Disclosure: I do not own a home, and I battle everyday to avoid buying a home.
Question for today: What is the fair value of a brand new home at any point in time?
My answer:
Assume that in December 1997, the price of a brand new house were $310K. Then the fair values of identical brand new homes, but in the following years, are:
DEC 1998: $322K
DEC 1999: $306K
DEC 2000: $295K
DEC 2001: $357K
DEC 2002: $415K
DEC 2003: $446K
DEC 2004: $445k
DEC 2005: $398k
DEC 2006: $390k
DEC 2007: $370k
DEC 2008: $360k
DEC 2009: $351k
DEC 2010: $342k
DEC 2011: $335k
How am I basing my answer?
In 50 words or less: Assume a mortgage payment growth rate of 2.4% per year and 30-year mortgage rates. Really, that's all.
In more than 50 words:
(a) Why am I stopping at Dec 2011, and not say Dec 2020?
That is the year when animation will shake hands with reality.
(b) Where did I get the 30-year mortgage rates from?
Up until 2007, I got from Bankrate.com. For the future projections, I have used an estimate of 8.5% by 2011.
(c) What about specific regions that have had explosive growth in factors such as salaries, new jobs etc.?
Right, that's the only thing I find difficult to estimate. I concede that is a drawback of my assessments above. I still think that if the average salary for the job that you are doing today has not changed by more than 32% in the last 10 years, THEN either you aren't having a great career OR the fair value of the house is not really greater than what I have cited above.
(d) But what exactly is the 32% I mention above?
That is 2.8%, the historic CPI (source: InflationData) in the last 10 years, compounded over a 10-year period. Let us say that back in 1997, a 30-year old with your experience/skill-set earned $75,000. That is equivalent to a you, a 30-year old, earning $100,000 today (2007). You might think you are getting $25,000 more.. but I am sorry to say, inflation has eaten away your comforts.
2 comments:
dude - what's your take on moving dollars to Chinese RMB ?
Hey PG!
I'd love to advise but..
The first thing is .. thank you for introducing me to the word "RMB". I had no idea what it meant till I just saw your comment and googled it.
Second thing.. don't want to disappoint you but am really no good with macro-economics or currency trading. The big shots in investments, esp. Warren Buffet, have correctly predicted for at least some years now that the US dollar would weaken against other currencies.
In any case, if you want to invest in Chinese RMB, what can I say - Go for it! Perhaps some years down the line, I'll come to you for advise on moving my dollars too. I will do your investments a favor by purchasing Chinese toys.
Disclosure: I personally don't own a single yuan, yen, euro etc. I proudly own the following currencies - Canadian Dollar (quarter coins actually), Vietnamese Dongs, and Indian rupees. It is another matter that all these currencies put together, I won't even be able to pay one night's stay in a decent hotel.
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