Real home prices are going to fall, and it’s going to cause a massive negative wealth effect. Real home prices are much more impactful for the wealth effect compared to nominal home prices. Many people invest in real estate as an asset to beat inflation. If inflation is 10% and your home goes up 15%, you beat inflation by 5%, and thus, you are 5% wealthier in real terms. If inflation is 10% and your home goes up 5%, you lost 5% of your purchasing power in an asset that is supposed to give you protection, and you are actually worse off.
Also, real home prices are the best measure of the true performance of real estate as an asset class across long periods of time. You can’t compare home prices today to those in the 1970s without looking at them in real or inflation-adjusted terms.
This chart shows real home prices since the 1970s, and you can see that real home prices have declined several times, mainly around the recessionary periods…
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