Quantcast

Numbers Game Understates Realty Appreciation

With so much attention given to stock market ups and downs, pricing changes in real estate are sometimes overlooked. No less important, real estate appreciation is often understated and therefore the investment value of property ownership is played down.

The Office of Federal Housing Enterprise Oversight is a little-known government entity which oversees both Fannie Mae and Freddie Mac. Those two organizations represent much of the trillion-dollar “secondary” market, which means they buy loans from local lenders. The local lenders get cash from the sale of their mortgages, use the money they get to make more loans to local borrowers, and then the process repeats itself.

A study recently released by OFHEO shows that during the past five years home values nationwide have appreciated 19.2 percent — higher in some areas, less in others. This appreciation compares with a 12-percent cumulative inflation rate over the same five-year period, which means that houses have typically appreciated faster than the rate of inflation. Appreciation above the rate of inflation is good news because it represents an increase in real wealth.

However, it must be said that 19 percent sure doesn’t seem like much when compared with some of the big winners in the stock market. Even accounting for recent ups and downs, any number of securities have had double- and triple-digit price increases in the past five years.

But maybe we’re looking at the wrong figures.

Let’s say a home was built five years and sold for $100,000. Today it’s worth $119,200 — a 19.2 percent increase.


The catch is that our percentage increase is based on the purchase price. In actuality, typical buyers did not pay $100,000 in cash for the property. They may well have bought with 5, 10, 15, or 20 percent down. And if they used the VA loan program, perhaps they bought with nothing down.

Let’s say that monthly mortgage, tax, and insurance costs are the equivalent of an economic “rent” — after all, people have to live somewhere and most choose to live indoors. But no one lives indoors for free regardless of whether the property is mortgaged, rented, or owned free and clear. Everyone “pays” rent, mortgage expenses, or the interest and opportunities lost when a mortgage is paid off and the money can no longer be used for alternative investment purposes.

So, if something was bought for $5,000 and is now worth $24,200 ($5,000 plus 19.2 percent appreciation on $100,000), the value of our investment has risen 37 percent annually.

  • With 10 percent down, annual appreciation is 23.9 percent per year.
  • With 15 percent down, the property value has risen 17.9 percent annually.
  • At 20 percent down, the profit is 14 percent per year.

Not all properties appreciate at the national level, some appreciate more and some less, and some properties lose value — real estate is a commodity with the potential for prices to move both up and down.

It’s great fun to play with numbers, but the bottom line is this: For most people their biggest investment is where they live — and many have done better than they think and with a lot less risk than some of the high flyers on Wall Street.

————————
Published originally by Realty Times on November 3, 1998 and posted with permission.

Technorati Tags: , , , ,

Posted in: Library

Post a Comment

*