With the historic rise and fall of home prices over that last 10 years, I think it’s safe to say that we’re all a bit more aware of and attentive to the value of our real estate. And we should be; for most of us, our homes will be our greatest financial asset (I’ll get into that more on another post). When your home appreciates/depreciates (increases/decreases in value), your equity (the difference between the value of your home and your mortgage balance) sees the full affect. Knowing where home values are, especially in relation to what is expected, gives you crucial information when deciding to buy, sell, access your equity, invest, etc. For example, if homes are selling for less than what is expected but are increasing, then chances are it is a wise time to buy.
What is normal?
As with all investments, what “should be” is a loaded question. The fact that real estate is local further makes this a harder question to answer (Detroit and Las Vegas have seen vastly different price fluctuations, even over the last 50 years). Still, I think it’s valuable to have a benchmark, and a fairly extensive review shows that long term, home prices appreciate at about 3.50% per year (roughly keeping up with inflation). So a home purchased 30 years ago for $100,000 would be worth close to $280,000 today. I must stress that this is the long-term rate of appreciation; the chart below shows how much things can change in the short term.
Where were we, where are we, and where are we going?
The chart below was borrowed from The Economist and shows how home prices have changed over the last 28 years. Salt Lake (or any other Utah city) was not represented, but the closest comparison would be to Denver. I took the liberty of inserting a red line to represent the long-term average rate of appreciation (3.5%). The other lines indicate the markets for Denver, Las Vegas, and a 10-city average (which we could use for the national average). Notice how we roughly “hovered” around the 3.5% average until the early 2000s when saw the boom years of the bubble. Then, as we all know, came the crash starting in 2007. We bumped around for a few years until 2011, when homes started appreciating again. As of the end of 2013 (and we’re not far off now), we’re just about right back to the historic average, with home values continuing to appreciate, but notice how the rate of increase is fairly steep (not as gradual as we saw in the 80s & 90s).
So…now what?
With this information, we can confidently answer a few key questions:
Are the rollercoaster years behind us? – For the most part, yes. We had some “emotional” years but the market appears to have returned the long-term average. Keep in mind though, that real estate is cyclical and will always be a bit of bumpy ride. The steepness of the current increase is something to be watched as well, although it’s unlikely that it’s another bubble comparable to the one we just experienced. Utah is truly growing, so there’s actual demand for more housing. Plus, we’re not seeing as much speculation and/or many of the silly financing that played a part in the previous boom/bust.
Is it a good time to buy? – Yes. You won’t find the deals that were available from 2009 to 2012, but homes are appreciating and at a solid rate. Unless you do something dumb, you won’t lose money.
Is it a good time to sell? – If you bought your home between 2005-2008 (yep, I’m in that boat), then you may still be slightly “underwater”, but probably won’t be for much longer. Unless you need to get out, I would probably give it another 6-12 months. Those that bought before 2005 or from 2009 to 2012 should collect a nice chunk of equity if they sold now.
Is it a good time to refinance? – All bias aside (well, most if it!), yes. Rates are still surprisingly low and you likely have the equity/home value to make it work (not to mention the options that are still out there for homeowners that are underwater). It’s also a good time to consider putting your equity to better use, as in paying off higher interest debt or potentially purchasing a rental (we’ll touch on that later).
Disclaimer – The amount of generalization in this post would give some economists/statisticians a heart attack and it’s always good to do more of your own research. Still, I think there’s value in rules of thumb, and that’s what this is.
Further reading:
http://www.economist.com/blogs/graphicdetail/2014/02/us-house-prices
http://realestate.msn.com/article.aspx?cp-documentid=23764511
