Price Increase Versus Price Appreciation
Price increase versus price appreciation is sometimes not understood by many people. Learning the true meaning of the terms is important for investors. Reading the headlines can be confusing. This confusion can often lead to people making decisions based on inaccurate interpretations. There is much diligence that can and should be done before investing in a market. An investor can gain many different perspectives from a variety of sources and the more sources the more clarity can be gained. The best way to create clarity of course is to read an article to the end. Many people like to read headlines and the headlines alone can be confusing. Remember headlines are typically written by a magazine columnist. A person making a report may not understand the terms the way an investor does.
Let’s examine a common miss-interpretation.
Home prices increase by 10 to 12% (2 interpretations)
Stop and quickly analyze what that means to you. Here are the two most common interpretations.
1. That the value of property rose by 10 to 12%. So the average person is thinking a house that sold last year for 100K is now selling for 110K to 112.K.
2. The median prices of homes in the area rose by 10 to 12%. Some are still wondering what the difference is. Let’s look at this. When a property increases in value or has an appreciation of 10 to 12% the values actually had a very significant increase.
The 50 year national average is a 6% appreciation rate so a 10 to 12% appreciation rate is almost double. Most people and possibly even the reporter believe that this is what is happening.
The truth to the meaning:
The median price increased by 10 to 12 %. What this means is if last year the average house price was 100K then this year the average house price is 110 or perhaps 112K. Simply stated, people are buying higher priced houses. As the economy gets better people are willing to spend a little more money to buy a nicer or larger house. The statement actually has most people believing their homes are worth and additional 10 to 12%. The home’s value may have not risen at all but the price point that people are buying is higher.
As you are investing it is paramount to understand this difference so you are not led into false representation of home values.