Want a risk-free California home purchase? Own it for 12 years.
If buying a home "works out over time" – how long must you wait so a purchase isn't a money-loser?
“Numerology” tries to find reality within various measurements of economic and real estate trends.
Buzz: If buying a home “works out over time” – how long must you wait so a purchase isn’t a money-loser?
Source: My trusty spreadsheet was filled with Case-Shiller home-price indexes for Los Angeles-Orange County, San Francisco, and San Diego dating to 1987 – with an average of this trio’s performance used as a benchmark for California housing values. Case-Shiller’s US index was tracked as well.
Fuzzy math: History says owning a home for at least 12 years yielded loss-free results.
Top Line
The assumption was “works out over time” translates to no price declines in a given period. Let me start by using one-year ownership as an example.
California prices fell in 30% of the 12-month periods since 1987. Now owning one year did produce an average 6% gain – ranging from a 28% loss in 2008 to a 28% gain in 2004.
And, by the way, US homes were down in just 18% of 1-year periods.
So clearly one year isn’t enough of an ownership length to be a “risk-free” purchase.
Nitty Gritty
I won’t bore you with every year’s worth of results, so I’ll just fast-forward to what happened with four years of ownership.
Since 1987, owning a California home for 48 months had 27% losing periods. Not much of an improvement.
The average 4-year result was a 27% gain.– ranging from a 38% drop through 2009 to a 94% surge through 2006. US homes had 13% down 4-year periods.
Next, look at 8-year ownership. History shows 21% losing periods but an average gain of 61% – ranging from a 24% tumble through 2012 to a 214% upswing through 2005. US homes had 14% down 8-year periods.
Even owning for a decade wasn’t risk-free since 1987. Over 10 years, there were still 9% losers – though the average result was an 80% gain. Worst was down 7% through 2016. Best was up 250% through 2006. US homes had 5% down 10-year periods.
A Californian had to own for 12 years to have no declining periods since 1987. The average gain was 94% – ranging from up 6% through 2017 to up 240% through 2006. US homes, too, had no down 12-year periods.
Bottom line
One could argue that the future won’t look like the past 36 years that featured a horrific market crash of the 2000s and housing malaise that ran for much of the 1990s. The purported shortage of housing might limit the odds of such home-price calamities.
Conversely, the next 35 years will unlikely see home-price drivers such as stunning California growth – economically or population-wise – or mortgage rates going from double-digits to under 3%.
Yes, past performance is no guarantee of future returns. But those who ignore history often learn tough lessons.
PS: When I used the California Association of Realtors’ median home price, dating to 1990, for the same math it took 14 years for risk-free ownership. Average gain was 90% ranging from a 4% gain through 2020 to a 221% surge through 2023.
Jonathan Lansner is business columnist for the Southern California News Group. He can be reached at jlansner@scng.com