Housing Price Return Is Same As Housing Price Index

What is your return investment in the house?

I'm guessing this is for some kind of homework assignment, so probably they're looking for a simple calculation like the following:

A 20% down payment on a $150,000 house is $30,000 so you invest $30,000 and borrow the other $120,000. After a year, you sell for $165,000 and pay off the $120,000 loan leaving you with $45,000. So you invested $30,000 and got $45,000 back after a year - which is a 50% return.

A 5% down payment on a $150,000 house is $7,500 so you invest $7,500 and borrow the other $142,500. After a year, you sell for $165,000 and pay off the $142,500 loan leaving you with $22,500. So you invested $7,500 and got $22,500 back after a year - which is a 200% return!

Unfortunately, in the real world your returns wouldn't be anywhere near that. In fact if the house price goes up by only $15,000 you'd almost certainly LOSE money selling it after a year. First, you'd have to subtract out the closing costs for buying and selling the house (transfer tax, recording fees, various inspections, legal fees, etc.) which would be a thousand or two. You'd have costs associated with obtaining the loan (origination fee, appraisal fees, possibly "points", etc.) which would be a couple thousand more. You'd have to pay interest on the loan for a year which might be about $7000. Unless you sell it yourself, you'd have to pay a realtor fee when you sell which is probably at least another $8000-$10000.

Buying and selling houses is very expensive so unless you're in a housing bubble, I think it's very difficult to flip a house in a year and make a profit (unless you buy it significantly below market value and fix it up to raise the value - or the housing market is in a bubble like it was a few years ago).

American housing bubble?

The collapse in the housing market that many were predicting has been regional. Some areas are almost unaffected.

Prices should certainly ease off some, but there should not be a collapse, unless the economy collapses. Here are some reasons why that may happen, from an article by Dr. Irwin Kellner for MarketWatch.

Economic Crisis

All recessions that have occurred since 1970 followed periods in which the Fed was actively tightening money. And all tightening cycles except two have produced a recession within at least two years after they ended.
The two exceptions took place in 1983-84 and 1994-95. They were called "soft landings," because the economy slowed enough to dampen inflation, yet not so much that growth disappeared altogether causing a jump in joblessness.
But these considerations aside, there was plenty of pain during these soft landings, as well as during the more widely recognized hard landings. This is because a number of collapses and bankruptcies occurred in the wake of each tightening cycle.
What follows are some of the better known crises and the years in which they occurred:
-- Penn Central went bankrupt in 1970;
-- Franklin National Bank went bankrupt in 1974;
-- The Farm Belt and Latin American Debt crisis in 1982;
-- Drysdale Securities and Penn Square Bank collapsed in 1983;
-- Continental Illinois Bank went bankrupt in 1984;
-- Stock market crashed in 1987;
-- Savings & Loan crisis/real estate collapse/junk bond crisis in 1990;
-- Mexican Peso crisis/Orange County went bankrupt in 1994;
-- Asian currency crisis/Long Term Capital Management/Russian default in 1997;
-- Internet/telecom/ bubbles burst in 2000;
-- Stocks collapsed into worst bear market since the Great Depression in 2000.
For 2006, we have a number of events to choose from, starting with the bursting of the real estate bubble. Two other industries with problems that could evolve into something worse are autos and airlines. And, of course, something completely unexpected could arise -- as it has many times before.
The message: whether the economy experiences a hard landing or a soft landing as a result of the current round of Fed rate hikes, it will most likely be only the tip of the iceberg.

When is Buying a House better than renting?

It depends on the housing market & economy. Housing prices go up and down in value. Selling at the right time is the key.
If you find that your rent (with utilities etc). is almost the same as a mortgage & that you can factor in extra expenses such as: maintenance, property tax, utilities, etc. than it is a good idea just to buy. Any home owner will always have to pay extra for maintenance & costs anyways. Just make sure it is all within your budget.
So if mortgage cost comes close to your rent & maintenance fees for a home are within your budget than yes go for it. Better to put your money into your own place, than over to your landlord. Sell your place when the market and economy pick up(if it works that way for you).
If you sell when it's a buyer's market, you may not get the amount of money back if housing prices are down. But buy when it's low.
Make sure to not buy a money pit of a home that will cost you alot of maintenance and headaches though.
There are also times when it's better to rent. It depends on your lifestyle and the economy. If you are hopping to one city to another for work, than renting would be great. If you are unsure about your job than maybe buying isn't the greatest.
Good luck.

Calculating return on investment.?

You have lost 20% on paper, any way you look at it.
You put down $25,000, you have a loan for $225,000, so you owe $25,000 more than the house is currently worth, minus whatever principal payments you have made during the 12 months. They are so small the first year, it would only be a few hundred dollars, if that.

The good thing is you have not REALLY lost anything unless you Sell! Simply hang in there.The value of housing changes every time a house is bought or sold in your area, as comparisons of recent sales are the best indicator of current market value. BUT, the only time any of it matters is when you are ready to sell yours. Until then, it is all on paper.
Hope this helps,
Al