Let me begin this post with one, upfront statement: I rarely recommend that someone buy a home strictly for potential appreciation. Appreciation is a bonus, if all of the other numbers make sense.
With an inventory shortage of near epic proportions (60% fewer homes on the market than two years ago with 15–25% more closed deals this year, depending on price point), bidding wars are the new norm.
Below $200,000, I know of almost no area that hasn’t seen at least 5% appreciation in the past year. And for homes below $150,000 (which basically don’t exist anymore), 10% appreciation might be a conservative assessment of how strong the market has been in 2012.
With that as groundwork, let’s run a quick calculation that will illustrate once again why buyers are competing in multiple offer situations on a regular basis.
If you were to purchase a $200,000 home in today’s market, and you assume the value of that home will go up 5% over the next 12 months, that’s $10,000 of equity gain. Divide that by 12 months, and you have $833.33 of appreciation per month.
Now, the other side of this amazing coin is interest rates. Unless you have been out of the country or living under a rock, you probably know mortgage rates have trended all the way down into the low 3’s!
If you purchase a $200,000 home today with FHA financing (which requires a down payment of just 3.5% of the purchase price, or $7,000 in this example) and take out a 30-year fixed rate loan at 3.5%, your monthly principal and interest payment is $866.
Equity of $833 with a payment of $866 equals net monthly housing expense of $33.
Do you want me to repeat that?
Of course, in addition to the P & I payment you still have property taxes, homeowners insurance, potential HOA dues and maintenance costs. But even with those amounts added in, the obvious value of ownership vs renting is impossible to miss.
Now, as I said at the beginning of this post, you don’t buy homes for appreciation. You buy them because you need a place to live, you can afford the payment, and you enjoy pride of ownership. You also get some excellent tax advantages, you accrue wealth by paying down your mortgage each month… and if fate is smiling on the Denver housing market (as it most definitely is right now), appreciation is the whipped cream.
But heading into 2013, it’s all good.
I have always been candid with my clients about the state of things in housing. I left California seven years ago in large part because I felt that market was unsustainable, and I didn’t want to see clients get hurt.
I have always preached caution, and I still do.
But these numbers are so stinking obvious they simply cannot be ignored.
I have a hard time believing that home ownership will ever be more affordable than it is in this immediate moment.