Appreciation: The Investor’s Great Unknown

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Most experienced investors will tell you that comprehensive analysis and underwriting is the key to success in real estate investing and that appreciation is just an added bonus in the equation.

While that is sound advice, lets be honest; appreciation is the 800 pound gorilla in the room when it comes to real estate investing. It has made fortunes for the most amateur of investors, and most recently, has destroyed the wealth of the most sophisticated of investors. Everyone wants to know where appreciation is going. And although there’s no scientific formula for predicting appreciation, there is no shortage of analytics out there that can give us some insight to where we are heading.

With that in mind, I’ve recently come across an interesting Case Shiller Housing Index Chart that tracked housing prices going back to 1890, adjusted for inflation (existing homes sales only). A perusal of the chart reveals that even with the depreciation we have experienced over the past few years, home prices are still above long term averages. If these averages hold true, it would appear that we’re in for some more depreciation in housing prices moving forward.

Before panic begins to set in, this is a very macro look at home prices. Every different market has its own characteristics and unique factors that drive price. Even if this is a good indicator of what is ultimately in store for overall home prices, looking at the chart, you could reasonably conclude that it may be decades before prices begin adjusting downward again.

A colleague of mine also noted that this chart doesn’t take into account square footage of homes. According to the National Association of Home Builders, the average home size in 2004 was 2,330 square feet. Whereas in 1970, the average home size was 1,400 square feet. I’m also guessing that the average house includes more amenities today than in the past, including full size garages, pools, etc. Perhaps a more accurate picture would chart historical home prices per square? Such a chart would predict a much more favorable appreciation outcome in the years to come.

At the end of the day, this is just one chart in a sea of statistics regarding appreciation; no one has a crystal ball when it comes to predicting future home prices. Nonetheless, the chart gave me pause when I first came across it and thought it was worth sharing. I would be interested to hear your thoughts as well as any relevant studies you have come across recently in regards to appreciation.

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  1. I like the analysis of square footage and amenities. IMO the neighborhoods (in my area at least) that offer smaller, more energy efficient homes, with more amenities and a location closer to the action (restaurants, bars, etc) have held value much better than many of the suburb neighborhoods.

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