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8th Wonder of the World

“Compounding interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

– Albert Einstein

You’re right, home price appreciation isn’t exactly “compounding interest”… it’s better!

Here’s why: when you own real estate, you are leveraging your investment dollars. If you’re buying a $500,000 home with only 10% down ($50,000), your annual appreciation isn’t on the $50,000, it’s on the entire purchase price, plus each year of appreciation that keeps stacking on top of itself.

So what kind of appreciation can you expect? Let’s take a look at the last 80+ years!

U.S. Housing Price Returns Since 1942

Bottom Line

  • When you own property, appreciation is real.
  • If you’re renting instead of owning, you’re still paying a mortgage; but it’s someone else’s (and they’re getting the spoils of appreciation).
  • With each monthly mortgage payment, the principal you are paying down is like a forced savings account.
  • But what if I park my money in treasuries earning as much as 4%? Well, you might earn 4% but you’ll still pay federal income tax each year, whereas your appreciation gains on your home are tax-free up to $250,000 as a single person and $500,000 as a couple.
  • If you know someone who is wondering if they can afford to buy a home right now, Einstein would certainly tell us, “You can’t afford not to!”

I hope you find these appreciation numbers as interesting as I do and as always, let me know if you have any questions.

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