The Past Does Not Equal The Future

In many of our real estate investor classes I remind our buy and hold real estate investors, Nomads™ and house hackers that what has happened in the past in a real estate market is no guarantee of what will happen in the future in that real estate market.

Just because a market has seen strong appreciation historically, does NOT mean it will continue to see strong appreciation.
Just because a market has not seen strong appreciation historically, does NOT mean it will continue to perform poorly.
Just because a market has seen strong cash flow historically, does NOT mean it will continue to see strong cash flow.
Just because a market has been cash flow weak historically, does NOT mean it will continue to see low cash flow.

Inflation Example

Here’s one example of what I mean using US inflation data.

Looking at the historical US inflation data from 1914 through 1920, you might believe that the normal range of inflation is between .92% (the value in 1915) and 17.80% (the value in 1917).

You might even think: the average inflation rate moving forward might be 10.88%.

But, here’s what inflation was over the next 10 years: 1921 through 1930.

So, your expectation of seeing between .92% and 17.80% or an average of 10.88% in the next decade proved to incorrect.

We saw a range of -10.85% to a high of 2.43% with an average of -1.71%.

I won’t bore you by doing this with each decade. Instead I’ll cut to the chase and show you historically what the inflation rate range has been in the US for over 100 years of historical data.

The high appears to be 17.80% in 1917 and a low of -10.85% in 1921.

The average annual inflation rate from 1914 to 2019 in the United States has been 3.23%. The median (or middle most annual inflation rate) was 2.59%. The geometric mean was 3.12%.

That’s why I personally use 3% for inflation when using the Real Estate Financial Planner™ software even though the US states their target inflation rate is 2% per year. This was officially stated on January 25, 2012. Of course, you could model it with both 2% and 3% with the software.

How has the fed done in maintaining their stated 2% inflation rate? Here’s what inflation has been from 2012 to 2019.

Despite their stated goal of 2%, they’ve averaged 1.61% per year. It ranged from .12% to as high as 2.44%.

These are smart folks trying their best to hit the 2% goal. The fact that they were unable to hit it is evidence in how hard it is to consistently manipulate the markets.

Appreciation and Rent Appreciation Rates

Recently, I showed a number of charts analyzing the compounding annual growth rate (CAGR) of home prices and rent prices in the top 552 real estate markets.

The source used to determine the appreciation and rent appreciation rates was the US census data from 2010 to 2018.

But be super careful using the historical appreciation and rent appreciation to predict what those markets will do in the future.

Specifically, don’t assume that because a market has seen great price and rent appreciation that the trend will continue. See the inflation charts above for a historical perspective of this.

For example, the following chart are the top 5 cities in Colorado for home price appreciation between 2010 and 2018.

I would not necessarily invest in these because they’ve historically done well. They may continue to do well or they may have run their course and will not under-perform compared to other markets. You can try to use demographic data to predict the future, but predicting the future accurately and correctly is a difficult game.

Similarly, the following chart shows the top 5 cities in Colorado for rent price appreciation. Again, this from between 2010 and 2018. And, again, the same warning applies. You can just invest in the top historical performing market and guarantee that you’re going to see the same growth rate.