What causes property value to increase
What causes property value to increase? The price of a house in 1970 would cost you more money to buy the same house in 2013. What changed? The price of the home did not increase, but the result is from the devaluation of the dollar.
The same home in 2013 requires more dollars in order to buy the same house, because there are more dollars in circulation. When more dollars are put into the economy, then the previous dollars becomes worth less in value.
A 1900 square foot home could be purchased for $30,000 in 1970. Assume that someone purchased that home in 1970 and stayed in that house until 2013. The owner places the house on the market for sale in 2013. The lists price of the house for sale is $150,000. Popular belief is that the owner’s house went up $120,000 dollars in value. The truth is that the value of money is worth less. What causes the dollar to be worth less?
In 1933, the dollar was set at a specific value when it was backed by gold. The two reasons for a set value are that gold had a set price and the exchange of money was in proportion to the amount of gold that existed. Therefore, the value of the gold certificate dollar is set.
In 1971, the dollar became a currency when Nixon took it off of the gold standard, which set the gold certificate dollar’s value. The result is that the dollar became a debt based note, which is now known as currency. A fiat currency goes up and down in value based off of the amount of that currency in circulation.
The reason why that exampled house above appeared to rise in cost is due to the fact that the dollar has less value since 1970. It takes more 2013 valued dollars now to meet the cost of that same house as a result of the 1970 inflated devalued dollar. The dollar today has 20% of the purchasing power that it had between 1970 and 2008.
The dollar has lost 90% of its value since 2008. The housing market has not reflected the correction from the loss of the dollar’s value from 2008. The housing market will have another big dip in prices.
The extra currency that was pumped into the market will have to be pulled out of circulation through high interest rates. Once the money is pulled out of circulation, then the cost to buy the exampled above house will be lower to adjust to the strengthening of the value of the dollar. I want to point out another problem for that exampled home owner above.
How much money did this owner actually make on his house if it sells at $150,000.00? Assuming that the house had a twenty percent down payment of $6,000.00 of the $30,000.00 purchased price. A balance of $24,000.00 is mortgaged at 6%.
The payment of principle and interest over thirty years would be around $150.00 a month. The taxes and insurance are going to be roughly around 15% of your principle and interest note. The total note would be around $171.00 a month.
171 x 360 = 61,000
There is another $3,500.00 for 13 more years of taxes and insurance. The total is at $64,500.00 over the years. The cost to maintain the home over the years has to be taken into account.
In forty years the house would have went through three a/c units, at the very least; one roof if it was a thirty year roof. The likely hood is that they went through a couple of sets of appliances, as well as normal upkeep to the home like painting, carpets, grass cuts, gardening and exterior cleaning. The yearly averaged cost estimated around $500.00 a year would be around $20,000.00.
The total holding cost of the home would estimate at $84,500.00. How much profit would the house give the owner? The house was sold at $150,000 and the total investment in the house is estimated $84,500.00 yielding a profit of $65,500.00 after 43 years not $120,000.00 of profit based on purchase price alone.
Did the homeowner really make $65,000.00 of profit after 43 years? Let’s find out. Think with me here. The house that was bought in 1970 for $30,000.00 would cost you $150,000.00 in present day currency value.
Let’s take the original $30,000.00 times 5 equals $150,000.00. We see that the currency has lost 80% of its 1970’s valuation. This is how you know. The original $30,000.00 minus out from $150,000.00 leaves $120,000.00 left over.
The $120,000.00 represents an 80% loss in value of currency. It takes 80% more currency to buy the same house in present day value. Did you really make $65,000.00 of profit after 43 years?
What is the purchasing power of the $65,000.00 in present day value? The present day purchasing power of the $65,000.00 at an 80% loss in value represents $13,000.00 in buying power.
The myth that your house is an asset or your biggest investment actually turns out to be the biggest robber of accumulating money for retirement for homeowners. I hope that this illustrates the power of inflation to destroy wealth. If you rent out real estate, then it is wealth creation? This is what causes property value to increase.
How to purchase a property without overpaying for it? Money or profit is only from purchase not sale. If you pay too much, then you lose money. Steps to find out how much people pay for the house? What is left on their mortgage? what are the current values in the area? What to offer?