Why High Priced Home is Worth it!

Real Estate

Why a high-priced home is worth it

Rick Newman
September 2, 2016
 
 
Home values in expensive US metros are surging

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If you’re tired of hearing how the rich are getting richer, stop reading. Because it’s more widespread than you think.

Wealth generates wealth, especially now, in an economy that has been rewarding people who own stocks and other financial assets a lot more than people whose income comes primarily from working. And new research shows that wealth inequality is growing in the housing market, just as it has been growing in the broader economy.

Real-estate research firm Trulia recently found that homes in the highest-priced cities haveappreciated far more than homes in lower-priced cities during the last 30 years. That means people who can afford to buy homes in the costliest cities earn a far higher return on their investment than people who buy in cheaper cities.

“The difference is quite stark,” Trulia chief economist Ralph McLaughlin tells Yahoo Finance in the video above. “There’s a really big difference in how much wealth is created across the country.”

San Francisco is the nation’s most expensive market, and the median home price rose from $161,000 in 1986 to $1.06 million today. That’s a gain of $898,000, or 558%. A theoretical family that bought such a home 30 years ago and sold today would have added nearly $900,000 in wealth, which could be invested elsewhere or passed onto children.

In Dayton, Ohio, at the other end of the scale, a median-priced home appreciated from $51,000 in 1986 to $103,000 today. That’s just $52,000 in new wealth, or a 101% gain.

Living costs are far lower in Dayton than in San Francisco, needless to say, and somebody with a job in Dayton may have zero interest in relocating to San Francisco. It might even seem absurd to move someplace where it’s so much harder to buy a home.

High-income-growth cities
But cities with high home prices—which include northern and southern California, New York, Seattle and Boston—tend to be cities with high income growth, which means they’re America’s most vibrant microeconomies. Such urban areas also tend to have limited land on which to build new homes, which limits supply and pushes prices up. Moving to such a place doesn’t mean you’ll automatically become more prosperous. But if you’re there and you can muster the wallet to buy a home, you’ll have a leg up on building wealth (assuming the trend of the past 30 years continues).

There’s nothing wrong with cities where homes are cheaper. Dallas and Ft. Worth are in this lower tier, partly because there’s a lot of home construction taking place there, keeping prices down. Both cities have low unemployment and a healthy business climate. Memphis, Tulsa, and Greensboro, N.C.—fine places all—are on the lower end of the list, as well. People can certainly get ahead in such cities, but they probably shouldn’t count on rising home values to generate a lot of wealth.

Wherever you live, it’s still worth buying a house if you can afford it, as long as you plan to stay there for five years, at least. “Job security, that’s the big thing,” says McLaughlin. “If you have job security, buying a home is a good bet.” And if you don’t, those cheaper markets might look pretty appealing.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom.

 

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