Michael Clarkson

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.

The Denver Market

The data - the S&P/Case-Schiller Index of Home Price Indices - shows just how local real estate markets are. So, let's look into it more.

Though the overall market is down 8.9% (see article here), the local markets show many different stories. In the inimitable words of Secret Agent Maxwell Smart, "Would you believe...?"

Though the data is national in scope, permit me to focus on Denver for the benefit of my clients.

Would you believe that Denver is:

• In the top 1/3 (~35%) of the 20 major markets for 2007?
• In the bottom 20% for the period from 2000 - 2007?
• That the trend from the bottom 20% to the TOP 1/3 is positive news for Denver?

Let's take a look at the data: the S&P/Case-Schiller Index of Home Price Indices show that the coasts are hurting - a lot.

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

As you see, Denver is #7 of the 20 major markets tracked. Though there was an overall 4.5% price loss this past year, it pales in comparison to the major markets on each coast.

• Miami - Down 17.5%
• San Diego - Down 15.0%
• Los Angeles - Down 13.7%
• Even the always exorbitant San Francisco - Down 10.8%

Only 3 - that's right THREE - major markets were up:

• Charlotte - Up 2.3%
• Portland - Up 1.2%
• Seattle - Up 0.5% (close to zero appreciation, but still positive)

Taken by itself, one would be inclined to think that Denver is a bad place to buy, losing 4.5% in value. I disagree. I think Denver is a great place to buy and sell real estate.

Why? Well, the data I have seen for the past several months, combined with lowered rates indicate that the local market is improving. Reinforcing that is are two studies offered through the National Association of Realtors® which can be found and downloaded from my website. http://www.milehighhomehunter.com/ .

• Market Study - http://www.milehighhomehunter.com/Denver_20_Housing_20_Market_20_Overview.html
• Pricing Study - http://www.milehighhomehunter.com/Price_20_Outlook.html

The raw data I see in the MLS - which is published on my blog at http://www.milehighmls.com/ - shows an improving market.

• A couple of months of smaller (and shrinking) listing inventories; though February should bring more listings.
• A continued pace of purchases - accelerated by rate reductions - which is higher than the trailing 12 months' average
• Under contract activity largely exceeding the trailing 12 months' average homes sold. Meaning, more homes are selling each month, than sold the prior 12 months' average.

Now, one would expect previously discouraged sellers to jump back into the market as the winter wanes and activity picks up. So, there is likely to be some short-term supply/demand imbalances, however, the longer-term trends tend to indicate strength rather than weakness.

To see those entries on my blog relating to the improving Denver markets, click here:

• February 2008 - http://www.milehighmls.com/2008/02/mile-high-home-hunter-denver-market_03.html
• January 2008 - http://www.milehighmls.com/2008/01/denver-metro-market-trend-analysis_8418.html
• December 2007 - http://www.milehighmls.com/2007/12/denver-metro-market-trend-analysis_1142.html
• November 2007 - http://www.milehighmls.com/2007/11/denver-metro-cities-state-of-market_10.html

So, the improving local market and it's comparative strength to other markets would indicate Denver is in a lot better shape than: Detroit, Miami...and even Los Angeles. Plus, you CANNOT beat the Colorado lifestyle!

So, if you were going to buy, would you prefer a market in the top 1/3 in the US or in the bottom 1/3?

If you don't believe it yourself, just ask yourself: Why would ConocoPhillips invest in the StorageTek/Sun Microsystems campus if the market were so bad? Why would ConocoPhillips bring nearly 1000 employees here? (See story here)

The big money sees Denver as the place to be.

You likely heard the headline today: "Home Prices Drop to 20-year Low!"

It's been all over the news and the internet. If you read the headlines, those of you from my generation would be reminded of a skit that Sean Penn did after the 1987 Stock Market Crash on Saturday Night Live.

In that skit, Sean - in character - was an inebriated floor trader being interviewed on a parody of Wall Street Week with Louis Rukeyser. Presumably, insulated from that day's trading troubles with copious amounts of intoxicants, a "mellowed" Penn - in character - advised getting out of stocks and into "canned goods and shotguns" a la survivalists as a pre-cursor to an impending societal breakdown. Well, though funny, societal breakdown didn't happen.

But is it really that bad? No. Far from it. (Ironically, that would be good for those Realtors® who had cabin listings in the mountains - far from civilization. So, SOME good would come of that!

While there is a valid concern about interest rate adjustments, overextended borrowers and foreclosure impacts on the remaining property values, the real estate markets - when taken in a broader context - are doing quite well, though suffering a short-term supply-demand misalignment.

Well, today's report from the S&P/Case-Schiller Index of Home Price Indices would likely be a comparable situation to that dreadful day in 1987 and an equally powerful source of fodder for another SNL send-up. However, it is also a PHENOMENAL example of something all professionals in this business state, but rarely provide data to support: "That all Real Estate is local."

So, let me discuss today's headlines in two contexts:

• The local market - focusing on Denver
• The historical return on real estate - anywhere

Is Denver back?

Since December 2007, strong news has been published about the Denver real estate market. As noted in the flash message on this page (immediately to the right), Denver has been touted as having:

1. A projected "Top 5 Market" as identified in a National Association of REALTORS®.
   • Click here to see this report on my Mile High Home Hunter site. (You will need to open it as "read only" as it it password protected.)
2. A "Top 10 Job Growth Market" as identified by Monster.com.
   • Denver is experiencing 14% year-over-year job growth.
   • Click here to see the statistics.
3. A city in a "Top 10 Fastest Growing State", as seen in this Realtor® Magazine Article
   • Click here to see the article.

Does this mean that there is no better time to buy? Only you can answer that for yourself, based on your personal circumstances. However, the news is not what you are hearing on the local media. (For up-to-date market data in selected markets, please click over to my blog at http://www.milehighmls.com/.)

However, here is some information from the National Association of Realtors® that seems to support the belief that Denver is coming back:

• http://www.milehighhomehunter.com/Denver_20_Housing_20_Market_20_Overview.html
• http://www.milehighhomehunter.com/Price_20_Outlook.html

Kind regards and happy home hunting!

Michael Clarkson