The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 61

U.S. Housing Prices

At least I know my house has been a good deal—right? Maybe. Few folks understand that most of their gain came from borrowing money, not price appreciation. This chart (which uses numbers from the U.S. Department of Commerce) shows the average price of an American home from 1885 through 1980. On first glance, it looks great. The index rose from 60 in 1935 to 1,000 in 1980. But looks are deceiving, so here's what you should learn always to do. Get your financial calculator and compute the compound annual increase involved in that rise since 1935. Believe it or not, that seemingly huge move from 60 to 1,000 is a compound return of less than 6.5 percent per year—hardly the greatest imaginable. You could have done much better on the New York Stock Exchange (Chart 12).

Perhaps you recall making much more than that with your home? Maybe you forgot that you only put up about 20 percent to buy your home and borrowed the rest via your mortgage? So, in your mind you didn't pay 60 in 1935, you paid 12. The important point to remember, which a generation learned in the 1930s and has been largely forgotten ever since, is that mortgages must be paid off. They provide potential for greater returns, but only by providing comparably greater risks. If for any reason the value of your home falls, as home prices did between 1925 and 1935, you can get stuck with interest payments and a big fat loss.

Imagine buying a house in 1925, which our index says cost about 100. You ...