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The Cyclical Nature of Real Estate Illustrated.

Hi there. In this post I'm going to explore the history of a couple of recent foreclosures (REOs) that have just been placed under contract (pending). I figure this little exercise will give you some incite on the cyclical nature of real estate and property values.

Both of these properties were sold by me, prior to opening up Tutas Towne Realty, 10 years ago.

The first one is a 3 bedroom 2 bath pool home with 1670 sq ft of living area built in 1991 and sits on a ½ acre lot.

I met the original owner of this house back in 1995. He lived in England and this house was used as a vacation home. He built the house in 1991 and paid $95,000. It has since had 5 owners including Countrywide Mortgage who now owns the property. Let's check out the sales history.

SOLD	PRICE	% CHANGE SALE - SALE	17 YEAR CHANGE
NEW 1991	$ 95,000	N.A.
1996	$ 98,000	+ 3%
2002	$ 154,000	+ 56%
2005	$ 275,000	+ 44%
2006	$ 300,000	+ 9%
2008	$ 153,900	(- 49%)	+ 62%

Wow! Isn't that interesting? In 17 years this property has increased in value by 62%. That's pretty darn good.

Now let's check out another one. This house was built in 1991 and is a 3 bedroom 3 bath with 1644 sq ft and a pool on a standard size lot.

The original owner of this property was also from England and I met her in 1996. She paid $87,900 for this property when she had it built.

It's had 4 owners including Bear Stearns who owns it now and is also currently under contract. Here's the sales history.

SOLD	PRICE	% CHANGE SALE - SALE	17 YEAR CHANGE
1991	$ 87,900
1997	$ 82,900	(- 6%)
2006	$ 232,000	+ 180%
2008	$ 114,900	( -50%)	+31%

This one didn't fare as well as the first one. It only increased by 31% over 17 years. But look at what happened between 1997 and 2006. Holy crap!!! A 180% increase!!! That's incredible.

These charts show you that during the 90s values barely increased if at all. This was a down cycle. Then, from about 2000 to 2006, values sky rocketed. Now we are back in a down market.

The big question is...will it last 10 years like the last one? Maybe. If that's the case then we are looking at 2016 before we hit the next big upswing in values. OR was 2001-2006 just an anomaly?

What do you think?

NOTE: Real Estate markets are very local. This report is based on data specific to Poinciana FL. Also, the 2008 sales data is based on a pending price not a sales price, so the percentages will vary slightly.

Posted by Bryant Tutas Broker/REALTOR(R) Tutas Towne Realty, Inc on 07/22/2008 02:51 PM

Comments (38)

poinciana fl, market data

Originally posted at: Selling Poinciana One Property at a Time.: The Cyclical Nature of Real Estate Illustrated.

This post has been included in Florida Information Osceola County, FL Information Poinciana, FL Information

38 Comments on The Cyclical Nature of Real Estate Illustrated.

JUL

2008

Reserved Parking For "The Lovely Wife"...TLW...ROAR!

Blog Boy...

I'm thinking anomaly. We've seen this before and we'll probably see it again. And just so you know I agree with Laurie Mandrich's observations a few days back. Our market makes for a great a case study :)

TLW...ROAR!

Seeing the numbers laid out like this really puts into prospective how bad of a market we are really in...

Interesting stuff BB! I like your optimist attitude :)

The lesson is clear. Buy and hold. Buy and hold.

8 -10 years for Florida. Traveling through Colorado recently...they have not seen the big decreases that Florida has..but they also did not sell most of their property to speculators over the last few year and they have jobs. With Real Estate being very local...you will see pockets that will recover faster than others...but i feel that Florida is a good 8-10 year sideways market....we have possibly hit bottom but will not be going up anytime soon...IMO

Bryant,

The numbers speak for themselves! I say we have hit bottom and will begin a slow climb out!!! Thanks, Fran

BB -

The market for 2004-2006 was by far an unhealthy market and now we are all paying the price for it. This was caused in part, due to seller's greediness driving the prices up at times over 100% within a short period of time. The real estate market as it is with the economy is cyclical.

Look at the auto industry; here in the U.S. the norm for years was "the bigger the better". Now, the car dealers have massive amounts of trucks on their lot, trying every conceivable way to make a sale because of the fuel prices and the economy. The folks at GM and Ford have never given it a second thought that perhaps a more fuel efficient car would carry the auto industry when times are intricate.

I do believe that it will take about 6-7 years for the (market) economy to rebound. So buy now and hold on because Real Estate is by far still a sound investment.

Just my 2cents!

Bryant - For your area, Lenn's right. Buy and freaking hold!

You gotta know when to hold 'em, know when to fold 'em, know when to walk away and know when to run...

What this illustrates clearly to me is that it's all about when you buy and sell. But over the long term, if you hold it you will reap nice rewards. Hmmm...that sounds exactly like what my financial advisor tells me about my portfolio!

Bryant, is there any adjustment for inflation in these numbers? Regardless: Buy and hold. Want to buy a flip?

BB,

You're right, it is very interesting!

Currently I have a home listed for $559,000 (today's pricing) they bought it from me for $35,000 37 years ago when we both had young families.

Just solely on those numbers, the first house averaged appreciation of about 3.6% per year and the second house was 1.8% per year. You could have done better in a 12-month CD. I know the housing fluctuations are pretty wild though.

I think we will be flat for quite a while. 2008 is about the equivalent of where the market was in 1990. So just based on historical years repeating themselves, we will be down another 2 years and then flat for another 8. I do think that this recession has been much worse than the one in the late 80's-early 90's though. Fuel costs are killing us.

I was just crunching some numbers for my outside blog that was going to look at the same thing. The long term appreciation of housing.

Those numbers look VERY similar to ours here. In fact you may have inspired me to dig further. I moved here in 1994 and we saw many homes that were in shambles, bank owned, etc. From about 2001 to 2005 the market was CRAZY. Then we decreased from early 2006 through until now. I think we have a couple more years of this type of market then I see it stabilizing.

I agree with the others, buy & hold! Real Estate shouldn't have ever been day/swing traded.

If you don't have to sell right now - WAIT!

Unreal...I hate to see what those stats look like in a bar graph...

I agree with Susan... RE wasn't mean to be traded like shares of GE. Buy and hold is definitely the order of the year month week day. Oh, and as for the 10 year down cycle... well, Blogging Betty and her push up bra may have to amend their retirement plans.... NOT.

I hope all my junk ratchets up over 10 years. Fingers crossed.

BB. Those are some seriously disturbing numbers. I'm going to do some checking. I usually view the property history, I don't think I've seen any quite that significant here in Fort Lauderdale...I'm sure there are some, however...I don't do many short sales...

I agree buy and hold! Just my 2 cents.

Bryant,

Thanks for the post. This market correction is complicated by factors that did not exist back in the 80s. The new President's economic policies will have a lot to do with market stabilization.

Those look like some really good bargains. I'm shocked at how much prices have come down.

The comments here are interesting. Not too long ago it seemeed like many were in denial and saying that prices were just leveling off a bit. Now it seems like most people are accepting the fact that prices in these areas might take a long time to recover.

Could this be the capitulation phase that signals the bottom of the market? When no one wants to own the stuff, it's usually a good time to buy.

Interesting numbers. I guess it goes to show that in the long term property appreciates. Sort of like the stock market.

Very typical for our area also we focus on the short term and forget about the tremendous value of holding a home for 15 or 20 years. Thanks for the analysis.

That's a huge jump. Our market actually started the incline aroudn 1998 or 99. And it depending on which city you view, the drop didn't happen until 2006 and it was very steep!

JUL

2008

I think it will nudge along and be a long time before appreciation happens in the double digits again.

Good morning everybody!!!

Charles asked if I had made adjustments for inflation. Nope. Took me long enough just to figure out the percentages.

These houses brought back some memories when I noticed both pop up as pendings over the weekend. I've sold the first house twice and TLW and I actually had Thanksgiving over there in 1997.

The second one I also sold twice. The first person I sold it to and sold it for later turned out to have an extended family in Poinciana and I have sold 8 homes for them over the years.

So these two houses alone were responsible for 12 closings over the years.

As always I appreciate you stopping by with your thoughts. Now go make some money today!!!

It's interesting how many folks from England have purchased real estate in Florida. My rental villa is in Boca Grande, Fl and we have a lot of English owners in that area. How is you market in Poinciana? Are things picking up at all?

Miss you guys here at Inman. Ok, back to your post....

We had a fairly consistent apprecation of 8% for many years in the Ann Arbor AREA market, some townships doing 3-4%, we never had that kind of appreciation, no wonder Florida is hurting. It must have been the speculation of people thinking the baby boomers were going to retire and move down there.

By 2005,2006, the MI market was not hot, but already flat due to job layoffs. We noticed it slowing in 2001 before 911.

Our current home prices are down to the year 2000 values.

I heard an economist at U of M speak, he said follow the jobs, when you see jobs coming in and a community growing you will see the market come back.

So for us in MI we will be waiting a little while, how about you?

BB,

My position is that the long term (true) value of a property can be measured (one of many ways) as the value of the land it sits on, plus the cost of building a new house, minus the accumulated depreciation. Does house #2 have new carpet paint and roof, energy efficient windows and a new AC, if not it's not fair to say it's value only increased 31%. (new houses by definition have new ammenities and 0 depreciation). If the house has nothing done to it and the mentioned items all need updating to make it the kind of place the typical buyer would want to live, it's not an apples to apples comparison.

The trend analysis should be what is the land worth? But this is too complex for the drive by media.

Diane, Buyer activity is starting to pick up because the prices are finally getting down to where they need to be. But it's going to be a long time before prices even think about going up. We have over 3 years worth of inventory on the market!!

Missy, It's going to be several years before things start getting back to normal. Poinciana is just now seeing the tip of the iceberg for foreclosures. So values are going to continue to decline for quite a while.

Consumer, Thanks for stopping by. In Poinciana right now new construction cannot compete with the resale market. Most of the current inventory are homes that were built in the last few years and are bank owned properties. You can purchase an almost new resale 1500 to 1800 sq ft in the high $80s. The lowest priced new construction right now starts in the $120s for about 1250 sq ft. These are being offered by the developer, Avatar, who has owned the land for more than 30 years.

There are 1000s of lots available with some being as low as $10,000 but most are in the $20,000 range. So an independent builder or even a national builder coming in can't compete. The majority of the lots available for an outside builder are located on the Polk county side. Impact fees alone are $20,000!! So if we do the math:

Lot            $ 15,000
Site work        7,500
Impact fees  20,000
                 ----------
Total         $ 42,500
                =======

This is before you even build the house and add in profit!!! Can't be done. You're much better off to buy a well priced REO or short sale.

JUL

2008

You can use this calculator to determine annual rate of returns:

http://www.moneychimp.com/calculator/discount_rate_calculator.htm

JUL

2008

BB-Ouch! Those numbers have to hurt. It seems the hardest hit areas were the ones with lots of speculation buying going on. The prices HAD to bottom out, eventually.....Remember when investors were buying and selling their "paper" on condos, homes, etc.? It has to stop somewhere. Sadly, these seem to be the areas that are getting it in the rear, with foreclosures.

Here in Huntsville, Alabama, we have had slow, steady growth over the years. My area had ZERO appreciation last year, but by golly we didn't loose a cent either. Since 2004'ish, we have had appreciation rates of 5 to 7%. I'm off to pull numbers for 10 years and see what I get.

JUL

2008

Interesting stuff. I will to take a stroll back in my market and do a few comparisons.

AUG

2008

Hi Broker Bryant, it's been a long time. I wanted to add my two cents to this post. As you know I live in Bakersfield and we have very similar markets so the same thing is going on here.

As far as the numbers on these two houses goes they were horrible investments. You need to factor in inflation and the cost of upkeep. When you do these houses as investments were probably net losses. An investor would have been much better buying a long term investment vehicle and even better than that doing it through a 401k so as to save even more on taxes.

Having said that, if the investor would have sold the property at the high they would have done very well.

You asked, is this an anomoly. Absolutely. What has transpired in real estate was caused by something that wasn't around historically, which is mortgages sold as securities. This won't be allowed to happen again in the same way. My guess is that you are getting close to your bottom for the lower end type house. It will probably level off in the next 1 to 3 years. But, it won't rebound after it stops falling. It will stay there for a couple of years and then go on to appreciate like it has historically appreciated, about the same pace as inflation. Housing as an investment is a good idea only if you can have a positive cash flow from renting. Appreciation wasn't part of the equation before everything went crazy and it won't be now. Appreciation only covers inflation, except for the crazy period we just went through.

If anyone wants to know what housing will be priced at when the bottom is here all you need to ask is if renting that house will cover the expenses of owning the house. Also, can the average house buyer in that area afford the average house price? The answer to both those questions is still no in most markets.

Bryant,

When shown these numbers many more may stop and think about the BIG picture..thanks for sharing.

Hey Ryan, Thanks for stopping by. It has been awhile. I've tracking rentals and they still don't make sense. One of the problems is that my market has an over abundance of rental properties too, so this is bringing the rent down. I do think prices are getting pretty close to bottom at least in my area. I'm starting to see quite few homes in the $55-$60 a sq ft range. That's where I feel they need to be. The average right now is $68. Another 10% to 15% decrease may do it. YIKES!!!

Dan, Folks need to shop for a home NOT a house.

AUG

2008

BB,

I agree. The prices here in Bakersfield are just about at the bottom as well. At least for tract type house they are. But, Bakersfield is a large city and we have a fair amount of high end houses and areas here. The high end custom houses aren't coming down nearly as fast or as far as they should be. I attribute this to the fact that their are fewer transactions occurring in that market so the depreciation has a delayed effect. Don't get me wrong, they are off around 25%, but the tract type house (which I live in) is off somewhere in the range of 40%. I bought the house we live in 10 years ago and paid $133,000 or $67/sq.ft. At the peak we could have easily sold for $400,000 or $200/Sq.ft. Now I am guessing based on comparables that we could sell it for $230,000! YIKES is right! But, we didn't refinance and pull money out. We did refinance to a 15 year mortgage at 4.75% interest, which is great. $750/ month goes to principal. I wish more people had taken the same kind of approach. You wouldn't believe the number of $800,000 plus houses on the market here, in BAKERSFIELD! These 4000 sqft monsters will eventually come all the way down to $400-500,000 IMO. That would be a reduction of more than 50%.

Hang in there BB. My wife was an escrow officer at First American and she quit right when it started to slow down because we had a baby. But, First American and other title companies here have shed well over half their work force. Many title companies have shut down altogether. It's crazy how much of the economy here was driven by real estate. Agents/Brokers like yourself will always be okay, but the legion of 20 somethings that descended on Bako to get rich quick are now flooding the unemployment lines.

OCT

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