You may have two homes in two different neighborhoods. You have some insight into why one will hold value better than the other (chances are your realtor already knows this – this type of market specific info is what they are good at, macroeconomic trends, not so good). I doubt one neighborhood will continually appreciate 10%, while the other stagnates. This should show up quicker in a price difference today. Thinking about potential appreciate is less valuable than finding an underpriced property.

In that light, today one of the places where good deals are possible are in either foreclosures or REO sales. A colleague of my wife bought a new-construction home after the bank foreclosed on the builder, for 18% off its list price. However, the price/sqft was only about 5% lower than a comparable non-distressed sale. Any investment acuity is baked into the purchase price and not dependent on assumptions of appreciation for one home vs. the other.

Evaluating current price is a better source of an advantage than extrapolating potential appreciation trends, especially property specific appreciation.

What you seem to be neglecting is the case of someone paying far more for a property than they could rent a comparable property for. This path requires an assumption of inflation, either home price or rental cost. These trends tend to be market wide – the 5M+ people in southeast FL, and not very property/neighborhood specific.

http://homeecblog.wordpress.com/2009/10/12/buying-a-home-in-todays-market/

Every person who buys a home is making an investment. Period. It is also the largest investment most people make in their lifetime. The “dream of home ownership” should more accurately be “the dream of using leverage (OPM)”. If people approached buying a home the same way an entrepreneur would approach taking out a business loan, then we would all be better for it. You have to identify risk before entering the transaction and examine ways to counter that downside risk if/when it starts to become realized.

The current real estate industry, for the most part, is simply the blind leading the blind as misinformed or malintentioned agents and brokers lead uneducated consumers into debt traps.

All costs of buying, owning, and selling the house should be included in that equivalent rent. Doing this calculation requires being able to convert a present value (the buying costs) and a future value (the selling costs) to a series of payments. And of course it requires guesswork as to the selling date and selling costs. But with a good spreadsheet and/or the help of someone who is familiar with these kinds of time-value-of-money calculations, it should be possible to examine an array of possibilities and thus get a feel for what the monthly “rent” will have been under the various scenarios.

A home for your own use is a consumption good, not an investment. If you sell it later for a lot more money than you bought it for, that doesn’t make it a great investment. It only makes it a cheaper place to live than you expected. You can’t forget the monthly mortgage payments when you do these calculations.

A 25% drop in 10 years is likely to imply a very high rent, at least as a multiple of the sales price. There’s no epistemological reason the house couldn’t be worth that amount of rent, though it’s not the scenario we’re used to. If it’s known when the house is to be sold, and how much it will be sold for, and all the maintenance costs and the like along the way, then it’s a matter of simple finance to work out the necessary rental value of the home to justify a given price.

The hairier bit is that there is uncertainty, both in home values and in one’s income and wealth (and therefore willingness to pay a given amount to live in a given house), there is flexibility (both for good and bad) in terms of when a house is likely to be sold — in short, we’re not just valuing a treasury bond here. I think the framework I used — calculating implied rents based on a set of likely scenarios — or its inverse — calculating required final sales prices based on the rent one would be willing to pay — is the logical place to start, though, and I think the problem comes when people who pound “buying a house is an investment” underestimate the likely implied rent.