Home Values Headed Up

This information should be helpful to you whenever you want to discuss the long-term financial benefits of owning property.

When it comes to real estate values, they are essentially guaranteed to steadily rise with time. Oh sure, there are certain areas in the country that have held their same value for decades and will probably stay about the same for years to come. And then there have been communities in which real estate values seem to be on a perpetual roller coaster ride, but those situations are the exception. So, what about the rest of us who live in more traditional communiites? What can we expect?

For starters, let me suggest that a home should not ordinarily be considered an “investment” per se because the primary objective of investments is to make a profit; but the primary purpose of the family home is to provide an acceptable place to live. Still, some people simply cannot resist refinancing their homes every time they rise in value. This is not usually a good idea if the borrower is taking out money to buy a car, pay off credit cards, remodel the home, go on a vacation etc. This equity is simply to precious to CONSUME like that.

However, if the borrower is using the proceeds of the refinance to buy a rental property, then that is a different matter, because rental properties should pay for themselves over time and that is only one of four ways to make profit off of the investment. The other three ways include cash flow, tax savings and appreciation, which is related to inflation.

Regarding Appreciation: There are quite a few ways a person can force the value of a home to go up. A few of them include remodeling, adding on to the property and rezoning. But the steady appreciation of real estate that can be gained over time by simple inflation can be every bit as dynamic as some of those more industrious undertakings.

Now, to prove that inflation is here to stay I offer you these points:
1) The United States government has more debt than anybody else. They currently owe over 11 Trillion dollars. Each person in your family owes a staggering $37,000 and it is growing like a weed.
2) By manipulating the inflation rate, they can pay back their (our) debt with cheaper money. For example, if they borrow a dollar from the Chinese Government today and then maintain a 1.5% inflation rate for 10 years, the future dollar that they use to pay back the debt only has 85% as much buying power and therefore inflation has helped them (us).
3) Other government agencies also like property inflation because rising values mean increased property taxes. Furthermore, when values go up, citizens tend to refinance their homes and spend the money on the type of things mentioned earlier and that stimulates the society and creates jobs and that results in even more people paying taxes.

Once we accept the fact that the various governments have a built-in incentive to maintain and manipulate inflation, there are two follow-up questions we should ask ourselves: 1) How would they actually do that? 2) and, How do their policies all tie into the housing market in particular?

To explain how the Federal Government manipulates inflation, imagine a machine-shop operator who acquires a pound of brass for one dollar and then makes it into a hinge that is worth two dollars. Our operator-friend has just created a brand-new dollar in goods. The same thing happens when somebody else turns a tree into 2X4's and then again when somebody elses turns the 2X4's into a home, or when somebody makes a new TV or anything else. New products make up the Gross Domestic Product; The government studies these figures and then releases new money into society based on all of that added value. If they did not do that, the money that is in circulation would have to be stretched farther and farther over all of the new goods. Eventually, very few people would have money and those wishing to sell goods or services would have to lower their prices dramatically to attract some of the money. When prices go down, that is deflation, and as we just discussed that is contrary to the governments’ basic objective.

So, all the government has to do in order to create the desired inflation rate is determine the total value of all the new goods that were created and then release a modest amount more money than that amount into society and basic supply and demand principles kick in.

Generally, the Feds do not like an inflation rate higher than 1-2% because many of our citizens are on fixed incomes (especially seniors) so limits and stability are in order.

All of this spills into the housing market and affects new home prices. If goods like 2x4's and carpeting go up in value then builders have to raise their prices to recoup their costs. In addition, premium land values go up and so do wages.

When new homes get expensive or they are found to be too far from employment centers then used homes become more appealing to many consumers. All of that attention to the used homes causes them to rise in value too.

The bottom line is that most areas are not immune from these forces so most of us can expect our property values to rise steadily over time, generally between 1-2% per year.

So, if you can graciously take advantage of inflation and structure your finances so that your assets grow faster than your expenses, you are on a path to wealth. An important part of that equation is to avoid refinancing your home and using the proceeds to support an unnecessarily frivolous lifestyle.


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