Location, Location, Location

I've talked before about why homes don't always increase in value and why renting is a good choice for many of us. However, recently I've been asking myself why homes ever increase in value. Most products (computers, shoes, cars) all decrease in value over time. What makes houses different? Part of it must be that the wear and tear of a house is less than most products. Also, the technology of homes hasn't radically improved. But those only explain why they hold value, not become more valuable. After running this idea by a good friend (thanks Ed), I believe the only reason why houses usually increase in value over time is because the land (or space) they occupy increases in value. I'm even willing to go as far as to say houses don't increase in value, their lots do.

It's the same reason gold, diamonds, or even collector's baseball cards can be good investments, it's difficult to create/find more. Demand increases, but supply can't match, pushing the price upwards. Land becomes more scarce because of increases in population and also because of the general desire for more land (farming larger plots, bigger backyards, etc). We see this proven in booming cities where homes are purchased, quickly demolished and new ones built instead. However, if land increases in value because of more demand, it can also decrease in value because of less demand. This can be seen in Detroit today. It also helps explain why mobile home prices don't normally increase. When buying a house, it's important to remember that you are mostly buying location, location, location.