Housing Prices: How was it that they were supposed to continually go up?

[Bonobo]

I always wondered about this. Maybe some of you can shed some light on it for me.

You buy a new house, right? You beat it up for 30 years and then sell it... how is it that it is supposed to reliably appreciate in value?

It seems that this expectation for the predictable rise in the value of homes is one of the cornerstones for the US economy and is what supported (in the form of 2nd and 3rd mortgages) people in the last 30 years despite the low salaries...

So please tell me how my beat up 15 year old house is supposed to be worth more -even in theory - than it was when I bought it new.

P.S> I am being a little intentionally simplistic to drive the point home.

[msongs]

1. maybe it goes up in value if you take care of it instead of beating it up? nt

[Bonobo]

2. Wear and tear and Chaos Theory.

3 kids growing up in a house and a few dogs and cats, heavy winters, leaking pipes, etc. generally lead towards wear and tear.

[The_Casual_Observer]

3. The average tract house will last about 100 years before it needs to be replaced.

[liberal N proud]

13. Didn't used to be the case

My dad lives in a house that is over 150 years old and still in good shape.

Homes built after WWII were made cheaper and much less durable construction. Planned obsolescence.

Europeans have houses that are 500+ years old because they built them to last.

[PoliticAverse]

4. Just ask a Real Estate Agent, they'll tell you... n/t

[cemaphonic]

5. The price of land can go up

depending on local conditions, amenities and improvements. My neighbor's house was built in the '50s, and the value of the lot alone is worth much more than what the original mortgage would have been when the house was new.

Also, after 30 years of inflation on labor and materials, the cost of buying an equivalent new house is going to be even more expensive, so a home with some wear and tear is likely to be a better bargain, even if it is more expensive than it was when it was built.

Fads in architectural styles can have an effect too. In Seattle, the craftsman bungalows that were being built around the 1920s command a large premium relative to other similar houses just because people love the style.

[ohheckyeah]

6. For one thing the value of the land goes up.

As more and more land is developed less land is available. Also, most people do some improvements to a house above and beyond contractor grade installs. Mature landscaping also adds value to a home.....when you buy a brand new home you can spend THOUSANDS getting the landscape up to par.

In my are which is rural, the value went up somewhat when we were able to hook up to cable. So, amenity addition and improvement affects the value.

[Zoeisright]

7. Because they always had.

[JDPriestly]

8. The idea that property values would perpetually rise was absurd of course.

But investing in a home is a good way to save for retirement if you buy a reasonably priced house and actually pay off your mortgage before or shortly after you retire. That is because you at least won't have to pay rent or for a mortgage when your income declines as you retire.

That is the real reason you want to buy a house and pay for it.

So if you buy a house, buy something you can realistically pay for in its entirety before you need to retire.

[uponit7771]

9. Population growth and an average of 6% unemployment would do it. Also, low rates

[Sherman A1]

11. Agreed

[csziggy]

10. We're making lots more people with the same amount of land to live on

That was part of the theory why land and real estate prices were expected to keep rising.

Of course, those who think that way have forgotten or never learned about the history of the business. The Florida Land Boom and following bust was a perfect illustration why it does not hold true. During the land boom prices were artificially inflated and real estate speculation drove them up even higher. Then news papers and the IRS began investigating the business and found little basis for the high prices. The 1926 Miami hurricane and the 1928 Okeechobee hurricane frightened people and prices plummeted. Although eventually those prices went back up, prices did not really recover until World War II.

[Sherman A1]

12. Well, in the spirit of intentional simplicity

*A growing population creates more demand for the housing resource, hence the resource increases in value even with additional production of that resource.

*Tax support of the housing industry through the mortgage deduction, which makes owning a house more attractive than renting which adds to that demand.

*The American Dream Thing and pride of home ownership adds to that demand.

So a reasonable increase in value of a well maintained home is reasonable to expect, frankly they are not making any more land (granted we are taking more land out of farm production to build houses upon, but there is no more land than we had with which to start).

My understanding of the real estate bubble, comes from the introduction of spouses into the workforce from the late 1960's to present, thereby helping to maintain or slightly increase family income making housing (and the cost of living) affordable for the family unit despite individual wage stagnation. An increase in the money supply by the Fed following the tech bubble burst in order to stabilize the economy with money being like water (it has to go somewhere) creating the cheap mortgages of the early 2000's creating the re-fi, subprime markets in conjunction with absent regulation. Money became cheap, more people could theoretically enter the market hence demand (and prices) increased, until of course they didn't when things unravelled. But, that's just my understanding.

I recall talking to my financial advisor ( a very bright young lady) in 2005 or 06 and she was simply scared to death of what was coming.

[NNN0LHI]

14. Never could beat up a house and let it go to hell for 30 years and expect to make a profit off of it

Every house I have ever owned including the one I now live in was in better shape when I moved out than when I moved in.

This house was a Spec-house. Meaning when I bought it everything was built as cheaply as possible. Cheap windows, cheap doors, no central air conditioning, and a dirt floor in the crawl space. There wasn't even any lawn here when we moved in.

Since I bought it I have spent more on improvements than I paid for the house originally. The cheap windows and doors are gone. It has central air now. And the lawn has been sodded or seeded. Instead of the wood exterior it came with that needed painting every few years it now has vinyl siding. The crawl space is now encapsulated, insulated and concreted in. This house is now maintenance free and looks good.

Now if someone had let the place go to hell and not do any improvements for 30 years I could see how they would lose money on their initial investment. It has always been that way as long as I can remember. But I don't live that way. Not many people do.

The houses that are not kept up were sold as "handyman's specials", since I was a kid. And none of those houses ever sold for more than the original purchase price.

Does that make sense to you now?

Don

[econoclast]

15. A sobering statistic

I have to go back and find the exact numbers, but the general outline is this...

In 1972 there were about 25 million families in America with 2 parents and two or more children ... ie ...The kind of folks who can afford and really need a house with 3 or more bedrooms. And there were about 35 million housing units with 3 or more bedrooms. So supply and demand were roughly in balance.

In 2007 there were still about 25 million families with 2 parents and two or more children. But. There were 65 million housing units with three or more bedrooms.

It seems that as a society we WAY overinvested in housing. Every time we had a recession we goosed the housing sector. Cheap money. Declining lending standards. Mortgage deductions Expanding Fannie Freddie. Etc. Housing, however, is a non-performing asset. Once it's built it doesn't produce anything. All that money misdirected into housing was money not invested in factories and roads and technology etc.

Housing prices, I think, have a way to fall yet.