My son wanted to know why the cost of cars go down and the cost of houses go up.
I told him that God isn’t making any more land.
Is it as simple as that?
Well, there is no evidence that God made the Earth we do have, but that’s beside the point. Maybe you could tell your son to go to http://www.khanacademy.org/ and check out the Current Economy section. There’s also sections on Currency, the Credit Crisis, the Bailouts, Finance and many, many other subjects.
The cost of houses does not always go up.
Given the nature of the “God isn’t making any more land” answer, I’m guessing his son is too young for that sort of thing.
Basic supply and demand.
I assume your son means the cost of a single car and a single house.
The value of a car falls because cars wear out.
Houses don’t ALWAYS go up in price, as people found out a few years ago, but houses wear out slower than cars, and people tend to put more money into keeping their house up than their car. If you bought a house and did not maintain it, you would find that the value would fall.
Also, of course, cars can be easily moved to where people have money and want cars, while a house stays put, so a house that is located where a lot of people want a house will go up in value, while a house located where no-one wants a house will fall in value.
good points
thanks
A really fascinating example to use with your son is that houses in Flint, Michigan were recently on sale for as little as $1000.
I’m not talking about toy houses; I mean real, actual houses. But Flint was a rare case of a city where so few people wanted to live that houses could be had for tiny amounts of money.
Also it’d be good to get the little guy to stop saying “cost” when he really means “price”.
Lots of opportunity for confusion there once he gets to understanding more traditional or technical definitions of “cost”.
The idea that a house appreciates in value is a pretty recent one, and would have puzzled my father.
In my opinion, that idea changed for a couple of reasons: several decades of inflation, and the growth in affluence (itself partly fueled by the entry of women into the workforce). In an affluent society, there is money to bid up the cost of the most desirable houses in the best school districts.
The first thing to teach him is the concept of supply and demand; very simple - something is worth what you want to pay for it, and what the other guy is willing to sell it for. Multiply that by a million people or 300 million, and it’s easy to see what something is worth very quickly. Add eBay to the mix and they can all find a price together.
The next step is depreciation or deterioration. He can see that living in a house, it does not “wear out” very quickly. A coat of paint every 5 or 10 years, the odd new carpet and furnace repair… Whereas cars cost money and get old a lot faster; motors break down, upholstery tears, window cranks (still have those?) get loose or fall off… so a 10-year-old car is worth a lot less than a new one, while a 10 year old house is not much different from a 1 year old house.
The other aspect of supply and demand is what someone can afford. If you olny make, let’s say, $50,000 a year - then do the math: (Every kid should be aware what life costs)
$13,000 for taxes. leaves $37,000 or about $3,000 a month.
From $3000 - say $800 - groceries and fast food (is $200/week too high? Low?)
From $2200 - other bills - $700
Leaves $1500 for a house. What’s the most you can afford with $1500? What would you have to cut out to afford $2000 for a house? Don’t forget paying property taxes, heating, electricity, etc.
If the average Joe can only afford $2000 or $1500 for a house, then there’s a limit to how expensive the house can be, even with today’s interest rates. If every builder makes $500,000 houses, then even at 3% that’s a mortgage (interest only) of $1250/mo. If your rate is 6%, that’s $2750, and a $50K worker would afford no more than about $250,000 house at $1250/mo.
Another important market principle is “substitution”. If you can’t afford a house on $50,000 you get an apartment. If too many poor working stiffs are chasing too few apartments, the rent also goes up and either you live in a cockroach infested slum or sleep in your car.
I once (within the last few years) read a review of a book that studied the sales of a single house in Amsterdam over a 400 year span and discovered that, all in all, it tracked inflation pretty exactly, but only over the really long haul.
Houses are generally maintained so as to last, if not forever, for a long long time. If a car is maintained like that, it will eventually be an antique and its value will start to rise again. But when I got rid of my last car, 17 years old, it was rusting out from underneath and repairing that would cost more than the car was worth. You expect to use up a car but not a house.
According to this, home values (in real dollars) have been pretty much flat since 1946, up until the current housing bubble.
It would help to know the age of your son.
Another factor is that car technology is advancing faster than house technology. After you’ve had a car for a few years, a new model of car will come out with new features, and everyone wants that new car with the new features instead of the old one, even if it’s in perfect condition. With houses, though, there just aren’t all that many new features appearing, so an old (well-maintained) house is worth just as much as a new one.