Saturday, January 1, 2011

Required Returns for Residential Real Estate

Breakeven returns are as low as they’ve been in a generation:

A couple of caveats are in in order.

First, no one has been earning these rates of return – no matter how low they’ve gotten – for over 3 years.

Second, many of you may not have gotten these rates of return – no matter how low – when the market was doing well.

To see this, use the mathematical shorthand known as the rule of 72: divide 72 by a rate of return per period (years in this case) to yield the number of periods (years) for the price to double. Right now we’re at 6% in the northeast and west, and 4% in other places. That means doubling in 12 or 18 years. When I look at my house realistically – bought in a buyer’s market in 2000 in the trendy southwest – the growth rates has been 1% plus or minus 2% over that period. So I’m a loser. When I look at my previous house – bought in a buyer’s market in New Orleans in 1995 and sold into a seller’s market without an agent’s commission in 2000 – my rate of return was 6%. That’s barely above breakeven.

In southwestern Utah, everyone thinks residential real estate is a good investment. Don’t be a sheep.

Via Paul Kedrosky's Infectious Greed via Bill Ackman.

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