How much does home value have to appreciate to keep up with inflation?
I'm a first time homebuyer. I figure that when I get the house paid off the value of the dollar will be much different than it is today. How can I wrap my head around this?
A generic example: Purchase $100K (I wish!) home today. For the sake of discussion, lets say I sell it the minute the loan is paid off. So, I'm spending 2009 dollars and "cashing in" on 2029-2039 dollars (depending on how fast I can pay), right?
Here is where I get stuck. If I sell the home for, lets say, 200K in 2039, the "net" profit would be 100K. But taking into account the inflation, I would guess that 100K in 2009 dollars would be worth close to 200K in 2039 dollars. So no profit at all, maybe even a loss. Does that make sense? Feel free to ask me to clarify if I am confusing or confused.
I know we can't predict the future, but I would like to know a bit about the theories in practice.
So, Theoretically, if inflation continues at its current pace, how much will a 100K house need to be worth in 2039 to realize any profit?
I also don't see how housing values can climb forever, but that's for another question.
Thanks.
Tagged with: Generic Example • Home Today • Sake
Filed under: Selling Your Home
Like this post? Subscribe to my RSS feed and get loads more!
House For Sale By Owner
It’s a good question. I really don’t think people understand the nature of inflation and the fact that it is essentially a tax on earnings. The reason it is a constant in the economy is simply due to the fact that there is not enough money within the economy to pay off the debt (plus interest) so the money supply has to be increased to stave off collapse! Inflation is generally kept at about 2-4 per cent, to figure out the answer to you’re question simply add 2-4 per cent to that 100K each year. So for year one, you’d start of with 100K, year two, 102K, year three 104.4K (I think) and so on.
Sell By Owner
You are thinking correctly — assuming we have inflation over the long term, 200k in the future won’t be worth as much as 200k is now. You might make a paper-profit of $100k in 2039, but in reality it’s not a profit at all, adjusting for inflation. Economists deal with this by speaking of nominal returns and real returns. “Nominal” refers to the the paper-profit, while “real” always means inflation-adjusted.
A problem here is that the government taxes nominal returns,whether or not those returns are real. If in 2039 the government taxes profits from selling homes, you’d owe tax on that “profit” even though you made no real profit after inflation.
Interestingly, the current pace of inflation is close to zero during this recession, so based on that this is a moot point. But the inflation rate will likely get a little higher again. 2.5% on average is a good estimate.
You can figure this out with the rule of 72. Divide 72 by the inflation rate to see how long it takes for a price to double (ie, for money to lose half its value). 72 / 2.5% = 28.8 years, so the scenario you threw out for prices doubling by 2039 happens to be a good estimate.