Question: Next year, our son will be graduating from Arizona State University. He recently told me that he has borrowed $40,000 in student loans for down payments to purchase three homes in a Queen Creek subdivision, in the past year. He is saying that in the next three to five years home values will appreciate rapidly, and that he should then be able to make over $100,000 on the sale of these three homes. I know that student loans are not dischargeable in bankruptcy, and I am concerned that he may have gotten himself in a financial mess. Is it realistic for my son to expect that the values of Arizona real estate and these three homes will appreciate rapidly in the next three to five years?
Answer: According to a Case-Shiller study the value of homes in the 100 years from 1900 to 2000 increased by 3.35% per year, just a little better than the rate of inflation. In other words, if your son bought a $100,000 home today, based on the historical 3.35% annual increase in home values, the home after three to five years would be worth $110,000 to $120,000. In light of a seller’s normal payment of 8 to 10% for closing costs such as broker’s commissions and title insurance, your son’s profits would be minimal, if any. However, home ownership today is a better investment than home ownership has been historically. Homeowners today who live in their home have tax deductions for mortgage interest and real property taxes, and since a 1997 federal tax law generally pay no tax on any gain on the sale of their home. In light of these tax advantages, and current low interest rates, values of homes, including your son’s three investment homes, should increase in the next three to five years greater than the historical 3.35% annual rate