Does Investing In An Addition To My Main Line Home Make Sense?

Exiting around the circular drive of the expansive Radnor home, A the words "We need to move quickly, there's a bidding war going on here," haunted my subconscious. Was my client serious? The home we had just measured was listed for $1,750,000.00 and she was asking me to design an expensive addition. The announcer proclaimed that it was 5:55 and time for the business report. The Dow was down again. Then it hit me. Home prices around the country where markets had doubled every three years were seeing massive retrenchment but Philadelphia on the other hand had experienced a slow steady advance. Was it possible home values along the Main Line had held up?



The next morning I searched for data. The S & P Case Shiller Index doesn’t cover the Philadelphia MSA but I did find that the National Association of Realtors published some data.


Median Sales Price of Existing Single Family Homes for the Delaware Valley

2004 $185,100
2005 $215,300
2006 $230,200
2007 $234,900
2008 $231,400 +25%

Wow, that’s impressive. I assume that unlike other more volatile markets in the U.S. that Philadelphia MSA never really heated up and over inflated. And since it never overinflated, it also hasn’t suffered a dramatic downturn. This data would lead me to believe that the investment in my home is safe.




So I plotted the Dow over the same time period. Yes indeed, my suspicion was correct. Home values had held up while stocks had plummeted.




Dow Jones Industrial Average

2004 10783.01
2005 10717.50
2006 12463.15
2007 13264.82
2008 8776.39 -18%

So with mortgage rates hitting record lows and with the commodities that are required to manufacture building materials like copper and oil dropping like a rock, the cost to make significant improvements to my home have never been cheaper.

Refinancing to borrow $100,000 to invest in my home at 5% will increase my monthly payment by about $450.00. And the interest paid will be tax deductible; net of the new 39 % Federal tax rate in my case the effective monthly payment is only about $300.00.

With the Federal government planning to borrow more than 10 percent of GDP over the next couple of years, deflation will soon be a concern of the past. A dramatic devaluation of the dollar, higher interest rates and inflation are on the horizon; three more excellent reasons why moving now to invest in a tangible asset like a home make sense.

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