Albert Einstein said that the 8th wonder of the world is compound interest. That compounding wealth effect also happens in real estate. Our homes experience historical appreciation averaging around 4% per year, which is 4% of the current property value, not merely what we paid for the home when we first bought it. That means that your home has and will continue to double in value roughly every 18 years.
Furthermore, the investment that you made to purchase the property doubles in a much shorter time frame because of leverage. Getting a loan on the property you want to buy multiplies your return exponentially. The simple explanation is that you pay simple interest on your loan, which reduces the balance a little bit more with every payment. At the same time, your property accumulates equity on a compounding schedule.
For example, if you invest $25,000 to purchase a $500,000 home, that home will appreciate an average of $1,666.67 per month…forever. At that rate, it only takes you 15 months to double your original investment and be sitting on $50,000 in equity in your very own place. The compounding effect is the biggest reason why study after longitudinal study conclude that people who own a home have a 40X greater net worth than those who continue to rent.
Mortgage interest rates have risen over the last three weeks. They jumped upward the day after the Fed lowered their overnight rate and like a wayward teenager, have been out raging against the machine ever since. This whipsaw effect is a byproduct of the bond market experiencing junkie withdrawals of the upside down yield curve we’ve been in for the last two years. As normalcy approaches ever closer with the Fed lowering their 24 hour rate a few more times, we’ll see the long term rates begin to settle back down. And when that happens, and demand picks back up, home prices will rise even further.
