This is from Alan in the comments about the "The Fed, Inflation, and a Solution..." post. I think it's a good question, so I'll leave it up for all. Alan, my thoughts are in the comments. The question:
What makes a house an appreciable asset? Why would a house be worth more today, than when it was brand spankin' new?
Apart from factors that are largely outside of any one person's control, i.e. you got lucky (or were clear enough in your foresight) that there was a significant amount of development around your house makes the area more attractive than when you bought it, all I can come up with would be that damn inflation...
Alan, here's my shot at an answer for you.
ReplyDeleteInflation is certainly a part of it, especially from a long-term perspective. I'm sure what it cost to build a new house 30 years ago would never get you the same new house today.
The last 10 years though I think is a little less linked only to inflation. I know for a fact that the people that sold me my house paid much less for it than I did, so they made out like bandits. But even knowing their cost, I was willing to pay the price they were asking because it was a reasonable price based on the comparable houses I had seen in the market. If I didn’t buy at that price, someone else would have.
I could get a “cheap” loan at the time, and since I gotta have a place to sleep it made more financial sense to buy a house if I could afford it rather than pay rent. Paying rent does not leave you with anything in the end. Buying a house leaves you with something that will (hopefully) at least equal what you paid for it.
Prices went up so much in our recent past because it was a "bubble." House prices went up only because house prices were going up (if that makes sense). As long as you bought and sold you were coming out ahead unless you were still holding on to a big mortgage at the end. It finally stopped when people couldn't pay their outrageous mortgages anymore and prices crashed.
Back to my situation, when we had to move in 2009 (after the crash) we would have been very lucky to sell our house and get what we had put into it back. Our costs were not only the purchase price, but also the work we did on the kitchen, bathroom, yard, and horseshoe pits. That’s why we decided to rent it out until the market comes back.
But, my fear for me is that house prices will not come back to those recent high levels. Maybe people will have wised up and feel too afraid of what just happened to get in over their heads with a mortgage they can’t afford. Or, and much more likely, banks have learned their lesson and will never allow people to borrow in such a ridiculous way like they were before 2007-ish.
I think the answer to this is much simpler. The housing market, like all markets, is based on supply and demand. Land, the driver behind houses, is a finite resource. Supply to some extent will be limited especially in certain areas (location, location, location arguement and why buying in NY is impossible for most). So yes inflation helps insulate you from losing money on the interest rate until you pay it off, which I think is a bad investment by the way but will help you sleep at night) but the real investment to me is based on buying an item that is in limited supply and holding to see what the demand will be in the future. People still like owning land and having kids so I like my chances in the long run.
ReplyDeleteThanks for the comments, guys. I was hoping to tie this question into your first suggestion, Ryan- using available cash to buy houses. I completely understand the idea of buying vs. renting... that doesn't apply when the topic is buying multiple houses as investments. The spirit of my question (and the concern behind it) was actually phrased very eloquently when you said "House prices went up only because house prices were going up."
ReplyDeleteThe part that I didn't consider was Jesse's point about the scarcity of the land itself. The 2 cities I have most recently inhabited illustrate this point perfectly. New York City is geographically constrained, so the land is very scarce and therefore very expensive. Houston real estate, on the other hand, is very affordable. With a quarter of the population of NYC managing to stuff themselves into twice the area, the land is obviously less scarce, and predictably less expensive.