Do houses double in value every 8 years? The rate of appreciation is volatile, but the stable rate of appreciation in Irvine is 4.4%, and it takes houses 16 years to double in price.
Irvine Home Address … 6232 SIERRA SIENA Rd Irvine, CA 92603
Resale Home Price …… $1,269,000
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Fly, robin fly
Fly, robin fly
Fly, robin fly
Up, up to the sky
Fly, Robin Fly — Silver Convention
California real estate prices take flight fueled by kool aid intoxication and a firmly held belief that trees really can grow to the sky. The reality is that prices cannot go up faster than incomes without (1) raising debt-to-income ratios and (2) lowering interest rates.
We inflated prices beyond the limits of people’s ability to service debt, so the Federal Reserve has lowered interest rates to compensate. They can’t hold rates down forever.
The discussions about appreciation always come back to the question, “How quickly should house prices appreciate?” Today we are going to explore that question plus a related one, “How long should it take for a house to double in value?” Once we answer the first question, the answer to the second question is applied mathematics.
How Fast to Appreciate
Home prices do not go up by magic. I discussed this at length in Ownership Cost: Income, Payments and House Prices:
“Wage inflation is the slow increase in aggregate wages over time in
a given area. Wage inflation is a driver of price inflation because
workers will use wage increases to bid up the cost of goods and
services they demand. in a housing market, wage growth pushes up prices
as follows:
Assume a worker is earning $100,000 and can borrow $400,000 to bid
on property in today’s market. In one year, if this worker gets a 3%
raise (not this year), he will be making $103,000, and if other terms
do not change, he will be able to borrow $412,000. If he has also
increased his savings, the amount he can bid on real estate has also
increased by 3%.
A property that might sell for $500,000 today can sell for $515,000 in one year and it is no more expensive in terms of its financial impact; debt-to-income, savings impact, time of amortization — the key
variables remain the same. This is “normal” home price appreciation.”
If this is the mechanism at work, then what is the rate of wage inflation, and why do prices in California go up faster than wage inflation?
Wage Inflation
Since 1975, wages have grown by 4.3% annually in Irvine. This is well above the national average of 3.3%. This explains much of the health of our local real estate market and the long-term growth in prices we have witnessed.
Wage inflation has primarily caused the long-term rate of home price appreciation in Irvine to stand at 4.4% — at least that is the rate from 1984-1998, the last period that spans two market bottoms (see below).
Irvine, CA, Projections from Historic Appreciation Rates, 1984-2026
What is your prognosis for long-term wage growth in Irvine? Will we continue to outpace the country by 1% per year indefinitely? Will outsourcing and offshoring cause our wage growth to be below its recent 4.4% rate of growth? Over the long term, wage growth equals home price appreciation.
Declining Interest Rates
One reason we have seen prices rise faster than the general level of inflation and the local level of wage growth is due to the long-term trend of declining interest rates over the last 25 years.
Declining Interest Rates, 1984-2006
Note that I am only looking at interest rates since they stabilized after the inflation fiasco of the 70s. I don’t need to add the drama of the huge interest rate spike of the early 80s to make the point.
Lower interest rates make for larger loans. Part of the 4.4% yearly appreciation rate in Irvine over the last 25 years is due to steadily decreasing interest rates.
Debt-to-Income Ratios
Another reason for price increases greater than wage growth is our ever-increasing debt-to-income ratio. Since the late 1970s, lenders have been testing the limit on the DTIs people can handle before they default. Each time lenders enable borrowers to cross the threshold of 32% DTI (based on market aggregates), the market will continue higher due to irrational exuberance and kool aid intoxication until the music stops.
Take a look at the chart below that graphs the aggregate debt-to-income ratio in Irvine based on the national contact interest rate, Irvine income data and Irvine median home price data. The shaded areas have been added to show some key thresholds.
When the government first engineered loan modifications, they tried to modify people to 38% DTIs — which was a big drop for many — but the number is just too high, and borrowers redefaulted at very high rates. The recent rounds of loan mods have been at much lower DTIs.
Each time the aggregate market DTI moves above 32% (1979, 1987, 2003) the market enters its manic rally phase when prices move higher when they should be moving lower (contrast with 1994). Thirty-two percent represents a Ponzi limit in residential lending. Each time lenders develop a loan program to push DTIs higher (interest-only loans, Option ARMs), they simply create a Ponzi Scheme that inevitably collapses. When the market DTIs get down below 32% into the green range, prices stabilize near 28% DTIs — at least when the FED isn’t buying mortgage debt and directly controlling interest rates.
Doubling Time
So back to the original question, “how long should it take for a home to double in price? In Irvine, a home should appreciate at 4.4% per year to match wage growth. At 4.4% growth, a home will double in price in 16 years.
If you buy a home during a period of debt-to-income payment affordability, and sell during a period of very low affordability (time the bubble), you can make significantly more than 4.4% — as today’s 11.5% attests; however, the opposite is also true.
If you buy during a period of very low affordability, you may be at or below water for a very long time. People who bought in 1988, 1989 and 1990 saw no significant appreciation for a decade. What will be the fate of those who bought from 2003-2009? I have profiled many of them….
At 3.3% it takes 22 years for prices to double, at 4.4% it’s 16 years, at 7.2% it’s 10 years.
Many have made the analogy about trees growing to the sky to illustrate the problem of very high or differential appreciation rates. For those of you that like charts and graphs, below I show what prices will be like in 20 years if we step back to 2000 prices as a base (like the chart above) and project forward to 2030.
It is human nature to project short term uptrends to infinity. Californians believe they are capable of producing unlimited appreciation working within limited incomes, limited borrowing and limited savings. Prices occasionally appreciate quickly, and lenders enable unlimited HELOC spending which taxes the limits of homedebtor avarice, pride, lust, envy and gluttony. Wishful thinking enabled by lender greed; the California housing cycle.
Irvine Home Address … 6232 SIERRA SIENA Rd Irvine, CA 92603
Resale Home Price … $1,269,000 
Income Requirement ……. $233,563
Downpayment Needed … $253,800
20% Down Conventional
Home Purchase Price … $429,000
Home Purchase Date …. 4/10/2000
Net Gain (Loss) ………. $763,860
Percent Change ………. 195.8%
Annual Appreciation … 11.5%
Mortgage Interest Rate ………. 5.00%
Monthly Mortgage Payment … $5,450
Monthly Cash Outlays ………… $7,540
Monthly Cost of Ownership … $5,590
Property Details for 6232 SIERRA SIENA Rd Irvine, CA 92603
Beds 4
Baths 0 full 3 part baths
Size 2,550 sq ft
($498 / sq ft)
Lot Size 6,625 sq ft
Year Built 1972
Days on Market 6
Listing Updated 11/18/2009
MLS Number S596070
Property Type Single Family, Residential
Community Turtle Rock
Tract Bm
10+++One of the best ever to come on the market in Turtle Rock Broadmoors! Charming single level custom home completely remodeled with over 750 sq. ft. added in 2008. Looks like it is right out of a magazine! Excellent floorplan with HUGE state of the art kitchen designed by well known designer Lynn Pries. This dream kitchen opens to HUGE family room w/high ceilings….HUGE Bedrooms..4th bedroom currently used as an open office area that can easily be converted. Quality craftsmanship throughout featuring all new windows,french doors, gorgeous wood floors, raised ceilings, remote control skylights, wainscoting, 2 air conditioners, epoxy garage floor, etc. etc. Enjoy relaxing on the darling porch with a custom brick fireplace and white picket fence. Worth your wait to finally buy without building your own. Architectural plans included for future expansion if needed! Sought after neigborhood! Best Irvine Schools: University High and Bonita Canyon Elementary. No Mello Roos & Low assoc.
neigborhood?
This property was purchased on 4/10/2000 for $429,000. The owners used a $130,000 first mortgage and a $299,000 downpayment. They did increase their mortgage debt during the last nine years like everyone else did, but they only took out and spent about $300,000 — which was their original downpayment. They spent their initial equity, but the bubble has enriched them, and if they sell now before the high end collapses, they stand to make about $750,000.
Today we are looking at tax implications and opportunity costs because these number will give you a more accurate measure of the impact home ownership will have on the owner’s financial life.
The reason we have a large deduction or excluded amount is because years ago when there was no exclusion, long-term homeowners would be punished with capital gains taxes when they sold a principal residence when most of that gain was due to inflation. Without a method of adjusting the purchase price basis for inflation (like using the CPI), owners are being taxed on the profits created by inflation. They are getting less than their money back when you consider money’s purchasing power.
$300,000 Resale Price
The tax code allows wage earners the ability to give up the Standard Deduction and write off 
Let’s look in more detail as to why this effect happens. Assume a borrower has $50,000 in mortgage interest during a tax year, and this borrower makes about $150,000. For this borrower, the portion over $137,050 is taxed at 28%, and the amount between $67,900 and $137,050 is taxed at 25%, the gross tax savings would be about $12,888 for an effective marginal tax rate of 25.5%. This is the impact of crossing marginal tax rate lines.
For instance, a buyer could choose to rent and park their money in a 
When mortgage interest rates are very high, the demand for money is high, and lenders will be paying high CD rates to try to supply the demand for money through loans. The inverse is also true. When lenders do not need money to loan, interest rates fall, and lenders do not need to pay borrowers much for money. Plus, in a deflationary environment the lender has no reliable customers to loan the money to anyway.
