Real Estate and Gold
Among the array of possible assets that you could buy, the largest tat many of you may make some day is a home, and the return on your investment will depend upon the appreciation in the price of the house. There was a time where homes were primarily shelter, but that all changed in the 1970s and 80s as real estate prices began to rise rapidly. In New England, for example, during the real estate boom in the 1980s [1983-1989], the average price of a house in Boston and Providence more than doubled while real estate prices nationally rose only six percent and the overall price level increased less than twenty percent. In 1989 the bubble burst, however, and in the next four years the price of houses in the two New England cities fell ten percent while nationally real estate rose 5 percent and the overall price level rose 16 percent.
As we look into the future for real estate, one of the major issues is demographics. What impact will the graying of the baby boomers have on housing prices? The concern that was raised a number of years ago was the movement of baby boomers into the home buying age bracket in the 1970s and 1980s helped drive up the price of homes? But this is a double edged sword and many are concerned with what will happen as they near retirement - when the boomers will be out of the home buying market. The story was that the loss of these potential demanders would put downward pressure on the price of homes. For a good set of charts detailing the potential impact of the baby boom, you should check out Dr. Yardeni's site. The bottom line on the investment is that you will make money on the investment if the price of the home increases in value at a rate faster than the rate of interest you pay on your mortgage.
For those who have a difficult time saving, however, the monthly mortgage payment can be thought of as forced saving. If you would have paid $500 a month in rent, but now pay it in a mortgage payment, you will be building up value even if the property does not appreciate. To see how this works let's look at a simple purchase of a $150,00 house. We'll assume you finance (borrow) the entire $150,000 and that you will pay 7 percent interest on a 30 year mortgage. Your monthly payment will be $997.95, which you could figure out using one of the on-line mortgage calculators. This mortgage payment has two parts - interest which you will pay for the use of the $150,000 needed to pay the seller of the house and principal, which is money that reduces the value of the loan amount. If you pay $2,000 in principal in the first year, then the balance on your mortgage at the end of the year is $148,000. If you happen to sell the house at the end of ten years for the $150,000, then you will have a balance due of $128,719 which will leave you with $21,281 - the amount of your forced savings. To run the numbers for yourself you might wan to check out Yahoo's link to calculators. Here is where you can find how much those payments will be. Autosite will allow you to figure out what that new car will cost you and allow you to compare the cost of buying a car and the cost of leasing. You can also check out Yahoo's site to find a number of calculators that will give you the cost of buying a house, but be prepared for some BIG numbers. Home Path calculators allows you to answer a number of questions including: should you refinance your home and how much can you afford in a home? If you want a graphical view, you might wan the check out Karl's calculators.
You could also invest in some other real assets. You could buy precious metals such as gold, but the return has not been good in recent years. In 1988, the price of gold hit nearly $500, but a decade later the price stood at barely over $300. Clearly the purchase of gold would not have been a good investment over this period. One of the factors responsible for the recent decline in the price of gold has been the decision on the part of some of the central banks (Fed in the US) to sell some of their gold which they had been keeping as a reserve against outstanding currencies ($s in the US). This increase in the supply put downward pressure on prices. There was also downward pressure exerted by a decrease in demand due to falling inflation rates. Gold had always been viewed as a good place to put one's money during inflation, so as inflation rates fell over the 1990s investors moved their money from gold into other assets. If you want to track the price of gold you could check out the commodities section of Dr. Yardeni's web site.