Deconstructing DC area home price gains

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Kelly
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Joined: Sun Nov 18, 2012 7:39 am

Deconstructing DC area home price gains

Post by Kelly » Sun May 22, 2016 8:42 am

Folks

I'm trying to determine how much of the price gain in Wash. DC area since 1987 is attributed to inflation and how much is attributed to the decline in mortgage rates. Here's my attempt and any comments are appreciated:

-Since 1987 the Case Shiller Home Price Index for the Washington DC area has shown an annualized appreciation rate of 4.4%. Inflation has averaged 2.5% over that same period.

-30 year conventional mortgage rates went from 9.2% in 1987 to 3.7% today.

-A $100,000, 9.2% 30 year mortgage in 1987 would have required a monthly payment of $819.

-A $819 monthly payment for 30 years at 3.7% would service a $178,000 mortgage. Thus, the decline in mortgage rates had the effect of boosting the loan amount from $100,000 to $178,000 for an annualized return of 2.1% over that period. If someone were shopping for a home based only on the monthly payment they would be indifferent to price.

Is it just coincidence that 2.5% annualized inflation and 2.1% annualized mortgage rate boost equal 4.6% compared to the 4.4% annualized actual home price change? I'm wondering if I am double counting inflation since expected inflation is embedded in the mortgage rate.

Kelly

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dm200
Posts: 17739
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Deconstructing DC area home price gains

Post by dm200 » Sun May 22, 2016 8:50 am

Kelly wrote:Folks
I'm trying to determine how much of the price gain in Wash. DC area since 1987 is attributed to inflation and how much is attributed to the decline in mortgage rates. Here's my attempt and any comments are appreciated:
-Since 1987 the Case Shiller Home Price Index for the Washington DC area has shown an annualized appreciation rate of 4.4%. Inflation has averaged 2.5% over that same period.
-30 year conventional mortgage rates went from 9.2% in 1987 to 3.7% today.
-A $100,000, 9.2% 30 year mortgage in 1987 would have required a monthly payment of $819.
-A $819 monthly payment for 30 years at 3.7% would service a $178,000 mortgage. Thus, the decline in mortgage rates had the effect of boosting the loan amount from $100,000 to $178,000 for an annualized return of 2.1% over that period. If someone were shopping for a home based only on the monthly payment they would be indifferent to price.
Is it just coincidence that 2.5% annualized inflation and 2.1% annualized mortgage rate boost equal 4.6% compared to the 4.4% annualized actual home price change? I'm wondering if I am double counting inflation since expected inflation is embedded in the mortgage rate.
Kelly
We have owned a home in the area for over 35 years -- and have seen large appreciation in market value as well.

I think, though, that the appreciation in home values in the area differs greatly from one locality to another, so I belive there are other factors at play. These might include the perceived "value" of the public schools, commuting cost/convenience (or lack thereof), mix of jobs/employment, etc. Our original mortgage had a rate of 9.50%.

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