[OPE-L:1829] Do houses depreciate?

glevy@acnet.pratt.edu (glevy@acnet.pratt.edu)
Fri, 19 Apr 1996 06:29:34 -0700

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Alan asked in [OPE-L:1827]:

> A question of practical as well as theoretical significance:
> Do houses depreciate?
> If they do, why isn't this reflected in their price?
> If they don't, what distinguishes them from other artefacts
> which do so depreciate?

I am going to assume that you are only asking about residential housing.

While I am not a home owner, I would assert that housing does depreciate.

However, let's first distinguish between the market price of the land
that the house is on versus the price of the housing (i.e. physical
structure) itself.

I believe that the market price for the residential land is largely
related to the market supply and demand for residential housing. Factors
of relevance would include the population in a specific geographic area,
income, land use limitations (affected by "city" government), labor
demand, and alternative uses of land.

More specifically, the price of land relates frequently to the demand for
housing and, therefore, is affected by all of the variables that affect
demand. As we all know, the market demand for residential housing is also
cyclically related, i.e. the market price for housing generally declines
during recessionary periods and increases during the expansionary period
(through the "income effect"?). This process, however, develops
unevenly in different urban areas and regions. Those who wanted to sell
houses in the Northeastern U.S. in recent years are very familiar with
this process.

Now, what about the physical structure itself? Housing, as all home
owners know, suffers from physical deterioration and requires additional
expenditures to maintain re-sale value (witness Alan's roof). One might
say as well that there is a form of ... (Jerry opens up another can of
worms) moral (i.e. social) depreciation or *appreciation* of housing.

How so? Well, the market price for existing housing can depreciate if new
technologies allow firms to build new houses at a lower cost. [Consider
changes in housing materials, e.g. asbestos in older houses]. Also,
the market price for housing can increase if there is excess demand for
housing or - under certain circumstances - if tastes in housing can change
(to give two examples).

Doesn't the presence of the above uncertainties also give rise to
speculation in housing which might assume particular importance during
inflationary periods?

In OPE-L Solidarity,