Interestingly, you don’t hear the term “appreciation rate” much anymore. I was conducting a seminar this weekend and somebody in the group asked what our annual appreciation rate was. I was taken aback because the notion that real estate values are increasing or may be on the rise in the near future almost seems taboo. Rather than calling it appreciation, I answered the question by estimating the rate at which prices may begin to recover in my area.
For years, investors loved to compare different real estate markets in terms of appreciation rates. I remember having conversations (pre-recession) with investors who were giddy at the 15% and 20% appreciation rates they were achieving in markets like Orlando, Phoenix or Las Vegas. Living in Atlanta, we didn’t experience any hyper-appreciation, but were quite content with a consistent and dependable 5% appreciation rate. At the time, this seemed like a modest amount and something that we should expect indefinitely. Of course, we never would have guessed that our market (or any of the other hot markets around the country) could lose so much value in just a few short years.
Every market experienced the downturn in varying degrees. I believe many of the hotter markets imploded as a result of wild speculation and out-of-control lending. For many of the bubble markets, it will be a long road to recovery and one in which values may never attain the same height. However, there are many markets around the country where the fundamentals of the local economy are still sound and yet the real estate values are disproportionately low. As an investor, I believe that this is where the real opportunity lies.
Even with high unemployment, many local economies are continuing to add jobs as well as population. In time, these markets will reduce real estate inventories and the demand for housing will eventually push prices upward. Take Atlanta for example; our real estate values are somewhere near 2000 levels. We can actually acquire properties for less than half of replacement cost. At the same time however, our economy is expected to add over 50,000 new jobs in 2012 as well as 100,000 new people. With residential inventory down for the third straight year, basic economics dictate that a decrease in supply and an increase in demand will have to drive prices up at some point.
I realize many investors these days are investing for cash flow and have no expectation of appreciation. However, I think it’s important for investors to invest in a market where the cash flow is strong, but the opportunity for appreciation is also good. I realize with prices so far below their peak just a few years ago, it’s hard to consider any increase in prices “appreciation.” Perhaps instead of appreciation, consider the coming increase in values a recovery from a market that over-corrected. Regardless, don’t miss an opportunity to buy real estate while values remain at historical lows.
Related posts:
- How To Measure Real Estate Appreciation In Your Housing Market
- Three Factors that Limit Real Estate Appreciation
- Appreciation: The Investor’s Great Unknown
- US Metros With Highest & Lowest Rates of Price Appreciation
- Future Housing Appreciation: Myth or Reality
Article Author: Ken CorsiniKen has written 42 articles for us.
Visit Ken's Website: http://gainvesting.com
Ken Corsini is the founder of Georgia Residential Partners, LLC - a real estate investing firm based in Atlanta, Ga focused on creating turn-key investments for investors all over the country. He has a business degree from the University of Georgia, a Masters degree in Building Construction from Georgia Tech and is a licensed contractor in the state of Georgia.. He has been investing in real estate since 2005 and has been involved in hundreds of investment related real estate transactions since this time.
Joshua Dorkin
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This is the perfect time to invest in real estate, and any other entrepreneurial endeavor for that matter. If you make investments now while the market is down, you will reap the benefits when the market rises.
It’s interesting how things have flipped. During the bubble, everyone was “investing” (speculating, really) for appreciation. Now things are based on cash flow. Your most salient point though is “cash flow is strong, but the opportunity for appreciation is also good”. Most folks make their money when they exit assuming they’ve bought correctly.
Your points about appreciation are great ! Everyone is looking for return on investment and not considering the fact that everything that goes down goes up as well. We are in a down market and I believe that within the next five to six years the buyers will be grateful they bought now. Nobody has a crystal ball but the true investors buying properties at below today’s market value will all be winners considering they can afford the costs involved. Demand is strong and supply is shrinking making this the perfect market for return on investment as well as appreciation down the road. Everything is supply and demand !