Why do people want houses to appreciate in value when they own?

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[quote author="25w100k+" date=1218081675]wtf? How doyou know it takes effort? Maybe they net 40k a month. The last two posts were absoltuely useless unless we know their income.</blockquote>


My young friend, I'd have to disagree. Especially in this area, you are bombarded with messages to buy, one up, and must have.... I catch SO much crap for owning a little economy car, for not "dressing the part" or owning a big house. I choose to do this because i'd rather keep my eye on the prize of retiring early and really not having to worry about being employed (insured yes, employed, not so much).



You can save 2-3k a month easily, its just take a little trimming here and there and of course your prioritization.



Good luck

-bix



p.s. i've seen my wife and I easily save 3-5k a month without any lifestyle change. Of course the apts add just a few dollars to the savings pot.
 
There are a few reasons to want your home to appreciate in value.



1) You plan on or want the leverage of being able to withdraw equity through refinancing or adding liens

2) You plan on selling and downsizing or moving to a different location with different market values

3) You already withdrew your equity and don't want to end up with negative equity in case you need to refinance

4) You just enjoy the psychological pleasure in knowing you "made money" off your home or that you live in a home of a certain "value"



There are two main reasons to want your home to depreciate.



5) You plan on selling and renting or buying another home of higher value in the same market, as long as you can afford the loss of equity

6) To decrease your property taxes



IMO, the first two are very powerful reasons to want a reasonable amount of appreciation in your home and probably what most homeowners are hoping for or expecting. Reason 3 is responsible for much of the pain of this current bubble. If you are in the immediate market for a "move-up" home, like I am, then reason 5 is most at play and I wouldn't mind seeing another 10-20% drop in values. :)
 
[quote author="Astute Observer" date=1218117284]I don't know exactly how much they make, but the lady of the house has a PhD and work at a tech shop, while the man is a low level manager at a telecomm place. I figure they must bring home six figures each?!?! Probably low six figures?



They are frugal in many ways. No cable, and the most expensive car is a 5 yrs old Honda Odysses. They brought their place in San Diego back in 1998, I think, and their Temecula place back in 2003, so they were lucky in the sense that they did not buy at the peak. They put all their money into the mortgage, however, and was not able to pay their income tax this year without help from relatives. I think the tax bill is more than the withholding amount by about $10k or so, and I did not bother to ask them HTH did they get into that situation. Again, some very smart people are not very good with money and finance. But to their credit, they were able to repay the interest-free loan (nice to have Asian relatives, sometimes) to their relatives within 45 days without eating ramen noodle everyday of the week.



They houses are pretty humble, with very few fancy furnitures. I think their 401k is worth about half a million each.</blockquote>


Just like I said earlier frugal Asian families are the ones with cash. We are envious of them because they can buy a house and qualify easily but on the contrary they are envious of us because we live a luxurious lifestyle.
 
[quote author="Astute Observer" date=1218199783]To each of their own, I guess.



But when everything is set and done, at least some of us have really lived. We can't take much with us, since there is not much room in the urn or coffin.</blockquote>


When all is said and done, more is said than is done.
 
[quote author="25w100k+" date=1218001205]Ok I've been here for a while but haven't figured it out completely.... assuming that renting isn't an option, or that with the tax benefits, you save more money owning vs renting....why does anyone want real estate to appreciate?

</blockquote>


To make money with investment properties.



Also, many people are bad at saving, so they depend on their primary residence as their retirement savings. Unless if the home prices rise with inflation, their nest egg will be quite small 30 years from now.



One of my buddy's parents bought their home new in Cerritos for $20k when they got married. That house is now worth probably $500k? They can use it to fund their retirement in a cheaper part of the world, and live in a big home with servants. A live-in maid cost about $100 USD/month in SE Asia.
 
"...5) You plan on selling and renting or buying another home of higher value in the same market, as long as you can afford the loss of equity

6) To decrease your property taxes..."



That was a good breakdown Irvine Allergy Dr. Considering we'd settled on paying a certain amount when we bought, the decrease in property taxes is nice. If you spent 2.5x your income or less on a bubble house, you still have the flexibility to save outside the mortgage and even pay down the mortgage to place yourself in a good position over the next few years to move-up.
 
It is NOT why people want their home to appreciate in value. It is a FACT that home did appreciate in value over long term.



Look at the graph below.



<img src="http://teamworkhomes.com/crm/stat/hpi_ca08q1.jpg" alt="" />



My neighbor Steve, 84 years old WWII veteran, bought his 3 bed/2bath brand new home in 1967 for $24,950; now on Zillow shows $551,000 value. If you do the math (551,000/24950)^(1/(2008-1967))-1 = 7.84% average annual appreciation rate.



http://www.zillow.com/HomeDetails.htm?zprop=25491354



Compared this 7.84% with long-term inflation rate 4.1% (ballpark #), Steve enjoyed a risk premium of 3.74%



The reasons are: 1) The cost of building a replacement home is lock-stepped with inflation rate. 2) Higher demand vs limited housing supply pushed the home price higher and higher over long term.



Now Steve is a very happy and healthy old man, because he has a roof over his head, which he otherwise would not have been able to afford the same house today. He is paying $954 in property tax per year. If he wishes, he could reverse-mortgage his house like another neighbor Bill did to get monthly income to supplement his social security income.



Of course, not all homeowners are as blessed as Steve. A lot of them were unfortunate to lose their homes during the bust years. But prudent homeowners with realistic expectation can achieve the same success as Steve and many other homeowners.
 
While the move up house is cheaper, how exactly do you sell your current house if it fell 50% since you bought? Basically, you would have to bring cash to the lender to settle your mortgage and then bring more cash for a downpayment. Even in your 20% falling example, the seller would need to find new downpayment money and pay the 6% closing cost of the current house.
 
[quote author="rkp" date=1218716634]While the move up house is cheaper, how exactly do you sell your current house if it fell 50% since you bought? Basically, you would have to bring cash to the lender to settle your mortgage and then bring more cash for a downpayment. Even in your 20% falling example, the seller would need to find new downpayment money and pay the 6% closing cost of the current house.</blockquote>


Only a small fraction of the market has fallen 50%, nearly all of them were purchased at the peak of the bubble. Many homeowners have quite a bit of equity in their property still and a 20% fall is a relatively small dent. However if the home you are looking at is two or three times as expensive, that 20% drop is significantly higher. Finally, not all of us depend entirely on home equity alone to provide for a downpayment. :)
 
25w100k+,



I think that the occurrence of appreciation in the real estate market is complex and driven by many variables.



Newspapers during the bubble would report that housing has appreciated "20% in one year", but what they're actually saying is that the median purchase price, or the "middle number" of all purchase prices if ordered lowest to highest, of all county properties including condos, single family residences, both previously owned and new, have risen 20% in one year.



Have all condos risen 20% in one year? Have all first-time-buyer run-down 30-year-old Irvine condos risen 20% in one year? Or have high-end Spectrum condos risen 20% in one year?



What exactly causes appreciation? Lets take an example: the sudden loosening of lending standards by the FHA for first-time buyers. Perhaps a new manufacturing plant opened up and created thousands of jobs for previously unemployed workers. Both scenarios would increase the qualified buyer pool of low end condos and starter single-family-residences (SFRs) and thus increase the demand of such properties. Assuming supply is fixed, the price-point moves higher and results in appreciation.



Since the Sellers of these condos and SFRs would have to move somewhere else, and they most certainly would not want to pay capital gains on their newfound financial windfall, the 1031 exchange process creates a domino effect in the move-up market one tier above the starter home market. Since the exchange period is 45 days this domino effect would be felt quickly.



Now we come to address the question of appreciation: is appreciation due to the exchange of property linear or proportional?



In your example, you assume that appreciation is proportional.



If appreciation is proportional then like bigmoneysalsa (great name btw lol) said "If you are a move up buyer, it?s a no-brainer that you should want prices to decline", which makes sense because even though your $500,000 condo appreciated 20% and you 1031 exchange your $100,000 in appreciation (to make this simple I am not counting selling and closing costs) into that $1,000,000 house, your mortgage jumps 50% from $400,000 to $800,000 and your mortgage payment goes from $2,398.20 @ 6% for a 30 year fixed to $4,796.40, or 50% as well.



Unless the Seller of the $400,000 condo has had a significant rise in income the Seller will want an identical mortgage payment and the only way to do this is through linear appreciation: take that 20% gain, convert it into its monetary equity equivalent and you've found your move-up price. In this example, your move-up price would be $400,000 + $100,000 (previous down payment) + $100,000 (appreciation) = $600,000.



Appreciation, I would like to think, is linear in a rational market where people actually care about paying off their mortgage.



Perhaps Irvine Renter can amend his "Appreciation-is-dead" Analysis piece to include the factors that cause the phenomenon.
 
In regards to the tangent this thread has taken about appreciation vs. saving, don't forget the tax implications...



If you are making enough to afford to save 2-3K per month then you're probably making <strong>well</strong> into six figures and fall into an extremely high tax bracket. Last time I checked there weren't a whole lot of tax deductions for renters. Saving that 2-3K while in the six figures and paying the high cost of living here in Irvine ($1600 per month for a 1-bedroom) means you will be sacrificing many of the things that your co-workers enjoy like eating out, disregarding produce prices, not worrying about leaving the lights on, realizing that your $5 blockbuster rental, $4.50 golden spoon ice cream and your $3.50 crapachino is a rip off, etc.



The government discourages saving through income for a down payment and encourages the building of wealth through appreciation a la 1031 exchange.



<em>1031 Exchange: IRC section 121 states that if a principal residence is owned and occupied by the taxpayer for two out of the last five years then the first $250K of gain ($500K for married couple) is income tax excluded.

</em>



So if you're making money as a renter and not spending it (no write offs) the government deserves a big piece right? Never mind the fact that you're eating beans to save that 2-3K while the homeowner next door with the exact same salary goes to is eating filet mignot every weekend. But less I diverge further, our tax system is set up on one's ability to pay, not to pay what is ?fair? (everyone disagrees what ?fair? is anyways).



Alas! I do not intend to drive this thread any further from its course and I diverge to my most recent my point regarding saving a down payment. One is presented with the classic chicken-in-the-egg scenario: you can't build wealth through real estate appreciation until you buckle down and save your down payment.



If your tax bracket is 40% you can only reap 60% of your income, and since many of your living expenses (rent, insurance, etc) are fixed-period costs (such as once per month), your ability to save up for your down payment is severely limited. Although you can save more if you are making more money and have the same fixed costs as someone who is making less money, the proportion of income you save decreases with your higher tax bracket. Its like tractor pulling.



<img src="http://www.ramidogstyle.com/images/dump/tractor.jpg" alt="" />



However, the $250,000 you gained on your house through appreciation is a 100% gain since you?re not taxed on it at all. The more your property appreciates the more you gain, so long as it is under the 1031 exchange limits.



The real question here is, how much appreciation has the move-up market that you will be buying into seen since the purchase date of your current home? If you desire to have your new mortgage payment the same as your current one and the move-up market has seen more appreciation than your market, then you don?t get as good of a deal and in some instances you may choose to stay put.
 
[quote author="Informed_Decisions" date=1218714761]It is NOT why people want their home to appreciate in value. It is a FACT that home did appreciate in value over long term.



Look at the graph below.



<img src="http://teamworkhomes.com/crm/stat/hpi_ca08q1.jpg" alt="" />



My neighbor Steve, 84 years old WWII veteran, bought his 3 bed/2bath brand new home in 1967 for $24,950; now on Zillow shows $551,000 value. If you do the math (551,000/24950)^(1/(2008-1967))-1 = 7.84% average annual appreciation rate.



http://www.zillow.com/HomeDetails.htm?zprop=25491354



Compared this 7.84% with long-term inflation rate 4.1% (ballpark #), Steve enjoyed a risk premium of 3.74%



The reasons are: 1) The cost of building a replacement home is lock-stepped with inflation rate. 2) Higher demand vs limited housing supply pushed the home price higher and higher over long term.



Now Steve is a very happy and healthy old man, because he has a roof over his head, which he otherwise would not have been able to afford the same house today. He is paying $954 in property tax per year. If he wishes, he could reverse-mortgage his house like another neighbor Bill did to get monthly income to supplement his social security income.



Of course, not all homeowners are as blessed as Steve. A lot of them were unfortunate to lose their homes during the bust years. But prudent homeowners with realistic expectation can achieve the same success as Steve and many other homeowners.</blockquote>


OH...MY...GAWD... do they not teach chart trends at USC or UCI? Dude... a lab monkey on experimental medications could see from that chart the trend is heading down, and heading down fast. You are really, really desperate for business aren't you? A reverse mortgage? You have to be kidding me, you are the scourge of sleazy subprime brokers who are either doing reverse mortgages or debt consolidation. How dare you put someone in more debt to leave to their family. You are truly a lowlife if you think a reverse mortgage is a good thing. It is the worst financial advice ever.



And even more OMG... you are so clueless that you still show up on <a href="http://www.zillow.com/HomeDetails.htm?zprop=63096478">Zillow as the one reporting 241 Coral Rose for sale</a>. Here is your informed decisioned fact for you of the day, someone bought it at the foreclosure auction for $430k on 7/30. You clearly have shoot yourself in the foot syndrome.
 
Informed,



2001 called and wants his analysis back.



NASDAQ always appreciates as well.

<img src="http://img901.mytextgraphics.com/photolava/2008/08/14/nazsmall-4birziq5o.gif" alt="" />
 
[quote author="acpme" date=1218757189]Informed,



2001 called and wants his analysis back.



NASDAQ always appreciates as well.

<img src="http://img901.mytextgraphics.com/photolava/2008/08/14/nazsmall-4birziq5o.gif" alt="" /></blockquote>


Thats the logarithmic scale. Here's a linear one:
<fieldset class="gc-fieldset">
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my chart was just through 2001 to mimic Informed's housing price index at similar points of their respective bubble bursting. shhhh! don't reveal what comes next!

oops, you did... and it's not pretty.
 
[quote author="25w100k+" date=1218001205]Ok I've been here for a while but haven't figured it out completely.... assuming that renting isn't an option, or that with the tax benefits, you save more money owning vs renting....why does anyone want real estate to appreciate?



Since RE is a leveraged move... if my small condo appreciates 10% but the move-up house I want appreciates 10%, I'm much worse off then if things had gone down 10%.



Right? Am I missing something fundamental? Even if I lose my downpayment, if in 5 years the bigger place I wanted to buy is 10% cheaper, I'm better off!</blockquote>
It's mostly a psychological positive as people feel richer than they really are.
 
[quote author="graphrix" date=1218725028]OH...MY...GAWD... do they not teach chart trends at USC or UCI? Dude... a lab monkey on experimental medications could see from that chart the trend is heading down, and heading down fast. You are really, really desperate for business aren't you? A reverse mortgage? You have to be kidding me, you are the scourge of sleazy subprime brokers who are either doing reverse mortgages or debt consolidation. How dare you put someone in more debt to leave to their family. You are truly a lowlife if you think a reverse mortgage is a good thing. It is the worst financial advice ever.



And even more OMG... you are so clueless that you still show up on <a href="http://www.zillow.com/HomeDetails.htm?zprop=63096478">Zillow as the one reporting 241 Coral Rose for sale</a>. Here is your informed decisioned fact for you of the day, someone bought it at the foreclosure auction for $430k on 7/30. You clearly have shoot yourself in the foot syndrome.</blockquote>


Please save your rants and attacks for private messages.



Getting back to topic, I think the idea of housing appreciation goes back to being an inflation hedge. While downpayment and trading up or even the general savings aspect do play a role, they aren't the main reason why people want appreciation. Basically, its not that people want it to go up or down but rather, its just what has happened historically and people have come to expect it. I am not saying that houses should always appreciate but over the long term, most real estate (worldwide) acted as a hedge against inflation and rose with it.



Also, I think the desire for appreciation is different for the types of people living in the house. For example, my parents have been in their house since 94 and they hate their prop tax going up, albeit slowly, it still takes away more from their disposable income every year. Then again, I assume my parents will love appreciation when they go to sell in 10-15 years as they start looking at downsizing. Hence, outside of the last few years when it was cool to talk about how much your house was worth at the dinner parties, most people werent constantly thinking of appreciation or really caring for it.
 
[quote author="rkp" date=1218810226][quote author="graphrix" date=1218725028]OH...MY...GAWD... do they not teach chart trends at USC or UCI? Dude... a lab monkey on experimental medications could see from that chart the trend is heading down, and heading down fast. You are really, really desperate for business aren't you? A reverse mortgage? You have to be kidding me, you are the scourge of sleazy subprime brokers who are either doing reverse mortgages or debt consolidation. How dare you put someone in more debt to leave to their family. You are truly a lowlife if you think a reverse mortgage is a good thing. It is the worst financial advice ever.



And even more OMG... you are so clueless that you still show up on <a href="http://www.zillow.com/HomeDetails.htm?zprop=63096478">Zillow as the one reporting 241 Coral Rose for sale</a>. Here is your informed decisioned fact for you of the day, someone bought it at the foreclosure auction for $430k on 7/30. You clearly have shoot yourself in the foot syndrome.</blockquote>


Please save your rants and attacks for private messages.</blockquote>


Go check the rest of his latest posts. He deserved to be attacked with the insulting and ignorant comments of his. And... this is what the forums are for, public discussion, and I have been known to rant and I will keep on ranting until I get bored with it. Plus, like I said, this guy has been posting a bunch of garbage lately, and his true intentions have been exposed and many others have ranted about it. You are a regular, come on, you know this is the norm for those that spew garbage.
 
[quote author="Roo" date=1218110160]This doesn't make any sense...If prices are expected to drop, why would you ever buy a house? at some point, would you pay me to own a home?



Also, keep in ind homes (under normal circumstances) are tied to salary, falling home price means falling wages, so you wouldn't be better off.



Finally, people want houses to go up in value to give them money at retirement when it is time to retire.



And for you, you want homes to go up in value to be able to move-up:



$1M home, with 20% down increases by 20%, you now have $400k, which is enough down for a $2M home (which was about $1.67M when you bought your first home).</blockquote>


That could make owning a home like owning most cars: not considered an investment, but rather a consumer durable which slow depreciates. This is what actually happens to the structures. It's the land which appreciates when home prices are going up.
 
[quote author="Priced_Out_IT_Guy" date=1218719318]



<em>1031 Exchange: IRC section 121 states that if a principal residence is owned and occupied by the taxpayer for two out of the last five years then the first $250K of gain ($500K for married couple) is income tax excluded.

</em>



However, the $250,000 you gained on your house through appreciation is a 100% gain since you?re not taxed on it at all. The more your property appreciates the more you gain, so long as it is under the 1031 exchange limits.</blockquote>


Priced_Out,



I agree with your comments. For the benefit of IHB readers, just one minor correction.





Section 1031 relates to Like-kind exchanges. In brief, <em> no gain or loss is recognized if property held for use in a trade or business or for investment is exchanged solely for property of a like kind to be held either for use in trade or business or for investment.</em> The key word is "exchange." That is, you need to sell a property and "buy" another like-kind property in order to "postpone" the recognition of gain. Generally, 1031 exchange refers to investment property such as rental property, not principal residence.





Not long ago, gains on sale of principal residence can be "deferred" and rolled into the next principal residence. But the new Section 121 in place since 1998 (or 1999?) allows one to "immediately exclude" gain of $250,000 for single (or $500,000 for married couples) provided the taxpayer(s) resided in that residence two out of five years prior to the date of sale. The gain is not "deferred" but "excluded." So, one will never pay taxes in his/her lifetime on this gain. The gain is not rolled over to the next house and you are not obligated to buy another (more expensive) house. Of course, if the gain exceeds these limits ($250k or $500k), you will pay the capital gains tax on the excess gain NOW in the year of sale at 20% tax rate. No more 55 year old exemption rule that went along with the "deferred" rule. That's all gone.





The perk of this new Section 121 is that if you are good, you can do this every two years. Buy a house, live there for two years, sell it and exclude $500,000 of gain (no tax, ever). Buy another house, live there for another two years, sell it and exclude another $500,000 of gain (no tax, ever again). But of course, we know from following IHB that this is not going to happen in the immediate decade.
 
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