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Home Prices Are Rebounding and That's a Bad Thing?

By Jay Jenkins – Mar 2, 2014 at 9:00AM

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The interconnection between home prices and interest rates is hurting affordability for American's in the market for a new home.

When you buy a share of a company's stock, you want that price to rise in the future. Your purchase is an investment in that company's future earnings, future dividends, and hopefully, a higher stock price. 

The same goes for your house, right? You buy your home, and with a little luck, it will be worth more when you sell it in the future. Warren Buffett spoke to this in his much discussed excerpt from the 2014 Berkshire Hathaway annual letter.

The takeaway is that when you invest, you're counting on the future productivity of the asset you buy. For your home, an asset without routine returns like a farm or apartment building (to be fair, I don't exactly consider a home an investment), this means there must be a buyer who can afford to buy your house for more than what you paid. Without cash flow or commercial application, your home's investment potential lies with a buyer in the future willing and able to pay up.

This is, unfortunately, the double edged sword of home price appreciation. 2013 saw marked gains in home prices at the same time as interest rates began to rise. Higher prices plus more expensive mortgages have sent home affordability plummeting. In the video below, Motley Fool contributor Jay Jenkins takes a deep dive into the home affordability issue, explaining the seemingly contradictory nature of rising home prices.

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Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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