Study of economics?

Question

Most goods, after being purchased, depreciate in value. For
example, automobiles, according to AAA depreciate an average of $3782 each year.
On the other hand, real estate seems to increase in value each year. Using market economic concepts, including supply and demand graphs, Please explain to me why real estate prices tend to appreciate instead of depreciate over time. Also, please explain to me how low interest rates have affected the recent housing market. I need different opinions. Thank you!

Answer 1

There is pretty much an endless supply of cars, new model each year, so the demand for old models is not that high.

There is only a certain amount of land, the supply of homes does not increase in step with the population (i.e. Demand)

The more scarce the resource, the more likely it is to appreciate (paintings by dead artists)

low interest rates decrease the cost to buy a house (costs less to borrow) increases demand, pushes prices up..

Answer 2

"Built-in obsolescence"! Things like cars, appliances, computers $ similar things a) break down because they're designed to, b) the cost to produce them goes down (whereas building costs and materials constantly rise) and c) people keep demanding the latest models and innovations in the above goods. The turnover rate is incredible and things like computers, once something only scientists and rich people could afford, are now in every home. They're almost seen as disposable.

Houses, however, do NOT become obsolete, as long as they're maintained. Even then, they can be fixed up and their value soars. Their value also appreciates as population grows and housing becomes more scarce (look at paying hundreds of thousands of dollars for a 600 sq. ft. apt in Manhattan!).

Furthermore, people do NOT see houses as disposable, but as either a) someplace they will live for a long time or b) as an investment, from which they'll get a profit when they sell it. Their cars, conversely, will NEVER sell for more than what they paid for them, but rather, considerably LESS!

Part of this is perception, but part is the nature of the goods concerned. The other part IS driven by inflation (see site 2), but the most powerful driving force, as stated above, is demographics. You already see the housing market slowing considerably, but the value of houses will stabilize, at worse, not decrease, unless we enter a recession like the one during the years of "Reagonomics". In the mid-1980's interest rates could be as high as 10-14%! Houses were practically being given away, especially in economically depressed areas. As you know, that is NOT the case now, and the low interest rates, even though they've risen somewhat, make buying a house more affordable.

The setting of the interest rate by the government is somewhat arbitrary, and the name "Greenspan" became almost synonymous to homeowners with "Dr. Evil", until later years!

As for doing graphs for you? No way...that'll take way too much time (Why can't YOU do it?) Get them for yourself at www.housingzone.com (1)

Is all this info for a paper you're doing? HMMM???

Answer 3

With regards to the impact of interest rates:

Your total cost of owning a home can roughly be divided into the principle payment for the home (say $500,000) and the interest payments that are part of the mortgage (say 6% annual interest on the principle outstanding). When a person is trying to sell a house, they need to account for the affordability of the house. If interest rates decrease then part of the total cost declines. Does that mean that the total cost itself will decline? No, in recent history the principle cost of the house has risen to offset the decline in the interst payments. Total cost of the home though has stayed roughly even (as a % of income) throughout housing booms and busts.

Answer 4

Holdon has the right idea. With limited land in good areas and increased population averages throughout the years, it only makes sense that prices increase. The more people there are and the less places there are for people to live, it becomes a competition among prospective homeowners to buy the home of their choice.
Low interest rates make it easier for people to afford loans to pay for things (ex. homes). As money becomes more expensive to borrow, people will be unable to afford as much house. This has the adverse effect of stunting buying, so prices of homes may decline in order to allow otherwise non-purchasing homebuyers to buy.