This Week's Q & A

Q: It is my opinion that low-priced homes (and neighborhoods) appreciate at a slower rate, on average than higher-priced homes and neighborhoods. Do you agree with this theory, and do you know of any studies or reports that have been published on this subject?

A: Your theory sounds plausible, but it isn’t accurate. It may be true that “location, location, and location” are the three crucial variables in the real estate equation, but it also is true that timing, while perhaps not everything, counts for a lot. The available data tend to support that view. Economist Karl Case, probably one of the region’s best-known real estate analysts, has an extensive data base – the Case-Schiller Index – through which he tracks appreciation trends by recording the sales prices of properties as they change hands. The sales data, which go back to 1981, indicate that appreciation rates depend very much on demographics and market conditions.

For example, Case notes, when real estate prices were soaring in the 1980s, many prospective buyers (a large number of whom were buying their first homes) were forced to lower their sights, and ended up buying less expensive homes in less prestigious neighborhoods, which had the effect of intensifying demand in that segment of the market. As a result, these lower-priced properties actually appreciated more rapidly, in percentage terms, during this period, than higher-end homes. When the real estate market stumbled badly a few years ago, Case points out, prices at the lower-end of the range actually held up better than prices at the higher end – again, reflecting the concentration of demand. So your theory about the appreciation of higher-priced homes holds true sometimes, but not always, and not in a predictable, consistent pattern.

I’m not sure what prompted your question, but I suspect (perhaps unfairly) that you are looking to use your theory as a rationale for buying homes (or encouraging others to buy them) based on their anticipated appreciation value. Please don’t. The Case-Schiller data highlight what experience confirms – that the “return” on a home depends partly on when you buy it, and largely on when you sell it. And there is no guarantee that your need for a larger dwelling, or the job transfer, or the change in financial circumstances that prompts you to sell will coincide with the appreciation peak for houses in your price range and in your market. You should buy a home because you’re looking for a place to live. If you’re looking for an investment, it’s the stock market, not the housing market, that you should play.