Today Bankrate ran an article telling how the rich and famous are trying unsuccessfully to sell their multi-million dollar homes. Some of them have been on the market for years with no takers.
Of course, there’s not a huge number of citizens who can even consider buying homes in the multi-million dollar range, so their buyer pool isn't large. But it made me think about the profits that some homeowners are still expecting today.
According to the article, Barry Manilow purchased his home for $3 Million in 1999. Then he put it on the market for $10.9 Million in 2009. Now he’s dropped the price to a paltry $7.9 Million and it still isn’t selling.
Is that price realistic?
No, not if you look at the “traditional” (pre boom) appreciation.
We used to believe that on average a home would appreciate 5% per year. If we applied that figure to a $3 Million price tag, that home today “should” be worth $5.4 Million. But of course, he’s still looking at what it was “worth” just before the bubble burst.
Since he once believed he could sell for $10.9 Million, he probably feels like he’ll be losing money if he sells at $7.9 Million.
Another example in the article was the Pierce Bronson home – it was purchased as a foreclosure for $600,000 in 1996 and now on the market for $3.5 Million.
For the sake of argument, I’m going assume he got a really good deal because it was a foreclosure, and the home was worth an even Million. According to my calculations of 5% per year gain, it would now be worth $2.08 Million. But he wants 3.5.
I know, national numbers don't count in your home town.
Here in our small town, the California bubble created a corresponding North Idaho bubble as people brought their profits and reinvested in the "land of peace and quiet."
Prices skyrocketed - in some cases by 180% within the space of 2 years. Now, prices have come down - but not to their pre-bubble levels, nor to a "normal" level of appreciation. It's still difficult for people who live and work here to purchase a home.
Is 5% per year the right number?
That 5% rate is only a number that used to be thrown out to convince buyers of the value of purchasing a home versus renting. When I checked the chart from decade to decade, I found that in the years from 1980 to 1990 the appreciation was much higher, and then it was lower between 1990 and 2000.
If you’re interested in housing history, I found a wonderful site showing the median price of homes in each state from 1940 through 2000. When you read it you’ll understand why your Grandmother is shocked at today’s prices – even AFTER the bubble burst. Check the Historical Census of Housing Tables for an interesting read.
According to this chart, the median home price in the U.S. in 2000 was $119,600. I didn’t find anything official for 2010, but according to a USA Today article, the national median price in the third quarter of 2010 was $177,900.
So – prices are still up. Just not up as much.
Maybe if you check those numbers, the facts will help you convince reluctant homeowners that they really ARE getting a good appreciation rate if their home has only gone up 60% since they purchased it ten years ago.