What Goes Up, Must Come Down
This holds true for airliners, bubbles, the heels of people in love, and the price of homes. And while there may be no good way of drawing a trajectory to measure the average rise and fall of the first few items, solid statistics can help us predict the course of the housing market.
Studies show that the historical long-term rate of appreciation for houses is four percent. If average prices climb above that line, at some point they will drop below it. This is known as a course correction, and is as inevitable as rain falling from a swollen cloud. In the past decade, we’ve seen housing prices outstrip the four percent rate, and then we watched as the average sank below that trend line. There’s no way of knowing if those numbers have hit bottom yet, but research indicates that there is less than a five percent chance of home prices dropping significantly below today’s average.
The Bottom Line
Right now we’re below the trend line. At some point, whether a few months or a few years in the future, prices will rise to meet the trend line. Take into consideration the cost of home mortgages, and you can see that paying less now makes sense. Interest rates on home mortgages are far more volatile than the prices of homes. A one percent decrease on a 30-year fixed rate mortgage is the equivalent of a ten percent reduction in the home price, yet we’re 20 times more likely to see interest rates climb a single percent than we are to see a ten percent change in average home values. Where do you want interest rates to be when you buy your next home?
A Look Backward
Here are a few comparisons that might help you determine whether owning a home is a fiscally sound investment:
- In 1989, the average price for a loaf of bread was $0.67. Today, it’s $2.78.
- Then, a gallon of gas cost $0.97. Today, it’s above $3.50
- A new car then, $15,500. A new car now, $30,000.
- In 1989, a 10% mortgage payment on a $94,000 home cost $825 per month.
- That same house today would be worth roughly $166,000. With a 4.45% interest mortgage, you’d be paying $837 per month.
Today, you’re paying four times more for a loaf of bread, three to four times more for a gallon of gas, twice as much for a new car, and $12 per month more for your home.
Like all investments, home ownership has its risks. By studying the historical trends, you arm yourself with the knowledge to make smart decisions.