate of 3-4% annual appreciation, it will take many years to get back to today’s lofty prices.
As the UCLA Anderson Forecast explains (and this does hold up to scrutiny), the rate of return on a house is 0%, after factoring in inflation. It gives you a place to live. Historically, housing rises with inflation, and equity is earned by PAYING OFF THE PRINCIPAL. People have to STOP thinking of housing as a cash machine.
Let’s all get the idea of housing as a cash machine out of our heads. This was a one-in-a-lifetime event, unless the Fed creates another real estate bubble.