It's funny to me that you hear so much talk from ordinary people about how great it is that their home is appreciating. I have never really understood this mentality from people when it comes to their primary residence. Why? Because rising home prices only benefit two classes of people who plan on living in their home.
1. People who need to take out a loan on their house to cover cost that they would otherwise incur anyway.
If you need to take out a home equity loan to cover cost that you would have incurred without the house, than this may be of some advantage to you. You will be able to cover the cost of that expense and have a relatively low interest payment which may (but most likely is not) tax deductible). However. If you use the loan to actually increase your consumption more than you normally would, this is not advantageous to you. This includes things like buying a new car, remodeling your house, etc. Regardless if you get to deduct the interest, YOU ARE STILL PAYING INTEREST! I swear, I don't know any other part of life where people get excited to save $0.25 by spending a $1.00.
2. People who sell their house and rent
Everybody else loses. If you sell your house to buy another house, you are gaining nothing and in all likelihood lose because you are paying higher fees (commissions) due to higher prices. The house you are buying in all likelihood appreciated too and probably appreciated more so since most people trade up. In fact, rising home prices may very well hurt you because you are going to pay more in property tax. Your house will be assessed at the higher value and you will pay more in tax. You didn't actually become wealthier, so you are for all practical purposes worse off.
If you are a first time home buyer it is pretty obvious that you are getting screwed.
Otherwise, if you own your home and plan to live in it, like most Americans, price appreciation does nothing for you. It may make you warm and fuzzy at night thinking about all those mythical gains, but until you sell your home and actually don't buy another, rising prices don't help you one bit.
Note: This is not necessarily a rhetorical question. If you can think of an instance where someone who plans on living in their house actually benefits from price appreciation other than the above, I would love to know. I've been really trying to think of a scenario.
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2 comments:
Well, appreciation can help if you sell your house and buy a less expensive house (smaller or in a less expensive city). Empty nesters do this all the time.
There is an implicit assumption here that houses of less value rise less quickly.
This is certainly not true as values in condominiums in some places have vastly outpaced that of traditional homes. If this is the case, you are paying more for the condo, smaller house, etc than you would have otherwise.
If this rise is greater percentage wise than the rise in your former home, you come out on the losing end. In this case, it would actually make more sense to trade up.
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