Buying a house involves several processes. One of the most crucial aspects is securing the finances to purchase the house of your choice. And since most houses cost a small fortune, this might mean applying for a mortgage.
A mortgage is a kind of loan given specifically to purchase a house or any kind of real estate. When you apply for a mortgage, the lender gives you the amount needed to buy the house but under certain conditions.
These conditions usually involve having to pay back the loan along with the interest at a specified date or over a specified period. Failure to do so will typically attract a penalty.
As such, buying a home isn’t a decision to take lightly. You need to weigh your options and ask yourself if it’s worth it.
In his article, you’ll get to know the value to place on houses, the history of home values, and mortgage rates.
We’ll also talk about the value of houses and whether a house is an investment or a consumption item.
House Value
A house’s value refers to the worth of a house at the moment and in the future. Just like mortgage rates, different elements influence the value of a house. Some of these elements include the location of the house, the size of the house and the design of the house.
Specifically, for a person to get an estimate of their house’s value, they might need to consider three aspects. These aspects are the fair market value, appraised value and the assessed value.
History of Home Value
Right from 1963, there has been an ever-consistent increase in home value as a result of various factors. Some of these elements include the economy and the rate of migration from one state to another.
Consequently, this has made the idea of home-buying an attractive investment. However, issues such as economic recession and other disasters can bring about a drastic fall in home values. As such, buying a house as an investment requires considering the financial risk involved.
Here is a history of how home value has changed over the years:
Home Value in the 1950s
The average value of a house in the 1950s was $7,354. This value was a result of the increase in the rate at which people purchased houses after World War 2.
In the 1960s
In the 1960s the rate of homeownership continued to move up an upward trajectory and so did the prices. The value of a house at the time was an average of $11.900.
One of the reasons why there were so many people becoming homeowners was the Federal Housing Administration(FHA). The FHA gave out mortgages that made it easier for people to purchase houses.
In the 1970s
The average house value during the 1970s was $17,000. This price came to be a result of inflation and the poor state of the economy.
In the 1980s
During the 1980s the value of a house was $47,000. At that time, not so many people could afford to purchase a house due to the spike in price.
In the 1990s
As of the 1970s, the prices for houses were at an all-time high. The average amount for which a person could purchase a house was $79,100.
In the 2000s
The 2000s saw that the value of houses had risen to a price of $119,600 however, close to the end of this decade there was a crash in the house value.
In the 2010s
The 2010s witnessed growth in the real estate business. Consequently, this placed house value at an average of $221,800.
In the 2020s
So far in the 2020s, different events such as the pandemic have resulted in the value of a home being at an average of $336,900.
History of Mortgage Rate
Like home values, mortgage rates have also seen a number of changes over the years. Here is the trend of the rise and fall of mortgage rates from the 1970s to date using the 30-year fixed mortgage rate:
Mortgage Rate in the 1970s
In the early years of the 1970s, the mortgage interest rates stood at 7.3 percent. However, due to the problem of inflation, the mortgage rate steadily increased to become 12.9 percent.
The 1980s
In the1980s the inflation became much more intense and one of the major reasons for this was the oil embargo that the U.S was under. Consequently, this jacked up the interest rate to the point of 18.4 percent but later dropped to 9.78 percent at the close of the decade.
The 1990s
During this decade the problem of inflation was becoming a thing of the past as the economy had started to recover. The reduction in inflation brought down the interest rate to an average of 6.91 percent.
The 2000s
In the 2000s the interest rates for mortgages declined from about 8 percent to 5.4 percent. This was primarily a result of the prevalence of subprime loans. Subprime loans gave individuals with low credit scores the opportunity to access loans available only to those with high credit scores.
The 2010s
The 2010s saw that the interest rates for mortgages continued to dwindle until it was somewhere below 4 percent.
The 2020s
The year 2021 witnessed interest rates go below 3 percent. However, experts have predicted that by the end of 2022 the interest rate will fall within the range of 3.5 percent to 4 percent.
Is a House an Investment or a Consumption Item?
Seeing how the value of houses and mortgage rates have morphed overtime, it’s only natural to wonder if buying a house is a good investment. Well, more often than not, a house is typically a good investment since home values tend to go up over time.
However, buying a house will only be a consumption item if you simply intend to live in it. It can’t be an investment if you’re not going to get any returns from the purchase.
On the other hand, buying a house would be an investment if you plan to put it up for rent or flip it and resell. Simply put, the ability to make a profit from a house is what makes buying one an investment and that requires some level of investing intelligence.
Bottom Line
Home buying and all forms of investment generally require financial advice. This will ensure that you are financially prepared to purchase a house whether as an investment or a consumption item.
At the Art of Financial Planning, we have what it takes to guide you in the process of making a smart decision regarding how you manage your finances.
