Phil's
Personal Finance Tip of the Day:
Housing looks good, but check the calculator
By Jack Hough/MarketWatch
U.S. home prices rose in June from a year earlier for the first time in nearly two years, according to data released Tuesday. Is this the start of a bounce back for housing, or is it just a cheerful blip in the numbers before prices resume their fall?
Bet on neither. Instead, assume for planning purposes that U.S. house prices will rise by an average of 2.3% a year over the next decade. Here’s why: House prices tend to track the rate of inflation over long time periods. After all, inflation is the gradual rise in the cost of ordinary goods and services, and houses are boxes made from ordinary goods and services—lumber, copper, carpentry and so on.
If house prices either outpaced or lagged behind the inflation rate over long time periods, houses would become either infinitely unaffordable or cheap.
Of course, that doesn’t happen. Booms and busts tend to offset each other, leaving house prices in sync with other prices. That’s what has happened over the past dozen years or so.
Predicting the inflation rate is difficult, but the work is already done. That’s because of a special kind of bond called Treasury inflation-protected securities, or TIPS. These give investors both a stated interest rate and an ongoing principal adjustment based on the Consumer Price Index, the main measure of inflation. Regular Treasurys give investors only the stated yield.
To read the entire article from MarketWatch:
http://www.marketwatch.com/story/housing-looks-good-but-check-the-calculator-2012-08-28
Proverbs 12:11 — He who works his land will have abundant food, but he who chases fantasies lacks judgment.
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