Homeowners Strike Gold With Appreciation on the California Coast

[Dax Nollenberger]

I wrote a blog recently about how Appreciation has historically compared by region and then zoomed into my market in Santa Cruz County. The results were quite fascinating. A 7.98% Compound Annual Growth Rate since 2010 is absurd. An abbreviated version is below:

In an ideal world (from a calculation perspective), homes would turnover yearly and you could easily calculate the change in value by calculating the percentage change in prices sold by year. Unfortunately, homes don’t turnover quickly. We CAN quickly measure individual appreciation of homes that have sold twice during a period of time. This doesn’t really help to measure entire market appreciation though… The best solution for calculating market appreciation is a change in median home price over time. I’m going to use the following measurements to determine the value of the growth by area:

Compound Annual Growth Rate (CAGR): It is the measure of an investment’s growth rate over time, with the effect of compounding taken into account (Investopedia). This is the primary tool for measuring past appreciation and predicting future appreciation- DN

Percentage Change: Total percentage change in median price over a specified period.

Dollar Change: Total dollar change in median price over a specified period.

I will be comparing National, Regional, State, and Local data going all the back to 1989 to show just how valuable Santa Cruz Real Estate is.

Enough with the buildup, let’s dive in with a visual BANG!

Let me say it again. REAL ESTATE IS AN INVESTMENT FAVORED BY TIME! Sorry, didn’t mean to yell but… isn’t this a great representation of the natural trend of real estate? Even with one of the largest housing recessions in US history, the trend of upward pricing is clear. What is also clear is that not all areas are created equal. While slightly flawed because we are comparing regions, states, and a locality, the general premise is not flawed, Santa Cruz Real Estate is a historically strong appreciation market. Zooming out, California and the West region are as well.

Side note: I wish I had local data going back another 20+ years. Then we could capture just how strong an investment many of our parents/grandparents made when they settled and invested in Santa Cruz. My parents bought their home for $119k in 1981 (Unreal, right?). That home has appreciated around 1076%!

For reference, here is how the regions are broken down by state.

A great way to measure the favorability of the investment is the Compounding Annual Growth Rate. As noted prior, this gives us an investments growth rate over time, with the effect of compounding taken into account. Below is the CAGR by area and timeframe.

To better understand this chart, let’s dive into a comparable example:

Let’s say the year is 2000. You’re considering every region in the US for a home purchase. You have $300,000 to spend and intend on spending that where ever you buy (even if it means multiple homes in one region). This is a buy-and-hold strategy. So, how much would it be worth today?

Northeast: $300,000 at 4.52% compounded over 22 years (start year not included): $793,429

Midwest: $300,000 at 3.74% compounded over 22 years (start year not included): $672,881

South: $300,000 at 4.72% compounded over 22 years (start year not included): $827,510

West: $300,000 at 5.27% compounded over 22 years (start year not included): $928,587

California: $300,000 at 5.73% compounded over 22 years (start year not included): $1,022,074

Santa Cruz County: $300,000 at 5.06% compounded over 22 years (start year not included): $888,677

Depending on where you invested you’re looking at a significantly higher (7% – 50%+) return on your investment in the Western States.

Quick note: California is higher than Santa Cruz County because counties such as Santa Clara (#1) and Orange (#2) drew up the gains for the state significantly. Santa Cruz was very strong though, ranking high in both dollar and percentage growth since 1990.

Santa Cruz County, California, and the larger West region have a couple of things going for when it comes to appreciation. Not only has it performed better than most of the country in terms of Compound Annual Growth Percentage, but it also did so with a much higher price point. This runs contrary to the expected outcome (see the law of diminishing returns). As the prices go higher, it should be more difficult to get a similar return as in previous years or other, less expensive, areas. And yet, Santa Cruz County, California, and the larger West region continue to outpace most of the country… widening the gap in home value and (un)affordability.

In 1998, the median home price in Santa Cruz County was 124.26% higher than the US Median Home Price. Since then, it has nearly doubled to 231.6%!

Some additional value needs to be placed on the rate of return given the original price point. After all, entering at a higher price point got you rewarded much greater than entering at a lower price point area. Revisiting the example above, it’s much more likely that you bought one house in an area than buying at a fixed amount of $300,000. Let’s look at the impact given this fact.

Let’s say the year is 2000. You’re considering every region in the US for a home purchase. You intend on buying a house at the median price point for the area you’re purchasing. This is a buy-and-hold strategy. So, how much would it be worth today?

Northeast: $161,200 at 4.52% compounded over 22 years (start year not included): $426,000

Midwest: $125,600 at 3.74% compounded over 22 years (start year not included): $281,900

South: $130,300 at 4.72% compounded over 22 years (start year not included): $359,500

West: $199,200 at 5.27% compounded over 22 years (start year not included): $617,100

California: $241,350 at 5.73% compounded over 22 years (start year not included): $823,000

Santa Cruz County:$305,000 at 5.06% compounded over 22 years (start year not included): $1,302,532

That extra $100k-$150k investment made you a return of $500k-$1M in 23 years!

I think I’ve made my point that, historically, the West is king when it comes to appreciation. Santa Cruz specifically has seen incredible price/appreciation growth. But how does this help you know? Well, for one, history is the best predictor of the future.

It’s not my style to leave it with a phrase and call it a day. Instead, I’ll leave you with a hypothetical to ponder. You are deciding if you really can invest in a CA home or look to purchase elsewhere. You ultimately decide to bite the bullet and become a homeowner of a highly valuable (likely leveraged) asset. We assume a highly conservative 4% (it was 7.98% since 2010). The purchase price is $1,200,000.

5 years of home ownership: New Home Value: $1,403,830 Appreciation: +$204k

10 years of home ownership: New Value: $1,707,974 Appreciation: +$508k

15 years of home ownership: New Value: $2,078,012 Appreciation: +$508k

30 years of home ownership: New Value: $3,742,381 Appreciation: +$2.55M

That last number sure does give a sense of urgency for buyers. While it seems like a ludicrous number, that same sticker shock would be felt if I told a buyer in 1990 their home would appreciate by over 300% in 30 years. And in my parent’s case… over 1000% in 40 years.

A primary home is not a liability if it builds your wealth over time. I can say with high confidence that real estate, over the long run, will continue to rise (and California real estate will likely rise more).