Question

14. Four years ago, when you were 24, you graduated from college and landed a good paying job. At that time you purchased your "starter home" for $200K. Since then, the housing market in the city where your home is located experienced unusually high rate of price appreciation and a local real estate agent informed you that if you were to put your home on the market today, you will be able to sell it for about $350K.
a. Did the recent abnormal housing price appreciation benefited you? Explain.
b. What kind of individuals benefited the most from the recent price appreciation described in this question? Explain
c. What kind of individuals suffered the most from the recent price appreciation described in this question? Explain.

Answer 1

Lets assume that interest rate you would receive on a typical investment four years ago was 10%

So $200 would have become: $200,000X(1+0.1)^4 since FV = PV X (1+r)^n

which calculates to :

$292,820

But As informed by agent you can get about $350,000 if you sell the house

then you would make: (Sell price - buy price)/ buy price X100

= $350k-$200k/$200k X100 = 75% in total.

which is 18.75 % per annum ( 75/4)   

Ans A:

So definitely the adverse movement benefitted you because your investment has grown @ 18.75% per annum which is way more than the then available investment rate (10% as per our assumption).

Ans B:

All those individual who have invested in real estate as against the investment options giving way lesser return than 18.75% per annum have benefitted the most.

Ans C:

So the sufferer would be those who had preferred to make investment in avenues other than real estate and have had their investment grown way lesser than 18.75% per annum.