Used Houses

I remember being shocked by the phrase “used house” as in “who would want a used house” since all houses where I grew up with were 60-100 years old– they were all “used”.    But it did get me thinking– why do used houses cost so much.  Once a house is paid off, either through waiting out a mortgage or inflation making the house payments essentially free, then why is it that one can sell the house again at a price as if it were new?

I don’t think it should be a strange question to ask:  Once a house is paid off, why does it go to another buyer as a debt burdened property?

The answer is, because people will pay.   That people are willing to buy many used houses for the price of building a new house plus the land.   It is what the market will bear.     But why will the market bear it?

The price is largely set by the monthly mortgage that people in the area can afford, rather than the worth of the house.   In the 70’s and 80’s in the United States the mortgage payments were set at a maximum of 28-29% of income to be guaranteed by the government.

“Prior to the mid 1990s the federal housing enterprises (Fannie Mae and Freddie Mac) would not purchase mortgages unless the principal, interest, tax, and insurance payment (PITI) did not exceed 28 percent of the borrower’s income for a conventional loan and 29 percent for an FHA insured loan.” US Census Department

This effectively set the price of the house.    And it was highly leveraged on the interest rate.   If the interest rate fell, then loan payments on a set amount would fall, but since people paid 30% of their income, this meant that the price of the house would go up to compensate for the lower interest rate.

This got even worse, when in the 1990’s the 28-29% rule was relaxed.   “The mid to late 1990s ushered in many less stringent guidelines.”    Therefore housing prices were allowed to increase further as interest rates stayed very low.

So the price of a used house stayed very high independent of what the house and property was worth.      How much higher than it would have without the mortgage system I will attempt to estimate in another post.

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