I’ve been bothered for some time about the commonly held belief that increasing home values are a good thing. This irks me as much as when I hear someone say that the dollar needs to be stronger. So I’m going to write an very very brief and incomplete explanation regarding why increasing home prices only benefit investors and NOT most Americans who only own one home.
Just to clarify before I begin - increasing home prices “create” money through our banking system when people take out home equity loans. If you think this is a good thing, then fine. But as we now see, many people who bought when home prices were low now owe way more on their homes then they are worth due to refinancing. And this rant only applies to general “across the board” increases in home values as we saw over the last decade or so. It does not apply to regional appreciation due to specific increases in demand in one neighborhood or city.
Most people generally get a warm, fuzzy feeling when they find that their house’s value increased 50% over the last several years. This gut instinct is generated by our many experiences in the past when we owned something that we could easily sell at a profit and walk away with money in our pocket. And if you are a real estate investor, when a property you own appreciates, this is exactly what you can do (or charge a higher rent, generally). But what about the average homeowner? The average homeowner cannot just sell their home and walk away – they must have a place to stay after selling their home. Sure, one could move in with a friend or relative. But most people don’t do this. They “upgrade.” Using the difference in what they owe on their home and what it is worth to move into a bigger and better house. How are they worse off?
A homeowner is looking at houses in the year 2010. They find one that they’d like to move into, that costs $100,000 (a nice round number for illustrative purposes). Little does this homeowner know that the house they really want to move into is now listed for $200,000 – but the homeowner for whatever reason doesn’t move into this one. Five years later, housing prices have doubled! Yipee! So now the homeowner’s house is worth $200,000 and they have roughly $107,000 in equity. They find that perfect house – the one they really want, which is now worth $400,000. Minus the $100,000 in extra equity (forget the extra $7,000, we’ll say they went to closing costs) and the home now costs this homeowner $300,000, or $100,000 more than it would have 5 years ago. By originally buying the “upgrade” house this homeowner would have saved themselves roughly (very roughly) $150,000, assuming a 30 year conventional loan (the extra $100,000 and the extra interest).
If that homeowner “downgrades,” then they actually come out ahead. But most homeowners don’t move into a “worse” neighborhood when property values move up.
The moral of the story? Buy the house you really want. And hope home prices stay low. Your new neighbors will have more money to spend, hopefully aiding you in keeping your job.
Slapbacks