Real Estate Investing in a Crazy Market: Running the Numbers [part 1]
We recently hosted a real estate investing meet up of the same name wherein we looked at the general state of real estate in Northern Colorado, and then we dove into our methodology for analyzing properties.
Our first big question:
Is Northern Colorado a safe investment? We all remember the crash of 2008 and the strong real estate market that precipitated it—is this deja vu? Let's answer that by the numbers.
When we hear that Northern Colorado has a crazy real estate market, that's usually referring to:
The rate of appreciation—how quickly home prices are rising
Property prices being high in an absolute sense—how expensive homes are, usually measured by median home price.
Median allows us to control for outliers, whereas the mean, or average, factors those in. Here's a joke to help you remember the difference: “Bill Gates walks into a bar and everyone becomes a billionaire…on average."
Median gives us a good idea of what we can expect to pay for a given property type, in this case, single family homes.
Here's a look at US Median Home prices, broken out by region. [we made the chart, but the source data is here: National Association of Realtors]
Looking at US Median Home Prices gives us a reference point for looking at our local market. Here are the numbers for Northern Colorado [again, our chart, but the data is available here: Fort Collins Board of Reatlors]
What this tells us:
We can confirm that yes, homes are expensive in Northern Colorado as compared to the US median.
But notice that every market in Northern Colorado exceeds the national median.
When you have an entire subregion—Northern Colorado in our case—performing this strongly, we know we’re experiencing economic factors that sprawl well behind just Fort Collins or Boulder.
But is this just a flash in the pan? That’s where we have to look at appreciation.
Definition: The increase in the value of an asset over time. The increase can occur for a number of reasons, including increased demand or weakening supply, or as a result of changes in inflation or interest rates. This is the opposite of depreciation which is a decrease over time.
The data we use to look at real estate market appreciation comes from the Federal Housing Finance Administration (FHFA), a regulatory agency that was founded in 2008 to oversee Freddie Mac and Fannie Mae. You can visit their website to learn more about their data and methodology, but in a nutshell, they use repeat sales and appraisal data to arrive at their appreciation rates. That means they're finding the rate of appreciation on one single home from transaction to transaction, and then aggregating that across their statistical area. They break this data out by census division (there are nine in the US), by state (hopefully you know there's 50 of those) and by Metropolitan Statistical Area (or MSA, of which there are 254). We're going to look at appreciation rates by MSA.
This slide shows the top 20 Metro Areas by Appreciation from the end of the second quarter of 2016 through the end of the second quarter of 2017
There's a red arrow next to Colorado markets
We see Fort Collins is #10 out of the 254 Metro Areas on the list
You can see that Boulder and Denver also made the top 20
This tells us that it’s a hot market right now, but that’s really all it tells us
Remember, we're trying to answer the question, "Is Northern Colorado a safe investment?" From just one year of data, we can't answer that yet. Let's zoom out and look at 5-year data.
This chart shows appreciation over 5 years, and now Fort Collins is down at #36. Still very strong, given that this is 36 out of 254
Let’s look at one more chart for a 26-year view:
Now Fort Collins is up at #6 with over 300% appreciation in 26 years
Boulder and Denver are #1 and #2, and Greeley is at #14
What story does this tell? We see Northern Colorado with a strong track record of appreciation, over twice that of the national average.
When we look at home prices in light of historic appreciation, they suddenly don’t seem quite so crazy, given that real estate in our local markets is such a solid investment.
So now that we know how to determine the health of a real estate market, and we can see that Northern Colorado is one of the more solid real estate markets in the country, how do we know if any given property is a good investment?