How to Buy a House home
Learn the basics
1.	The Basics
2.	How much home can you afford?
3.	The Down Payment
4.	The Loan
-	Assuming a Loan
-	Owner Financing
5.	Qualifying for a loan
6.	Understand Closing Costs
Do the groundwork
7.	Get your finances in order
8.	Check Your Credit Report
-	Repair bad credit
-	Establish Credit if you don't have any
The Process
10.	Find a Lender
11.	Evaluate the bank's offer
12.	Start looking at houses
13.	Get the Disclosure
14.	Make an offer / Sign a Contract
15.	Have the House Inspected
16.	Problems on the Inspection?
17.	Renegotiate the terms
18.	Appraisal, Survey, & Insurance
19.	Appraisal went through?
20.	Closing!

After the purchase

Avoding scams

More about Mortgages

How much loan can you get?

Figuring your monthly pmt.

15- vs. 30-year loans

Prepaying your mortgage

How to figure mortgage interest

Private Mortgage Insurance

Paying Points

If you won't live long enough to pay off the mortgage

Other Topics

Renting vs. Buying: Which is better?

Homebuyer Tax Credit

Buying is an investment

Appreciation

Paying cash vs. getting a loan

The Debt Ratio

Tax breaks are actually welfare for the rich

Other

Links to helpful sites

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Long-term real estate appreciation rate in the U.S. Your home is an investment! Some bloggers are trying to use my article to claim that buying a house isn't an investment. That is absolutely not a valid conclusion. Saying that a home isn't an investment just because it doesn't appreciate faster than inflation, is like saying a bicycle isn't transportation just because it doesn't fly. A bicycle doesn't have to fly to be transportation, and a house doesn't have to appreciate faster than inflation to be an investment. I have a separate article explaining why buying a home is indeed an investment. Before we talk actual real estate appreciation rates, let's talk about why you'd want to know what they are in the first place.  by Michael Bluejay Last update: August 2009 Appreciation matters because it can make the difference between whether it's better to buy a home or continue renting.  And even small changes in the appreciation rate can change the long-term value of buying considerably.  A $235k home becomes worth $485k at 3% appreciation after 30 years, but it becomes worth a whopping $649k at 4% appreciation.  One percentage point makes quite a difference! Another reason to know the rate is that you might not want to be tied to your home for 30 years. You might want the option to move after a few years.  If the appreciation rate is high enough, the extra value of the house in a few years will offset the upfront costs of buying.  If the appreciation rate is too low then it won't. Finally, if the appreciation rate is high enough, you actually live for free!  The increase in value of your home can be greater than what you pay out in taxes, insurance, maintenance and interest.  You can cash in that value when you sell, or when you're old enough to qualify for a reverse mortgage.  And is there anything sweeter than living for free?  But you live for free only if the appreciation rate is high enough, usually about 1.75 percentage points higher than the general rate of inflation. For these reasons, it behooves us to get the appreciation rate right.  Unfortunately, that's easier said than done.  Here's why. Trying to predict future appreciation rates is like trying to predict anything.  Nobody can see the future.  The best we can do is to see what happened in the past, but that's no guarantee that we'll see those kinds of returns in the future. Homes are getting bigger.  So when we see the median price of homes go up each year, what's hidden in those numbers is that part of the increase is because the homes being sold themselves are getting larger.  Not all of the increase is due to appreciation. Some figures show average prices, not median prices.  The median price is the middle price, and it's generally more meaningful when doing this kind of analysis.  For example, let's say we have five workers, who make $15k, $20k, $30k, $40k, and $600k respectively.  The average income is $141k, but that's not really very representative of how much people actually make, is it?  The first four people don't make anywhere close to that, and the last person makes considerably more.  But the median income is $30k, which is much more meaningful.  Average home prices are higher than median home prices because the mansions of the ultra-rich pull the average figure higher.  So we use the median figure, which is more helpful.  Here's a chart showing how the average price is higher than the median price.  So we need to make sure we're looking at median prices, not average prices. Local rates are different from national rates.  In this article I look at national averages, because I can't easily cover each of hundreds of different areas throughout the U.S.  But in reality, local rates can differ greatly from the national average.  (For example, in 2010 Austin Texas had an average yearly appreciation rate of 8.92% over 20 years (5.1% annualized).  Local and national rates can even move in opposite directions, with a local rate going up while the national rate goes down, or vice-versa. Once we figure an average historical appreciation rate, even ignoring the flaws that went into finding it, it can bear little resemblance to the next few years.  That's because short-term real estate rates fluctuate wildly. We might come up with a long-term appreciation rate of 4.3%, but next year prices could go up by 14% (like in 1979) or down by 15% (like in 2009). With all those caveats, you might be tempted to give up!  But I think it's better to have some idea of what's happened in the past, even if we know it might not be accurate for our area in the near future.  So with that in mind, let's get to work. Theory When you think about it, it seems that long-term appreciation rates would have to be pretty close to the general rate of inflation.  Because if appreciation were much higher than inflation, then it wouldn't be too long before no one could afford to buy a house!  If workers make 3% more per year on average, but the price of homes goes up by 6% per year, then pretty soon homes become widely unaffordable.  I'll be keeping this in mind as we go through the appreciation data below. U.S. Census data The price of new homes increased by 5.4% annually from 1963 to 2008, on average. (U.S. Census, PDF)  New homes aren't the best yardstick -- we'd really prefer to see sales of existing homes.  But if new homes are all the U.S. Census gives us, then that's all we have to go on. First, let's account for the fact that the average new home size exploded from 983 s.f. to 2349 s.f. from 1950-2004, or about 1.6% per year on average. (NPR)  So a big chunk of the increase isn't inflation, it's that bigger homes cost more money. O nce we factor that in, the price of new homes per square foot went up by only 4.2% annually from 1963 to 2008. And now let's compare that rate to the general rate of inflation, which was 4.4% for the same period. (CPI, BLS)   As predicted earlier, the rate of real estate inflation and the general rate of inflation are almost identical. National Association of Realtors The price of existing homes increased by 5.4% annually from 1968 to 2009, on average. (Natl. Assoc. of Realtors, p.1, p.2)  Notice that this is the same figure as new homes by the Census Bureau for a similar period. Once we adjust for the fact that homes get bigger over time, the annual rate is 3.7%. The general rate of inflation during this time was 4.5%. So here again, homes didn't appreciate faster than inflation. Case-Schiller Index The price of existing homes increased by 3.4% annually from 1987 to 2009, on average. (Wikipedia)  We don't adjust for houses getting bigger, because the Case-Schiller Index tracks repeat sales of the same homes. (They might get a little bigger from remodeling, but so few of them will get bigger, and by such a small amount, that we can safely ignore that.)  The general rate of inflation during this time was 2.9%. So again, the appreciation rate for homes was very similar to the general inflation rate.   Conclusion I find the often-quoted idea that homes generally appreciate faster than inflation to be a load of B.S.  Sure, local appreciation can be higher, especially in the short-term, but the average appreciation for the whole country over the long-term is very much tied to the general rate of inflation, as the figures from three different sources above readily show. This would have to be the case, because if homes got more expensive faster than earnings went up, pretty soon nobody would be able to afford to buy a home. Of course, you could get lucky.  I once enjoyed an average 16% appreciation rate each year for five years in Austin, Texas, and as of 2010 Austin actually averaged 8.9% yearly appreciation over 20 years (5.1% annualized).  But by the same token, homes can actually depreciate while general inflation is going up, as happened all over the U.S. in the late 2000's. So when you're using a rent-vs.-buy calculator, I strongly suggest you set the rate of appreciation to be the same as the inflation rate.   Related articles: Rent vs. Buy calculator How much home can you afford? Full list of articles