There was a time when it was common knowledge that real estate only ever goes up in value. With the traumatic drop in prices in 2007-2009 it is pretty clear that this “fact” was utterly false.
The truth is that real estate is like any other capital asset, it can go down as well as up in value. This currently has buyers nervously asking the question because it is imprinted on the common memory that prices can and will fall.
Looking at the historic trend in real estate prices it can be seen that prices have been following an underlying upward trend that follows inflation. The prices of the housing bubble deviated upward from that trend and then crashed down again.
The underlying upward trend is still there. If you slept through the entire fiasco of the ‘00s you would still be feeling pretty good about your prior real estate investments and home value.
Pricing The Emperor’s New Home
The irony of a bubble is that when we are in it no one realizes. As soon as the public discussion and perception becomes aware of the bubble prices are likely to collapse. As long as you are looking at prices that are reasonably in line with the historic trend you are less likely to suffer any remarkable loss.
Some of the factors that contribute to the value of your home are the basics of economics and politics. The law of supply and demand ultimately determines the value; when there are parties willing to buy your home the price will remain stable or rise.
What Determines Your Home’s Value?
The supply and demand for land and improvements – The value is in the land and the improvements; building structures will degrade over time and need rehabilitation or replacing but the space has potential for value based on its location and the presence of people who would put it to use.
The condition of the economy – As the economy moves through the cycle from recession to growth and boom demand will fluctuate; prices will get upward pressure in good times and negative pressure in the bad. Fear and greed dramatically exaggerate these tendencies, causing prices to oscillate wildly as panic takes over.
Political stability – In the United States, regardless of news reports and politicians bickering, we have been blessed with a relatively stable political and legal regime. There is no faction seriously calling for the end of property rights or other changes to the laws surrounding real estate.
Will my home value drop in the future? Probably. It is not likely on average and it may go up for years before it does. Buying your own home is a great way to create wealth that renters do not.