Can you find me an example of the price of an 'average house' decreasing over a 20 year period?

Yes.

Housing prices are cyclical, depending on the economy and supply and demand. In Alaska in the 1970's during the construction of the trans-Alaska pipeline, many houses sold for nearly double what the same house brings today. Some banks went under when the pipeline boom ended and hordes of people walked away from their mortgages, being a hundred thousand dollars or more upside down.

I think it is highly unlikely that the grossly inflated housing prices in the high-demand areas of California are going to stay. California as a state is in so much economical trouble that it is not inconceivable that it could see financial collapse. What will happen to the real estate market then?

Ask your grandparents what happened to property values across this country in 1930.

You "youngsters" think that property values only go up, because that's all you've ever seen. I'm here to tell you that it just ain't so!

Now, I have spoken to a few people about this topic since I made my first post last night, and there are two holes in my logic that some folks on this bbs have approached but not hit directly.

1) My suggested interest rates are high based on the market situation today. However, in my defense, the key word in the previous sentence is "today". I vividly remember being grateful that my mortage rate was only 11% when new fixed-rate mortgages (if you could even get one) were going at 18-20%, and some people who chose variable rate mortgages (remember those? Prime rate +x%) were as high as 24%. Historically, 8% might not be that much out of line. The same arguments apply for my suggested 8% rate of return on the investment account. You won't get that today without high risk. But 20 years ago you could have gotten that much or better putting your money in a bank savings account.

2) I'm told that my estimation of rental cost was too low -- that to rent the equivalent of the hypothetical $150K house would cost more than $900 a month. I have no good feel for this -- it has been nearly 30 years since the last time I rented, and I have no good idea of what it's like to do so today. My $900 was just a wild guess, and I might be justifiably called to task for it.

There is a long-held rule of thumb that from a landlord's perspective, you should try to set the monthly rental price at 1% of the value of the building. If that is what is truly happening in real life, then my arguments lack merit.

tanstaafl.