What’s a paradigm in real estate? Here’s one used so often you can’t open a blog reader without reading about it. Real estate is local. I don’t see that one changing soon.
Since World War II there’s been another paradigm. This one isn’t talked about much. Going back to when the G.I.’s came home, went to college on the G.I. Bill, then bought homes via V.A. loans, this paradigm has existed.
To be clear, I’m only gonna be talking about Southern California as a general example. To be fair, even those regions with a history of slow and steady combined with a pronounced and demonstrable absence of periodic spikes in appreciation rates, show measurable increases in appreciation every 10 years at least once. Instead of a spike it’s more accurately called a small blip. An example would be a region accustomed to 3-5% yearly, enjoying 6-8% for a year or two.
The following is a rough history of Southern California real estate prices.
Every decade there is at least a year or two when real estate prices rise at a relatively higher rate than the historical average. But let’s forget averages. Here’s what’s happened to real estate values (home values) since 1940, which obviously includes a decade in which WW II accounted for more than half. So what happened?
Every 10 years, (let’s use from ’0′ to ’0′ each decade) prices doubled more or less. Even in the 1940′s when the first half of the decade the world was at war.
The 1950′s included all kinds of huge and positive changes in the American way of life. Appliances mass produced. Lower and middle class citizens getting college educations. The embryonic stages of our space program. The first two major league baseball teams moved to the west coast. Prices doubled from ’50 to ’60.
The 1960′s saw the Viet Nam war, three very traumatic political assassinations, and the huge cultural changes caused by the advent of the pill. Huge political upheaval defined the ’60′s. To top it all off, the Amazin’ Mets won a World Series in ’69 — a year of recession. Yet prices doubled from ’60 to ’70 give or take.
The 1970′s saw our withdrawal from Viet Nam, the shameful resignation of a president, monster inflation, our nation’s 200th birthday, the birth of the Padres, and the crash & burn of the economy in the decade’s last quarter. Yet prices roughly doubled from ’70 to ’80.
The 1980′s saw a ginormous income tax cut, massive job creation, and the biggest one day drop in the stock market since that dark October day in 1929. Geez, even the KC Royals won a world championship, and the lowly Padres, led by a svelte Tony Gwynn got into a World Series. The first third of the decade was marked by double digit interest rates and very hard times. Yet prices pretty much doubled from ’80 to ’90.
The 1990′s opened with the now infamous S & L Crisis which wreaked havoc indiscriminately. In San Diego it was made unimaginably worse by the loss of a few of our largest most deeply rooted employers. The Chargers went to the Super Bowl and rolled over for the 49ers. The Padres did the same for the Yankees. It could be argued the entire first half of that decade was disastrous for real estate. Still, from ’90 to ’00 prices again more or less doubled.
The initial decade of the 21st century? The first half saw prices rise 2½-3 times. Then came the inevitable correction, and what a correction it’s been. Wanna bet the prices in 2010 will be about double what they were in 2000? Wanna bet against it? I didn’t think so. Here’s what would happen if they didn’t.
I’m thinking of three income properties I sold for $200,000 in the first quarter of ’01. They sold for just under $525,000 in the late spring of ’05. If their value dropped a net 25% +/- in the 4½ years from their June ’05 sales price they’ll be worth $400,000 — which is, (in totally awesome Valley Speak) OMG, double their ’00 value. Go figure. My cracked crystal ball is as reliable as yours, but it seems that’s a scenario as plausible as any.
I’ve spoken before here about presidential election year economies. Since the end of WW II they’ve all been good to very good with just two exceptions — ’80 & ’92. We’re in an election year, and it’s my view the four months or so preceding election day the national economy will be measurably on the upswing. We’ll know one way or the other this summer. It pretty much comes down to how quickly the pitiful excuse for a stimulus package combined with the Fed Rate cuts (another ½% next month?) begin to impact our economy.
Also, and this has not a thing to do with anything but my memory and experience, since I was first licensed back in October of ’69 (just days after the Amazin’ Mets won the World Series) there has been a trend repeating itself inside the paradigm.
Generally, prices are kinda sucky in the front end of the decade. The middle seems to find a balance, sometimes even falling a bit. From around the 6th or 7th year ’till the end prices have risen. That cycle was ended when from ’97 through give or take summer of ’05 it was all up up up.
Again, I’ve spoken of this many times before here. I’m thinking since the cycle was destroyed by ignoring the slowdown period usually found in the middle years, I think the recovery will follow the same altered path.
Though the above example used So Cal, it can be argued regions around the country experienced the same trend lines even if to differing degrees.
That paradigm is what I think is about to shift, if only for the 20 years beginning in 2000 and finishing around 2020. As mentioned above, the first half of this paradigm shift has already occurred with 8 straight years of rising prices, many years sporting silly increases.
For the 10 years beginning with the recovery — whenever it begins — we will see most of the country with some very rare exceptions, plod along at 2-6% annual appreciation. Slow but steady. If we allow ourselves the hopelessly impossible exercise of predicting 2020 So Cal prices, it’s my guess they will fall short of doubling 2010′s prices. Our thinking will have to undergo a change. Think plow horses instead of race horses when you ponder appreciation.
BawldGuy Disclosure #37: As usual this opinion along with my heavily armed Starbucks card will get us some coffee and cookies.
Those who insist traditionally high appreciation regions will fall right back into the old pattern might be, in my opinion giving voice to their hopes. Until proven otherwise, I’m behaving as if 5% appreciation is flirting with Nirvana.
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Nicely written and argued. I believe you are essentially correct. What that means in the short run is a few years of negative or no appreciation, then a slow but steady movement upward. Investors, either must take that into consideration, lengthening their time horizons and changing their planned ROI or look at other real estate plays.
Ever since David Lereah wrote a book called “All Real Estate is Local” I’ve disbelieved it just on principle.
Ok seriously now….
Real estate is local, but the money supply is now global. We can’t seperate the two out anymore.
At least some of the quirky gains in various markets comes as a result of global money sloshing around into “local” real estate markets. Instead just locals investing/buying in any one area, suddenly anyone can invest anywhere.
I suspect real estate values will in general become less predictable than they have been in the past. They should become much faster to respond to market forces than in the past.
All it takes is a little hype that “Town XYZ is gonna grow and prices increase” and SLOSH! here comes the global money.
Though I agree that an average gain of 5% seems about what it should be. Though -5% somewhere and +15% somewhere else = 5% average gain.
The trick is to know one from the other.
Very well written. I think allot of R.E. is emotional. The media has convinced buyers to wait so when there are no buyers, the price goes down and down and down.
I loved the article that you referred us to that called for a Buyers day sometime in the future. That was a hilarious article and so true.
I’m wondering how lowered constuction will affect when buyers start buying again. Will this result in shorages in some markets? Many projects are being put off. Who wants to pay the price of construction loans and hard money only to have the units sit there unsold.
I agree, that appreciation will be slow for a while but then one never knows. Who could have predicted that San Diego prices would go down 30- 40% in some areas. I don’t remember them going down that much in other downturns. Did they?
Thanks Cher — as usual your observations are laser-like.
Lowered construction will certainly sway buyers. An anecdotal piece of evidence is what I’ve found while surveying agents I’ve met across the country.
Every single one said the traffic to local developer projects has increased dramatically, and is showing up in measurably decreased inventory.
This is a very cool trend, if it really is a trend.
In Phoenix, arguably one of the 2-3 worst hit regions nationally, three local agents there have told me the weekend traffic is akin to what we see at a local fair. Hyperbole? Probably — but one said they had to wait to speak to an onsite agent. Considering most agents at new Phoenix projects have been catching up on their Tom Clancy novels, that’s encouraging.
Nobody could’ve predicted what’s happened so far, though many claim to. This is a unique situation in my nearly 40 years here. That said, San Diego is still a horrible place for anyone’s investment capital. It’s the best place to live period — just don’t invest here.
FYI, ’0 – ’0 is 11 years. Other than that I am with you.
Geez Louise.
Good thing we have people like Michael looking over your shoulder to keep you honest, BG:-)
Yep, the ecomomy is unique uncharted territory right now. It’s a good time to learn the lesson of how to hang on to your wealth.
Amen,Phoenix is a tough market right now. The combination of the Sheriff scaring both illegals and legals out of AZ, 50% vacancies in the latino communities (and spilling over to other communities) rental concessions of two months, condo and SFH’s coming on line at the same prices as apartments is making for tough competition. From what the AMA “experts” say, this should absorb in about 6 months. We’re running 15% vacancy and DH is onsite for the last month retaining the tenants we have left. This is where the “Ambien” account comes in handy.
Where there is panic, there are deals. I heard that Robert Kiwasaki made allot of money buying in Scottdale during the last Phoenix downturn.
All the “debt free” owners are laughing themselves silly at those of us who have option arms. My hope is that we will have the last laugh!!
Interesting times…
Phoenix has been adding jobs and people without pause, which will bode incredibly well in recovery.
i think there are empirical signs fence sitters are beginning to jump onto the buy side.
And don’t believe builders aren’t building. They are — in places i’ve been telling my clients to go for a year now.
The adjustable loans are now adjusting down, and have been. The margins aren’t good, but you’re absolutely right about the absorption rate for these rentals. Those with well located rentals will be singing with smiles this summer, in my opinion.
Jeff,
Look at Tony Gwynn! I don’t remember him ever that skinny. I guess we all have short memories, especially when it comes to Real Estate investing.
Your points are well argued. I would highlight one thing (and step on the third rail while doing so): The tremendous average return on investment that you document does not even take into account tax benefits. That is how I can commit the blasphemy of saying I would give up the various tax deductions we receive now for a MUCH simpler and lower tax rate. Real estate as a long term investment stands alone and on its own.
Sean — You wanna talk tax benefits? The best of all times was ERTA, Reagan’s first tax bill in the early ’80′s. Depreciation went from 30 years to 15! It was later amended twice, finally settling in at 19. It was Heaven.
If you got your way with the reduced tax benefits etc., you’d have to go on vacation for a year or two while the chaotic real estate market found it’s level — which would be way way lower than now. But if we could figure a way to lower taxes while streamlining the IRC without creating an economic hurricane, I’d be right with you.
Here’s my #1 bar bet question for San Diegans and Tony Gwynn fans everywhere.
What was Tony’s main claim to fame as an San Diego State athlete? What very rare tribute to his athleticism did he receive shortly after graduation?
Absolutely on the tax benefits. Mom has a percentage in our Real Estate portfolio because we have more than enough depreciation for us AND her. Ever since she has been a partner, her tax bill:zip. Before? April 15th was painful and whiped out the saving account for the year.
It’s interesting how once folks invest in real estate they don’t fear April 15th.