As you know, disclaimers and other fine print usually appear at the bottom of the page, but in this case we should state it at the outset: This article includes forward looking statements based on projections of past market data. The accuracy of the data is not guaranteed, and the projections are likely to vary from the real future.

Hey, this is like an ad for stocks. But it isn’t.

It’s a real estate ad. On a real estate web site. Go figure!

In response to an optimistic post of mine that showed that in the 19 months since the peak of the market boom, we’ve only lost the appreciation from the final four months of the boom, a reader was somewhat dissatisfied with the darkness of the shadow of gloom this cast, and asked me to project the depreciation out five years. Well, that’s fair enough, but to give the boom it’s due I begin at the time the Sacramento Bee suggested was a period of 103% appreciation in five years, and project forward ten years from there. The results are over on the right (click to enlarge).

Now let me say it again: we don’t have any data past today, so the real shape of the curve from then on is unknown, and even before then it’s artificially flattened somewhat, but it’s based on what we consider good data. Interested parties should run their own projections.

So let’s look at what we have, even if it’s all just hypothetical. According to data from the Sacramento Bee for appreciation, and from my own research for recent deprecation, the projection at right yields a 45.837% appreciation over 10 years (granted that’s unrealistically precise, but that’s the number). So let’s say you bought a 100,000 house in April, 2000, when interest was at a bad old 8.30% (Source: HSH), and you put 20% down. That means you financed 80,000 at 8.30%. According to our chart, your investment was worth $145,837 ten years later when you decided to sell it and invest in a bubble blog.

Let’s see how you made out. OK, you put $20,000 down at the beginning, and let’s say you paid 2.5% closing costs on $100,000, so that adds $2,500 more for a $22,500 initial investment. Over the course of ten years you also spent $72,414.31 in principle and interest, so you’ve spent a total of $94,914.31 over ten years. When you’re done you sell this property for the full $145,837. After paying off your loan balance of 70,606.05, and 7.5% in closing costs, you net $64,293.18. So let’s subtract out our 94,914.31. Oh rats, we’re about $30,621 in the hole at this point. What a lousy investment real estate is! This really stinks. That’s why I want a bubble blog.

But wait a minute, this house wasn’t sitting vacant during these ten years, you were living in it. So if you didn’t have this house, you’d be paying, oh, I don’t know, $700 a month in rent. Over ten years, that works out to $84,000. Now let’s subtract out our $30,621 that we are in the hole. OK, here’s our net: $53,389.

Now here’s what just happened:

• You got a lousy initial rate of 8.3%.
• Your house has just declined in value for five straight years in a row.
  
• You haven’t paid anyone rent for the last ten years, and yet you still had a place to live.
• You’re $53,379 ahead of what you paid in.
• You have $64,293 in cash in your pocket. One might say you won the $64,000 question, and the question was: “Can I go look at some houses?”

OK, on the plus side we missed the income tax write off on the interest, and on the minus side we didn’t factor in property tax and insurance and maintenance. Call those two omissions a wash. We’re guessing on the rate of decline anyway, so there’s no point in being fastidious about the exact dollar amount.

Now, will prices go down from where they are now? Probably. Is the interest rate today more than two points less than what they are in this example? Definitely.

If I made a mistake on the math, I’m sure someone will call me on it. Meantime, if you’re running a bubble blog or otherwise channeling the ghost of Nostradamus, that’s terrific. I’m happy for you. However, if you want to enjoy the benefits of home ownership, our number, as always, is (877) 735-5657.

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