"The ability to manage the unexpected consequences of our decisions is the real secret of investment success". Peter Bernstein.
The Last Two Years Have Been Difficult. It seems like there are so many unexpected consequences that expected consequences don’t exist any more. We can use the statistical tools, the laws of probability, and our experience but we can’t avoid the events which take us by surprise. Many so-called experts tell us that this is a difficult time to invest. I have news for them. It’s always a difficult time to invest.
I Discovered A New Source of Data. It’s been around for a long time and I don’t know how I missed it. It’s called the Case-Shiller Report and it’s published by Standard and Poor’s. It follows real estate statistics in 20 metropolitan regions. Fortunately, Denver Colorado is one of them. The unique thing about their housing statistics is that they have the most accurate statistics on home appreciation rates that I have seen. In the past, I have used increases in the average sale price for a given area to determine appreciation rates. This leaves a lot to be desired since it doesn’t account for increases in home size or the proportion of homes that sell in a given price range. The Case-Shiller Index employs a technique in which they keep track of the sales of individual houses and derives an index to illustrate the increase or decreases in sale price. Data has been collected for 20 years.
Appreciation Rates Are Highly Variable. As an example, consider the period from 1988-1990. In Denver, the appreciation rate was zero. Contrast that to the period from 1999-2001 when the appreciation rate was approximately 13%. During the next 5 years, the appreciation rate slowed to about 3%. July 2006 was close to the high point in the market as prices began to deteriorate at the rate of about 2.8% per year. That period is the only one during the past 20 years where there has been a substantial depreciation in the area. This is a good example of unexpected consequences. The question is, can we use these and other statistics to predict the future of the housing prices.
What Can We Learn About The Future. From last month’s data, it appears that prices are stabilizing; however, one month doesn’t constitute a trend. Positive factors are a rapidly declining number of new building permits, declining inventory of existing homes for sale, and a slower rate of job loss. Although Case-Shiller does not publish some statistics for individual areas, we can learn something from their national statistics. On a national level, homes in foreclosure have increased by 23% from a similar period last year. Even more troubling is the delinquency rate which has increased by 44% from last year. This indicates that we will be seeing a consistent supply of new inventory via foreclosures. Even though the government brags about the success of their foreclosure avoidance program, they say little about the fact that 50% of the loans that are modified to help the consumer are delinquent again within 6 months.
So Is Now The Time To Invest In a Single Family House in Colorado? You definitely have less competition from other buyers. The $8,000 new home buyer tax credit is expiring soon and I suspect that there will be less competition from other investors and buyers of second homes. In 2007, 21% of buyers were investors and 12% were buyers of second homes. This means that fully one third of buyers were in the market for something other than a primary residence. I suspect that many of these have left the market for lack of confidence. You will also have more renters in the market place as those who lose their homes to foreclosure have to live someplace. You might have heard that it is more difficult to qualify for a mortgage in this market. That’s true; however, lenders are always eager to loan to buyers with good credit and a substantial down payment. It is my opinion that buyers of single-family home investments will do better than other investors in today’s market place.
I Am In Colorado For Awhile. Give me a call on my cell phone at 303-902-3940 if you would like to get together.
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