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There is Nothing Like Optimism

The American love affair with real estate is alive and optimism is in the air, particularly in the Golden State. Skeptical? Don’t be, it’s coming straight from the buyers’ mouths. The California Association of Realtors concluded their 2014 Survey of California Home Buyers, and the results are good enough to make my day.
According to the survey, buyers are burning with confidence about the future value of their homes. 81% of them believe that prices will further increase (and therefore build up more equity) over the next 5 years. It’s at an all-time high. When you have 81% of the buyers who agree on something, that makes page 1 of the news these days. Remember, the economy and real estate values were going backwards until just three years ago, at the tail end of the Great Recession.

If you compare the survey results to those results registered in the 2012 similar survey (41%), buyer’s optimism nearly doubled. FYI, the percentage of buyers who were betting on price appreciation was a dismal 35% in 2009, in the midst of the crisis. We’ve come a long way.

Real estate prices are pretty much reflecting the state of the economy. When things go in the right direction and financing is both available & affordable, real estate is where the family savings go, for shelter, savings and investment.

Over the last 10 years, the market has seen the best and the worst, going up or down on a roller-coaster ride. Some people benefited substantially from the fluctuations; some did not and are only now recovering from 5 years of recession. Looking back at where we come from and looking even more closely at where we stand today, I can honestly say that I don’t know too many people who lost money in real estate. I know a lot who made plenty.

Case in point: let’s look at San Mateo County in the Silicon Valley, a stretch of the Peninsula between San Francisco to the North and Palo Alto as the Southern border. The lowest annual average sales price of a Single Family Residence during the last 10 years ($876,958) was registered in 2009, at the bottom of the market cycle.

If we use this price as a base and compare it to price levels achieved 5 years before (prior to the financial crisis) and 5 years later (first 9 months of 2014), we see that it is 10% below the average price that would have been paid in 2004. Ouch, it hurts. But wait, look at where we are today: the price of this virtual home worth $877k five years ago, would now be $1,411,606… A whopping 61% jump!… And 44.5% more than in 2004!

Of course, such rate of appreciation cannot be generalized blindly on the US map. Various States, regions and towns fare quite differently in terms of real estate prices, depending on basic economic factors and overall supply & demand. However, irrespective of where you reside on the map, there is a far greater chance that you will gain substantially over time, than you will lose.

As a matter of fact, it is not uncommon for homeowners to “earn” more from their house’s appreciation than from the revenue of their labor. Interestingly enough, even if and when you stand to lose a little or more from the sale of your home, you may in fact “win”. At the end of the day, you might have ended up better off than if you had invested your money elsewhere, like the stock market for example.

My very favorite story, to illustrate the point, is one that stars a good friend of mine, who is also a top producer in the San Francisco Peninsula marketplace. A while back, when money was growing on trees in the Silicon Valley (1999 or beginning of 2000 if I recall), he sold a sumptuous estate in a renowned zip code (sorry I can’t be more explicit for confidential reasons) to a wealthy hi-tech guru.

Many years later, well after the market crashed and stabilized, the buyer put the property back on the market and sold it for a lot less than he paid for. And it so happened that my friend and his past customer crossed paths around that time. A little uneasy about the meeting, my friend felt compelled to mention how sorry he had felt upon learning that the buyer took a beating on the sale. And you know what the buyer replied? No you don’t…

What the buyer said is something like this: “you are kidding, I owe you. You saved me: if I had not bought this property with your help and guidance, I would have lost all my money… Thank you for having sold it to me… At least, this way, I recovered a lot of my investment!”

I guess you can’t go wrong buying real estate. I am glad you agree!

Alain Pinel

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