Saturday, November 14, 2009

Housing as the Great Investment

I am always surprised to see the enthusiasm people exhibit when they hear that housing prices are rising, to me this is 100% bad news.
I hear remarks all the time like,

Housing prices are up 12% over last year, I am going to make a killing on this house when I sell in a year or two!
Let's say you buy a house as a primary residence at $300K and are fortunate enough to see a 12% compound increase in the price of the house for 3 years in a row. So that makes the value of your house now an impressive $421K- wow $121K nice return, well worth celebration.

But wait, are you going to live in a paper box now? The average North American's needs/desires grow instead of shrinking, very few will voluntarily downsize in the purchase of their next home. So at the end of the three years shopping for a bigger home is the next logical step.

Most consumers have bought the $300K house not because they believe it will always meet their needs, but more because they couldn't raise that extra $100K to afford that $400K house. So what happened to that $400K dream house over this same period? Well now that $400K house has risen at the same impressive 12% and is up for sale for $562K. Unfortunately this leads to a rather undesirable circumstance; while you were $100K off of your dream home three years ago, you are now $140K off today- and this doesn't take into account the 3% or more you will end up paying a real estate agent and the monies required to pay the government and lawyers offices.
Now for the few out there that are multi home owners, or who plan to downsize this isn't a problem, sell a home, bank the difference, and invest in another small home. For the majority of people though housing price increases are just bad news. The only one that really wins at the end of the day is the bank; as you will now require a larger loan to finance your $562K dream house.

I have painted a very specific circumstance here, but I feel that it is one that represents the average North American. They live in a house that is their primary residence, and they are not currently living in the house of their dreams. For this individual an increase in housing prices is hardly worth celebrating.

I would recommend instead hoping that prices get frozen, it benefits everyone except those at the top of the chain and those with multiple homes. It makes home entry points fixed and allows a house to function as an advanced saving mechanism. But that is just what I think, what do you think?

This article was written by buyingvalue. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

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