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.