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Archives for February 2015

Property Appreciation Over the Past 14 Years

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We all know that we experienced what economists would call an “anomaly” between 2004 and 2011, and as a result, thousands of people who were adversely affected by it have developed a particular point of view concerning the value of real estate and it’s viability as an investment.  Remember that time?  Prices shot through the roof, then the whole market “crashed.”

Savvy investors understand that their wealth is built over time, and strange occurrences in the market can be averaged over time to reflect common, long-term patterns.

You may often hear from real estate agents that the average rate of appreciation in the Greater Phoenix Metro Area ranges between 4-7% annually.  That doesn’t apply in every area of the valley, but that’s why they call it an average.

Appreciation is calculated year over year using a rather complicated formula.  Determine a single year’s appreciation is simple, but in order to figure out a pattern of growth over a long period of time dating back many years, this formula must be applied.

A Sampling of One Area of Scottsdale

The area I’ve chosen to highlight lies between Hayden Road and Pima Road, South of McDonald, and North of Chaparral Road.  It contains approximately 2,636 parcels according to the tax records, which are public.

In this area, from the year 2000 through the end of 2014, there were 1,132 closed sales recorded in the Arizona MLS, starting with an average price per square foot in the year 2000 of $87.16 through a final average price per square foot of $172.13 in 2014.

Remember, individual home values should not be calculated based solely on price per square foot.  There are many variables that will improve or hurt the value of an individual home.

Through the mortgage crisis, the highest average $/Foot was in November of 2005 at $223.00, but despite the massive bubble that we all lived through, over the past 14 years, the average rate of real estate appreciation rounds out at 4.98% annually.

Despite the chaos, we have found a relatively normal appreciation rate based on past performance.  This is an important number because it is the number any investor would use to determine what the potential future value of a home might be worth (sans the crystal ball that we all have in our back pocket.)

This average can only be applied to the area that I’ve sampled.  It’s not general.  It’s specific.  It takes time to calculate this information, but it’s important to know what to expect when you compare the value of your home to the current rate of inflation.

Your investment in real estate starts with your equity in the property you own.  Whether you pay cash for a property and own 100% of the home or you make payments whereby a portion of your payment is added to your equity, you can apply an average rate of appreciation to that equity to forecast what it will be worth in the future.

If there’s an area you’d like to have analyzed, I’ll be happy to do that for you.  Contact me today.

Calculating Rate of Appreciation

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Real estate goes up in value, for the most part.  True, there are reasons that values can fall, as we’ve seen in the past, but overall, as long as the property is in an area that is not adversely affected by some sort of uncommon variable, then it will gradually increase in value at varying rates.

When you read about the rate of appreciation for a given area, make sure that the source of the information is properly calculating the numbers you’re looking at.  It’s very easy to paint a picture that doesn’t truly represent what’s happening.

I’ll give you an example.

Let’s say in the year 2015, you purchase a home for $100,000.  In 2016, you sell that home for $200,000.  It would be safe to say that year over year your home appreciated 100%.  It wouldn’t, however, be safe to say that month over month your home appreciated by 8.33% (100% divided by 12.)  Why?  Because appreciation is a compounding calculation.

If your home which you purchased in 2015 for $100,000 was worth $150,000 in 5 years, a 50% increase, it’s possible to make an error in calculation by saying that the average rate of return for the area over that 5 year period was 10% per year, but that’s not correct.

The actual rate of return is a much more complicated formula.  In fact, it looks something like this:

R = 100 × ((EndingValue ÷ StartingValue)(1/period) − 1)

…where Period = years, months, weeks, or whatever you choose.

So, for our calculation on this 5 year period for a huge guide on sharpening knives, we would find that the actual annual rate of appreciation is roughly 8.45%, not 10%.  Let’s proof the calculation, adding the 1 before the rate to include the starting value in each result.

$100,000 X 1.0845 = $108450.00 (Year 1)

$108450.00 X 1.0845 = $117614.03 (Year 2)

$117614.03 X 1.0845 = $127,552.41 (Year 3)

$127,552.41 X 1.0845 = $138,330.59 (Year 4)

$138,330.59 X 1.0845 = $150,019.52 (Year 5).

The variable that changes the rate of return is obviously the amount of time that you calculate, and what period you are calculating (yearly, monthly, weekly, etc.)

So you can see that someone could easily lead you astray in determining your annual appreciation rate.  Sure, estimating 10% per year in our example would only be 1.55% off, but when you’re talking about compounding values with real estate, there’s not much room for error when it comes down to the bottom line, especially when you’re considering a given area as a potential investment for your future.