The Illusion of Appreciation

When we talk about housing - the only way buying a house makes you money directly is through appreciation. This appreciation is real, but it is also an illusion.

Why? If you buy a house for $200,000 and it is worth $400,000 now. The $200,000 in wealth is only real to you if you sell the house and no longer need housing.

If you sell the house for $400,000 and want to buy a new house now, that same house will cost you $400,000 - so the wealth - while it is on your balance sheet as money, has no new buying power associated with it.

This is still far better than renting in many cases, as your real rent is likely to have increased 100-200% over time while your personal income is less likely to grow that quickly.

A STORY - a young man I know had a used car and he said his dealer offered him $14,000 more than he paid for it two years earlier - he was so excited he sold his car for a nice profit and figured he could rent a car while he found a new one. Rental cars were too expensive, but after two months of searching, he can't find a used car he likes because they are all more expensive than what he sold... so he wants his old car back, but he's likely with taxes and tags and title to spend more than $14,000 to get back into an equivalent car.