It always scares the daylights out of me when I start to read about “appreciation” in the housing market. It’s not that there is a discussion regarding appreciation occurring… that is always a good thing. What worries me most is that there are far too many investors, usually new investors, who get caught up in the promise of huge profits driven by appreciation and they make their investment decisions accordingly. OUCH!
We saw this happen every day during the run up. In fact, many “successful investors” – and I use that description disparagingly — during the run up, were successful only because of appreciation, yet they thought themselves to real estate geniuses. Well, we know how that ended for thousands. Not only did the investors tank, but so did the lenders who funded them!
With that as a backdrop
I found this article, a Baltimore Sun real estate blog that displays a Case-Schiller map of the U.S. and predictions of when housing prices should return to their pre-decline days. In other words appreciate to the point where they were in the summer of 2006.
After taking a quick look at these predictions, I am not sure I agree. While I do believe we will be seeing measured – very measured – appreciation starting in the next few years, hoping for property prices to climb to their previous highs is wishful thinking!
Why Wishful Thinking?
To get to those highs would mean that the economy would have to produce over 8 million new jobs (just to reclaim all those who lost their jobs) and then it would have to grow so that incomes increase to the point where higher priced homes could be afforded.
Lets dissect the probability of the economy creating in excess of 8 million new jobs anytime soon. Economist have indicated that in a normally functioning economy it can be expected that 50,000 new jobs will be created every month, or, 600,000 every year. To replace those 8 million that were lost would require at least 12 plus years, and in some states like California and Michigan, they may never recover. Bottom line… it ain’t going to happen!
Are we likely to see appreciation anytime soon? Yes! But in very modest terms and not for at least the next 18 months. And, we can be pretty sure that we are a very long way off from the pre-meltdown highs.
How will a prudent investor respond to this scenario?
Simple. The prudent investor will know that they should never purchase a property where appreciation is considered into their calculated profit. So, even more simply put, the smart investor doesn’t care about appreciation because they aren’t considering it to make their deals work.
Related posts:
- Appreciation Rate Isn’t What’s Most Important
- US Metros With Highest & Lowest Rates of Price Appreciation
- Housing Rescue Bailout and the Future of Lending
- The State of the US Economy and Housing Market and Tips for Future Real Estate Investments
- Michigan: On a Collision Course with Reality
Article Author: Peter GiardiniPeter has written 87 articles for us.
Visit Peter's Website: http://www.theclubmastermind.com
Peter is an active and successful real estate investor in the Baltimore Maryland region for the past 8 years and is one of the founders of The Club Mastermind a real estate investing coaching program focused on local coaches helping investors to perfect their game.
Joshua Dorkin
{ 10 comments… read them below or add one }
Peter, great points. To consider for that type of appreciation in calculating the potential profit is misguided. Not only is that something that can be predicted with any degree of certainty, but it is exposing your investment to unnecessary risks. We will see appreciation in the coming years, that much is for sure, but nowhere near the levels that were experienced during parts of the past decade.
Mariah… I totally agree! If we start to drive towards pre-2007 price levels it will only be due to high inflation… not due to economic growth.
Peter, I think you might be discounting the effects of inflation. If inflation heads back to the 10% area, which is not too far-fetched, we could get back to 2006 numbers pretty quickly.
Of course, there will be some who call this appreciation and crow about the wonderful recovery, but that is another story.
Steve… I deliberately left out inflation driven appreciation due to the very point you make in the last sentence. Inflation driven appreciation creates its own problems… but you know that…and I bet we both agree that the problems would far outweigh the benefits.
Good article Peter with some hard cold facts. I have to agree that it’s going to take longer for a rebound this time around. Aside from the jobs, there are other world factors that affect our economy as well.
Visit Liz Voss’s last blog at San Antonio Homes.
Liz… there are so many things globally and nationally that are in play and all changing so fast that this ride will continue for a while. The really great news in all of this is that within all of this turmoil and uncertainty is certain opportunity.
Pete
Appreciation is, and will be for the foreseeable future, a luxury. Good stuff, Peter.
Jeff… you are so right… a luxury is a great way to descibe it.
Pete
“Don’t believe the hype” – great post, Pete!
Good article, Peter, but the baby boomers were the biggest house builders in the history of the world, in part because they were the greatest population bulge. Continued declining birth rates make it very unclear where these purchasers will come from. Who will buy all the four bed, two bath subdivisions that will come on the market in the next twenty years as those ‘boomers’ look to downsize, get rid of the stairs etc. I am inclined to think when the hot air and taxpayer housing programs fizzle, most traditional North American housing markets will see a long, slow deflationary trend. Appreciation? Like families with five kids, it will only be a quaint memory of times long past.