Economics on the small scale

Thursday, April 20, 2006

Housing is not an investment that appreciates



Want to know the reasonable upper limit of the value of a house ?
Figure out who is likely to buy such a house to actually live in it and figure out the maximum mortgage payment they can afford to pay, then figure out how much principal that currently buys them.

The big factors are going to be the likely buyer's income and current mortgage interest rates.

Now given that real median family income has been declining somewhat in the past few years, Income gains have not pushing up housing prices except perhaps at the high end.

That means that the housing appreciation of the past few years has largely been due to lower interest rates, and consumers pushing the envelope of what they can afford.
The former is coming to an end, and will likely take a bite from the latter.

Housing is an important investment to own, but it's one where -absent a housing bubble- you'll be lucky if you break even when you sell, if you take into account inflation.

That doesn't mean you can't get lucky. But you're better off planning for disaster than planning on being lucky.

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