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Does Home Appreciation Make It Easier to Move Up?

Published by Lawrence Roberts | December 26th 2008 | Views:

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The conventional wisdom in California real estate is that you buy a home, and when it appreciates, you sell it and move up to a better home. There is some truth to this idea, but not in the way most people think.

Look at a hypothetical example. Assume market prices are stagnant, and a small starter home can be purchased for $200,000. The next level up can be purchased for $350,000, and the high end can be purchased for $500,000. The price differential required to move between these classes of housing is $150,000. In a stagnant market, the only way anyone could move up would be to save or make more money. Someone would have to either save the $150,000, or get a large enough pay raise to finance an additional $150,000 to upgrade to the next level of housing. Appreciation does not change the equation.

If you factor in appreciation (or depreciation), nothing changes. All the properties would become more valuable, and the gap between price levels would increase at the same rate. It would still require savings outside of the house appreciation or a raise in pay to move up. Appreciation alone does not close the gap because all properties will appreciate. There is a belief in the general public that the only requirement to end up in a Mansion on the beach is to climb aboard the "equity train" and wait for the appreciation to transport you to your beachfront paradise. It does not work that way.
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