Historical Return on Real Estate

Now that we have seen how Denver appears to be bucking the trend, nationally, let's look at returns on real estate.  As the story is national in scope, permit me treat it nationally as well.

Let me start this section with a question: Do you recall the couple from Georgia who just won the lottery?  (See story here)  Robert and Tonya Harris picked all the correct numbers in the Georgia Mega Ball Lottery.  Their winnings: $270 million.  Sweet! 

Now, they won't get all that. Having chosen the lump-sum option, they will get $164 million, before taxes.  Let's say they wind-up with about $75 million after all the government taxing authorities get their cut. 

• Would you find it acceptable to net $75 million?
• Would you find it acceptable to net $75 million after having $270 million? 
• Would you find it acceptable to net $75 million when you started with $10 ticket?

I guess I would find that a nice return on my $10.

Now, let's take that example and extend it to the real estate market.

One invests in a property. It appreciates. It depreciates.  It appreciates again. It depreciates again.  Well, would you be happy if that net change - using the year 2000 as a baseline - were:

•·        76%?

•·        91%? 

Would you be happy with 76% net return?  Would you be happy with a 91% net return?  I would bet most people would be.

With that context, permit me to share the S&P/Case-Schiller Index of Home Price Indices, using the year 2000 as a baseline.

Data source: S&P/Case-Schiller Index of Home Price Indices

http://www2.standardandpoors.com/portal/site/sp/en/us/page.article/2,3,4,0,1145923002722.html

Original interpretation of data from S&P/Case-Schiller Index of Home Price Indices by Michael Clarkson

Though Denver is only up 26.5% - much of that due to the technology implosion in the 2001/2002 timeframe - that is still a 3.8% annual return (non-compounded) for that period.

In most of the market that get the predominant media attention, the returns rival what Tony Soprano charges for his "unsecured lines of credit". The top 5 markets returned the following return from 2000 to 2007:

1. Los Angeles - Up 119.3%
2. Miami - Up 114.2%
3. Washington - Up 108.4%
4. New York - 96.2%
5. San Diego - 87.5%

That's an annual return (again, non-compounded) of:

1. Los Angeles - Up 17.0% annually
2. Miami - Up 16.3% annually
3. Washington - Up 15.5% annually
4. New York - Up 13.7% annually
5. San Diego - Up 12.5% annually

Would you like those types of returns? You bet you would!  If you don't, then let me borrow your money and I will split the return 50/50. Deal?

In fact, the reason I noted the lottery winners is that these returns are similar to the lottery experience of Robert and Tonya Harris. However, in the instance of real estate, it's the free-market taxing the real estate, not the government. 

Would you spend the $10 to get $75 million? You bet!

Would you spend $100,000 on a home, to get $219,300 in 7 years (not to mention the tax benefits)? You bet you would!

So, is it realistic to expect those types of returns forever? No. It isn't. 

Did you know that Denver has that type of appreciation? It sure did.  Did it last? No.

In fact, in January 1993, when a net immigration to Denver started, Denver's index was 55.83 and in January 2000, at the beginning of the tail end of that boom, it was the baseline of 100.0. 

That change was:

• 79% over 7 years
• 11.3% per year, non-compounding

That's a rate rivaling the top 5 markets noted above. 

So, think of this blog entry as your "time machine".  For those of you who look back and think: "Man! I shoulda bought some houses back then! Boy, I would be in great shape today!"

Is it 1989 again? Is it 1993 again? Only you can judge that for yourself.  If you feel it is, then I am here to help. As an investor myself, I am a strong resource to help you achieve your real estate investing goals.

One will note that the only major market that is down - at all - is Detroit.  It's a one industry town with bad winters and muggy summers.  If you take 2007 out of the mix, even it is up 3.3% since 2000...but it's still Detroit!   

Look back to 1989 as noted above. Look back to 1993, as noted above (as it relates to Denver).  What you didn't do then, is what you can do now! 

Even when using Denver's low point in the 20 years this index has been tracked, February 1989, and projecting forward 7 years, one sees Denver moving from:

• 47.21 - February 1989
• 71.83 - February 1996
• That change is:
• 52% over 7 years, or
• 7.5% per year, non-compounding

Is a 7.5% return a good return for you?  Is 11.3% (from January 1993 to January 2000) a good return for you? Only you can answer that for you.

So, as you read today's headlines, step back.  While it is certain that losing money is worse than making it, a modicum of perspective is important.  Just like the lottery-winning Harris', every winning/earning/appreciation has a tax on it - even real estate.