Housing Market

*Disclaimer, I'm not an economist, a lawyer, or anything else that makes what I say below more "legitimate", I'm an engineer, and while I am sure there might be mistakes, it's at least worth giving it a thought.

Today I wanted to talk about the housing market. Specifically house values and how it relates to the current economic situation with the pandemic.

Right now you hear and see it everywhere, houses are selling like mad. Great must mean that everything is going well. I suppose I would argue.... maybe not necessarily.

Lets take a look at the value of houses first. First, lets define what the value of a house is from my perspective. I define the value of a house to be how much you pay for the house plus all interest you pay for the house. 

Lets take an example house, lets say 2 years ago that house was listed as 200K, and the interest rates were 4.5% (these are all hypotheticals, but lets assume we are close enough).

The value of that house is what you would pay for that house over 30 years at the interest rate and price you paid. Plugging this into an amortization calculator you get the following interest and principal paid.

164813.42 + 200000 = 364813.42

Great we have something to compare against.

If we plug in the total value at http://loan-optimizer.com/equalizer.html and 30 years we get a chart, if you scroll over the chart and move over to 4.5% you can see we are at 200K.

Now if we scroll over to 2.75% interest the base price comes out to, 248K. 

There is also a table, but for now lets only look at the first two columns:

But what does this mean?

This means that if you take the exact same house and adjust the interest rate the price of the home on day one needs to adjust similarly to have the same total value of a property (in our case 364K). 

If we look at the chart/table and we tweak around the interest rates, we can see how the value of the home remains static, however the base price has to adjust to maintain the value.

If your home value is lower than that number on the table then the *value* of the house has actually dropped. You see, adjusting interest rates just gives the appearance of improved value. Sure as a seller, you see the price go up and sell you make a few extra bucks, but the person buying is actually buying it at a cheaper/lower value than it was prior to the pandemic.

This can actually be an interesting thing to think about from an investment standpoint. We want to look at this chart, and if a home price (purchase price) is lower than this line, then we are getting a better deal than we would have a year ago given the interest rates.

Hope this was an interesting foray into home values.