I think it is a no-brainer -- your friends are going to save thousands of dollars in interest paid each month by taking the 400k house. The appreciation is a non-factor in comparison to this. Even if they stuffed that savings in their mattress, they'd be much better off under virtually any circumstances 5 years or 10 years from now. The only scenerio where they are really on the wrong side of this "trade" is if home price appreciation over the time they own their home is extremely high compared to the historical average. A high inflation environment could contribute to this.I think your friends could hedge a good deal of their risk by investing a big chunk of the money they save on the mortgage payment each month into a real-estate related investment (i.e. REITs, homebuilders). By doing this, they would assure themselves some gains if HPA picks up substantially, while still avoiding the extra thousands in interest expense that would come with the more expensive house.
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