Most assets don't stay at one fixed value forever. In general, there are those assets that over time are expected to gain more and more value the longer you hold onto them and those that are expected to lose more and more value the longer you hold onto them.
When an asset gains value over time, it "appreciates," and when it loses value over time, it "depreciates." In both cases, this happens as the addition or subtraction of some percentage of the value of the asset over time. Because the value in a certain year is proportional to the value in the previous year, gains and losses add up very quickly. In either case--appreciation or depreciation-- the higher the value of the asset, the quicker it will gain or lose value.
Think about it: there are 2 cars, one worth $10,000 and another worth $50,000. Cars depreciate, so both cars will lose 15% of their value in one year. A year later, the car that used to be $10,000 is now only worth $8,500-- that's a loss of $1,500-- and the car that used to be worth $50,000 is now worth $42,500-- that's a much bigger loss, of $7,500. After another year, the two cars will be worth 15% less than $8,500 and $42,500, and so on, year after year.
But houses do the opposite-- they appreciate. There are 2 houses, one worth $175,000 and one worth $1,000,000. If both go up 10% in value, then the cheaper house gains $17,500, while the more expensive house gains $100,000.
Let's now meet Gary for two more (quite realistic) examples. The instant Gary bought his brand new car from the dealership, it lost about 10% of its value, and over the next several years, it lost several percentage points more each year, to the point that after 5 years, Gary’s car might be worth half what he bought it for when it was brand new-- if that much.
Essentially, from the instant you buy the car because it’s no longer 100% new, it loses value and will continue losing even more value with each mile driven. It’s tough for a car to break this cycle of depreciation unless, for example, the car, decades later becomes a “classic” and therefore becomes a valuable collector’s item.
Ordinarily, it would never make sense to buy an asset you now know for sure will depreciate in the long term, especially as quickly as cars do. But the world—and the US especially—is very car-dependent, so having a car is necessary, despite its poor quality as an asset.
If you buy a used car for $10,000, and over 3 years, it loses 15% of its value, you lost $1500. But if you buy a new car for $60,000 and over 3 years, it loses 45% of its value (new cars lose value faster), you just lost $27,000. Any rational actor knows the most sensible thing to do from an economic standpoint, knowing a loss is inevitable, is to minimize it. So, buy a car that works well and is safe and efficient, but it doesn’t need to have all the bells and whistles, and it doesn’t need to be new.
A house, on the other hand, is an appreciating asset. Let’s say that Gary buys a house for $325,000 soon after he graduates from college and starts working. Over the course of the time he has lived there, for 40 years, the housing market on average appreciates 3.1% a year. Gary then wants to sell the house 40 years later because he wants to retire and move closer to his adult children who will help care for him, and he can get close to $1,102,000 for the house— a profit of $777,000.
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