Real Estate is a longer play with ups and downs.
If you went to a casino to play blackjack and started with $100, got up to $1,200 but left with only $1,000 would you feel like you lost the next day? When looking at any investment, it’s important to see the long play and the rate of return, rather than focusing on the highs and lows along the way.
2017 Home Value : $320,000
2022 Actual Appreciation Rate: $601,243
– 2022 Historical Appreciation Rate: $389,329
Historic Appreciation would have been: $69.329
Bonus Appreciation: $211,914
Let’s say that you hypothetically bought a home in Gilbert, Mesa, or Phoenix for $320,000 in 2017. Using average figures, you could expect that home to be worth about $601,000 in July 2022 due to both an aggressively appreciating market prior to the Covid outbreak, and the historic appreciation seen during and post-Covid.
Historically, we have seen an average of about 4% appreciation year-over-year over the long-term. In this hypothetical instance, however, the housing market grew at astronomical levels, resulting in an increase of over $280,000 over 5 years. In a normal market, one would expect to see appreciation of just $69,329 – still a hefty return, but nowhere near how the market actually performed.
In this instance, you can see that the homeowner saw an increase of $211,914 above historic market expectations. This leads to a few points.
If prices fell, they would have to drop to 64% of the current value to reach the historic appreciation trendline. Any price reductions or corrections less than that still puts homeowners in a strong position versus historic market expectations for equity increase.
Seller concessions should be in perspective. As we move to a more balanced market, sellers may be asked to make concessions for buyers. A seller considering granting a buyer 3% concessions, which in this hypothetical would be a hefty $18,000, should keep in mind that they would still be $194,000 above equity projections from 2017.
