Real estate investment scam

I recall nearly a decade ago hearing homeowners note with pride how much the value of their homes had risen. I found it very discouraging. How was I ever to buy a home with prices so high and rising? Would I ever escape rent slavery?

In those circumstances, it seemed rational to buy a home and start building equity in the rising market. Renting appeared to be plain stupid--simply throwing money away. If you wanted to get ahead in the world, you absolutely had to get into the market as soon as possible.

But it was baloney. It was a bubble that burst soon enough, bringing misery to millions of home owners. Now people are living in negative equity slavery, where they are stuck with a house worth substantially less than the mortgage they are paying on it.

See, it turns out that real estate generally appreciates at approximately the rate of inflation. Look at the Case-Shiller home price index from 1890 to present.

This inflation-adjusted index shows a couple interesting things:

• As noted in the index's Wikipedia article, there has never been a long-term upward trend in real estate prices. The market rises and falls, but has always gravitated back to 1890 prices.
• The height of the most recent boom was unprecedented. But like all past booms, it was followed by a bust that returned prices near 1890 levels.

Many people profited handsomely if they bought low and sold high. But this is a zero-sum casino game. If I bought a home for $100 in 1999 and sold it for $180,000 in 2005, I made an $80,000 profit. But when the market crashed, the value of the property returned to around $100,000--a loss of $80,000 to the buyer.

Even with a rise in a property's inflation-adjusted value, the investment is not necessarily profitable. Consider this scenario: I bought a house for $100,000 in 1984 and sold it in 2013 for $300,000. Wow, a $200,000 profit! But not really. $300,000 is worth about $134,000 in 1984 dollars. That's a profit of $34,000 in 1984 dollars, right? No, that is an incomplete picture of the investment. $100,000 is the purchase price, but certainly not the entire amount invested in the property. The taxes, mortgage interest, and maintenance costs incurred over the 29 years that I owned the home were substantial. Depending on the actual tax and interest rates, it isn't uncommon for these costs to equal or exceed the purchase price. Including those costs shows that a nominal profit can easily be an actual loss.

Of course there are benefits to owning a home. It is wonderful to put down roots and have control over your living space.  But the most cited benefit, that it is a good investment, is a scam.