The 10-year run up in real estate values has been one of the most remarkable wealth creators in history. The rewards have been spread around democratically, with as much as $10 trillion in home equity being created in the last 25 years for everyday homeowners. Everyone seems in on the action: first-time home buyers, Realtors, mortgage brokers, office builders, small investors and old ladies giggling as they watch their Fannie Mae stock.
These riches are one reason the psychodrama over a housing bubble takes hold. When this much wealth is created so quickly, people scratch their heads and wonder if it is logical, even wondering if it is right. How long it can continue is an important question. For now, this three-part series focuses on how some of the riches are being distributed. (See Part 2: Builders, mortgage lenders at top of housing wealth chain and Part 3: Billionaires make real estate look easy.)
Dona Hayes of Home Quest Realty in Greenwood, Ind., bought her first home – a mobile home – when she was 16. She bought her next house when she was 18, and she became a real estate investor in her early 30s, about a decade ago.
“I have been a buyer, seller, ‘contractor,’ manager, landlord, real estate salesperson and broker. I’ve seen the perspective of most all sides,” Hayes said.
Her general advice, which she has followed, is to start small and build momentum, reinvesting the equity into new ventures.
There are examples of people like Hayes across the country – people who started out humbly in real estate before turning it into a major income stream. While there is no such thing as a sure thing with investments, real estate has been paying off big-time for some people.
The nationwide median price of new single-family homes surged from $24,700 in 1968 to $208,900 in August 2004, and the median price of existing single-family homes soared from $20,100 in 1968 to $190,100 in August 2004. In California, for example, median home prices increased about 22 percent from 2003-04 after a 17.9 percent increase from 2002-03. It’s no surprise that such examples of rapid real estate appreciation have lured seasoned and amateur investors, alike.
Many real estate agents are making a good living in this prosperous housing market, and the number of real estate agents continues to grow. Though agents’ average commission, when measured as percentage of the home’s selling price, has slid somewhat over the past several years, escalating home prices have served to counter this shrinkage.
A National Association of Realtors study, the “2004 Profile of Real Estate Firms,” found that about 60 percent of all residential real estate firms had increased profitability in 2003 compared with 2002, and 53 percent of all residential firms expected profitability to increase this year. The “2001 Profile of Residential Brokerage Firms” found that 49 percent of all residential brokerages had increased profitability in 2000 compared with 1999.
Hayes said she has worked to buy and sell homes that were in the process of foreclosure. She has earned $100,000 or more, in some cases, for turning around a single property. “A couple I’ve doubled my money on. Not all properties can be bought and flipped immediately. We use a ‘rent or sell (strategy), whichever comes first’ as another conservative strategy. Properties repossessed by the Department of Housing and Urban Development can be ideal properties for people hoping to find a good deal and make a good profit, she said.
David “Chauncey” Shiflett, a Realtor for Venture Property Inc., in Leland, Mich., said properties in his area have experienced some uncommon price appreciation over the past few years.
Shiflett said he has tried his hand at the real estate investment game. Along with a colleague, Shiflett purchased a portion of a 10-acre piece of land in 2002. Shiflett paid $45,000 for his piece of land and earned $95,000 for the sale of that land a short time later. The land since sold for $130,000, and more recently sold again for a higher price, he said.
“We’re a resort market. We’re a ‘want’ market, not a ‘need’ market,” he said. Properties with frontage on Lake Michigan are selling particularly well, he said. Some lakefront property that sold for $1,000 per square foot several years ago now fetches from $5,000 to $11,000 per square foot, he said. “In the last year and a half the majority of my clients have been buyers who are investors.”
In Southern California, a real estate investor reported one property in Cardiff, Calif., that rose in price from $267,000 in 1999 to a value of $660,000 this year. And an investor based in Arizona reported that the price of a home in a subdivision north of Phoenix jumped from $283,000 in January 2003 to about $460,000 this month.
Luca Bolognese, a resident in the Redmond, Wash., area, said he and his wife purchased a home for $239,000 about three and a half years ago, and since then its value has increased to about $330,000. He said he is not surprised by this rate of appreciation, “because we paid a low price.” Bolognese said he would consider real estate as an investment, because “you can more easily get an information edge, which you cannot for other investments like stocks.”
While residents in some very hot housing markets have made a lot of money from the sale of their homes, some of them are faced with the prospect of buying a similarly high-priced home in the same market.
Loretta Barra, a Realtor associate with Coldwell Banker in Orinda, Calif., a market in the San Francisco Bay Area with many high-end homes, said she has worked with a number of older clients who have sold their homes for a high price, though “where they’re relocating is expensive as well.” Barra said she has a sister who sold her home in California and bought a large home on five acres in Idaho for a portion of the price it would take to buy a small condo in many Bay Area markets.
And there are the other stories of people who sold their homes in less expensive markets and experience sticker shock when they see Bay Area home prices, she said. Some people who sold their homes in hopes that the market would calm down have gotten into trouble, she said, because prices seem to keep rising.
“I know someone who three years ago said prices can’t go higher so they’re going to wait – at this point they are totally priced out of the market,” she said. “The prices just keep escalating.”
And people who are looking to buy a home for a bargain, fix it up and sell it quickly are having trouble, too, she said. “Everyone wants to buy a fixer-upper for under $500,000, but there aren’t any. They don’t exist.”
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