Forget Real Estate Appreciation, Just Call it Recovery
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.
Want more articles like this?
Create an account today to get BiggerPocket's best blog articles delivered to your inboxSign up for free
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.