Does anyone remember the days when 5% annual appreciation was considered really good? These days it appears that some consumers now perceive anything under 10% as horrible, and reason enough to keep renting. As our market returns to normal it may be beneficial to help future homeowners, specifically the millennial generation, visualize where they could be in 5 years with a “horrendous” 4% appreciation rate. For the following example, we chose a $175,000 purchase with 3% down since it falls in line with where a first-time home buyer might start.
| Date | 1/1/2015 | 1/1/2016 | 1/1/2017 | 1/1/2018 | 1/1/2019 | 1/1/2020 | |
| Purchase Price | $175,000 | Future Value @ 4% Annual Appreciation | $182,000 | $189,280 | $196,851 | $204,725 | $212,914 |
| 3.5% Down Payment | $ 6,125 | Beginning Loan Balance @ 4% Interest | $166,153 | $163,069 | $159,858 | $156,517 | $153,039 |
| Loan Amount | $168,875 | Net Equity | $15,847 | $26,211 | $36,993 | $48,208 | $59,875 |
Home ownership in these circumstances gives the borrower a net equity of almost $60,000 after 5 years. Not bad compared with renting a property for the same 5 years. We assumed that the seller paid all the closing costs (which is quite a reasonable assumption these days).
The secret ingredient is leverage. The borrower puts only 3% down but gets to keep 100% of the appreciation. With interest rates as low as they are today, the millennial generation will probably want to kick itself in ten years time for the missed opportunity today.
Even with no appreciation the borrower gets net equity of $22,000 after 5 years, because a chunk of the monthly check goes to pay down the outstanding loan balance. However property taxes and maintenance will eat into that.
Realistically, 4% appreciation is over twice as high as inflation and a very satisfactory rate for the realistic homeowner.
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