Question

As a real estate speculator, you are planning and able to buy a house that costs $200,000, borrowing the full amount with no money down with the goal of selling this same property in exacty one year Mortgage interest rates are 5%, and the expected increase in housing prices is 2%. (All rates and percentages are annual values) What is your expected capital gain/loss when you flip the house in one year? The expected capital gain (or loss) is S(Round your response to the nearest dollar) What is your real rate of return? The real rate of return is % (Round your response to the nearest integer) How will an increase in mortgage rates to 10% and an expected increase in housing prices of 9% affect your decision? You will be

Answer 1

1. House Cost = $200,000

Expected increase in housing price= 2% = 0.02

Expected capital gain/ loss = 200,000*0.02 = $4,000

The expected capital gain (or loss) is $4,000.

2. The real rate of return is -3%.

Real rate of return is 2% -5% = -3%

3. You will be more likely to buy.because Real rate of return is increased to -1%