Will real estate ever appreciate again? The answer is a resounding yes, and the factors that will contribute to long-term real estate appreciation are many.
Ever heard the Mark Twain's quote about land? He said, "Buy land. They aren't making it anymore." It's as true today as it was in his day.
There's a finite amount of real property in the U.S., much of which is owned by the federal and state governments. Take out the properties that are geographically impossible to develop or that have no services, such as water and sewer, and the resource of land becomes even more finite.
While we have a finite supply, we also have an inevitable increase in demand. Why is it inevitable? The population of U.S. increases by roughly 3 million people each year, both through immigration and a positive birth-to-death ratio. No one foresees the U.S. population growth slowing any time soon.
Now, add to the finite supply-inevitable demand dynamic one other element: growth management. Many cities and states have orare putting in place growth-management regulations to slow urban sprawl and conserve natural resources. It's expensive to keep extending roads, water, sewer, and other services farther out into areas of low-density development, so governments are looking to curb urban sprawl.
The goal of growth management is to draw a boundary around an urban area and limit development on the rural side of that boundary. The corresponding goal is to stimulate infill development. Lawmakers want to encourage the creative use of property inside the circle and increase density, making use of the infrastructure that's already in place and reducing the future cost of continually extending expensive infrastructure.
Done properly, I believe growth management has many benefits to the environment and the economy. Some people won't agree with me, as additional government controls add to the cost of housing for everybody. However, we are heading in this direction as a nation, and we need to look for the opportunities created by this change. As supply is constricted further by growth management and our population increases, prices will go up.
Another factor on the supply side is that old and obsolete buildings will be torn down to make way for new projects. Hundreds of thousands of homes are demolished nationwide each year. Also, while a number of historic and nonhistoric commercial buildings are preserved and revitalized every year, plenty of commercial buildings that are no longer functional are taken down to make room for new projects.
A local example of this would be the Jensen Byrd building in the University District. It's a historic structure. However, it is functionally obsolescent with low ceilings and multiple support columns that don't make it conducive for a retrofit or cost effective for arestoration and reuse project. Not every old building can be repurposed.
Of course, some of this is theoretical. Supply does outweigh demand during down economic cycles, and we are currently coming out ofa recession with an excess supply of homes that will limit new construction for a number of years. The market will balance out over time, and when demand rises again, prices will rise with it. Through typical, long-term real estate cycles, there will be solid and steady appreciation, especially in well-constructed, well-located, well-occupied investment real estate. Well-located real estate has always enjoyed solid long-term appreciation.
A lack of cash, creativity, or long-term confidence is still sidelining some investors, but nowwhen prices are still depressedis the time to buyreal estate.The old saying goes, "Buy in bad times on good economics and sell in good times on bad economics." We currently are seeing manyinvestors taking advantage ofreduced prices to make some great buys onall types of real estate investments.
Not everyone will be able to profit easily from the current down market as the amount of cash required to make real estate investments has increased substantially. But despite the increased down payment requirements by financial institutions, there are opportunities for everyone. You just need to be a little bit more creative.
Many investors are taking advantage of depressed housing prices to invest in single-family rental homes. My brother-in-law in Phoenix is pooling money withfriends to pay cash for homes in the $30,000 to $40,000 range and renting them to other friends who have been foreclosed out of their homes. This has turned out to be a win-win situation that is producing solid cash flow with low risk.
Their returns easily will beat the 1 percent certificates of deposit I saw advertised in the lobby of a local bank yesterdayespecially if you add in some appreciation down the road.
Prices on apartment properties in many metropolitan areas around the countryalready are beginning to show significant appreciation.Thisappreciationis fueled by low vacancy rates and increasing rents brought about by the demand for housing by people who have been foreclosed upon and have lost their homes.
Investor demandhas increased due to the largest spread we have seen in the last 50 years between cap rates and interest rates.This spread provides double-digit returns on leveraged real estate investments.
As economist Peter Linneman recently stated, "Watch out or you are going to miss the recovery." Now is the time to invest in real estate, and yes, real estate will appreciate again.
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