What is your 2015 - 2020 Real Estate Market forecast?

Question

1. Do you believe that the appreciation we have seen in the past (1990 - 2010) will continue in the future (2010 - 2030)? For example, markets that tripled in value like the LA market ($250k median home price to $750k) will continue to appreciate in double digit %.

2. Do you believe the real estate markets will start to decouple in 2015? Some under valued markets like Dallas will see a unprecedented sustainable 7-9% appreciation while an over valued market like the Bay Area / OC / LA will see either 1-2% appreciation, or possibly negative numbers in the years ahead while other RE markets will not see appreciate at all.

What are your thoughts?

James Park · Answer

Here is the Appreciation Index Data (YTD)  from Jan - Sept 2014. Think of the national real estate market as one big stock market, where each blue chip stock pays dividends. The national index would be equivalent to the Vanguard Total Market Index fund and the 20 MSA City Index is equivalent to the top 20 Blue Chip Stock Index like San Francisco (Apple),  Seattle (Microsoft), JP Morgan Chase (New York) and Atlanta as (Coca Cola). Certain micro cities within that MSA will either out perform or under perform the city index. For example, Dallas Index shows appreciation of 7.17%, an Rental property in an A neighborhood in Dallas may have appreciated 13%, a C rental property in Dallas may have only appreciated 2%. 7.17% is just the index metro Dallas.

The top three MSA appreciation goes to San Francisco, Dallas, and Seattle. The bottom three MSA are Cleveland, OH, Washington DC, and Phoenix, AZ. Each of the index data below is the average YTD appreciation of the MSA city.

10 MSA City Index 4.78%20 MSA City Index 4.89%National Index        5.04%

YTD Appreciation in 2014.

Rank #1: Bay Area, CA:    7.57%#2: Dallas, TX:         7.17%#3: Seattle, WA       7.05%#4 Denver, CO        7.00%#5 Portland, OR     6.92%#6 Las Vegas, NV  6.78%#7 Miami, FL          6.66%#8 Atlanta, GA       5.09%#9 San Diego, CA   4.87%#10 Chicago, IL      4.82%#11 Tampa, FL      4.77%#12 Boston, MA    4.71%#13 LA/OC, CA     4.68%#14 Detroit, MI      4.23%#15 Charlotte, NC 3.94%#16 New York, NY 3.59%#17 Minneapolis, MN  3.25%#18 Cleveland, OH  3.24%#19 Washington DC 2.74%#20 Phoenix, AZ  2.01%

Mike H. · Answer

I'm not as familiar with some of those other markets. I think its local and most of the stuff I read tends to be on the areas here.

But what I believe the market is going to look like for Illinois is that there will be a return to normal appreciation models as have occurred in the past. Basically a doubling of property values every 20 years or so.

I think many areas here where I'm at in Illinois had some significant bumps (relatively speaking) of 10 to 15% over the past year or so and I think that has come to an end.

But I do believe that simple supply and demand will eventually hit this market. That and a combination of the improved job market and the new fannie mae low money down program will cause a bit of a spike in pricing sometime in the next 2 or 3 years. After that, I think it will be back to more historical levels.

Bottom line is that rental rates are simply too high relative to the prices you'd pay if you were to own a house and thats what ultimately is going to drive more people to buy homes. And when they do, because of the almost complete lack of new construction in this state over the past 6 or 7 years, I don't see any way for pricing not to bump up with a one time spike.

If I had to put some numbers to it, here would be my guess for the next 5 years for Illinois anyway :
2014 - 5%
2015 - 5%
2016 - 8% - Here is where the bump comes in and new construction finally starts to come back a bit. At some point, the lack of new construction homes is going to create a shortage that drives up prices.
2017 - 6%
2018 - 4% (and back to normal 3% to 4% a year after this.)

Frankie Woods · Answer

My guess, if you go back to 1990 and project what property values would be given a 2-3% annual gain, most markets will revert to that growth rate over time.  I haven't run the numbers, but that's how I would use trend analysis vs. the 3-4 year look.

James Park · Answer

@Mike H.

This is what the Chicago index chart looks like. The numbers look like the following as of September 2014.

1 month : 0.22%3 month : 1.03%12 month : 2.57%

For properties to double in ten years, you need an average of 7.2%. 3.6% annual appreciation will get you there in 20 years which is below inflation. My concern for Chicago is that the population is slowing significantly compared to the other large metropolitan cities like LA, NY, Seattle, SF, Dallas and property taxes are high. This is just my opinion, but I do not think we will see the Chicago index appreciate at the same percentages we have seen from 1990 to the peak before the crash 2006. It may be a while until Chicago reaches the Sept 2006 index again.

What is your 2015 - 2020 Real Estate Market forecast?

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