Seven or eight years ago, the real estate market was on fire. Buyers and investors were purchasing real estate with reckless abandon, despite the fact there was no logical way to justify double-digit appreciation. Despite the fact that inventory levels were rising, buyers moved forward thinking they would add to their financial nest egg. Investors also fell into the trap of thinking they could flip property as soon as they closed for big profits. A great deal of the buying frenzy was caused by the media hyping huge appreciation numbers.
Now, it appears to be déjà vu. Data just released on the first quarter by Case-Shiller shows that home prices are rising at their fastest pace since 2006. Prices rose in March year-over-year by 10.2%. Another report just released by the Conference Board, showed that consumer confidence in May is at its highest level since February, 2008. And not surprisingly, the media has not been shy about sharing news of a big recovery under way. Every day new reports are coming about how quickly real estate is recovering and how the stock market is reaching new highs it seems like almost on a daily basis. The million dollar question on everyone’s mind is, “are we going to repeat the major mistakes we made a few short years ago?”
Now for the answer. Absolutely not! This time it is different because this time, double-digit price increases in real estate are completely justified. Consider that:
- Investors have soaked up an oversupply of foreclosed properties
- Rents are rising at a rapid rate
- Mortgage rates are still very low
- Consumer confidence is improving by the week
- Pent-up demand for homes has just recently been released
- Inventory levels continue to drop
- Home prices nationally are still 28% lower than their peak prices in 2006 and still reflect 2003 levels
Now, for the big news. Homes prices nationally are still 28% lower than at their peak prices in 2006. In other words, today’s real estate prices still reflect values that made sense in 2003. But without the housing bubble, we should have seen appreciation of about 5% per year since 2003, yet we haven’t seen any appreciation. Why? Because the housing crash and recession caused the boom prices to overcorrect and drop much farther than they should have.
If this is true, the only way for us to recapture lost appreciation and return to the 5% per year appreciated values we should have seen since 2003, is for us to experience short-term double-digit appreciation. If this is true, we should have seen prices bump up more than just 5% recently.
And, guess what? They’ve officially gone up 10.2% just in the past year. This is proof that there is significant additional appreciation for buyers that make a move today, as opposed to waiting until prices once again level off.
This is called the Metamorphosis Theory of Recaptured Appreciation. To determine how much you can save, or make from an investment standpoint, all you need to do is the following:
- Go back to what the values in your neighborhood were in 2003 and multiply that number by 105% each year until you arrive at 2013.
- Then, deduct the amount you can buy the home for right now, from the final number in step #1. This will give you the amount of “Recaptured Appreciation” you are likely to see if you buy now instead of waiting until prices level off again.
Although there is no guarantee this will work, virtually every indicator and expert opinion points to substantial short-term appreciation for real estate. As we all know, timing is everything. Don’t let bad timing cause you to miss out on what you could get as a return if you buy today. And remember, you could be buying real estate with the same potential that investors realized when they bought back into the stock market a few years ago when the Dow was at 6,800. How did that work for them? Why not take advantage of the next best buy, Real Estate!