In my previous article, we talked about how owning real
estate is a major component of increasing family wealth. In this article I want
to address the growth in residential real estate value. Just like the stock
market, we tend to be aware of whether prices are increasing or decreasing. It
takes an effort to research the long-term trends. However, I want to make you aware just how
much real estate has appreciated in value over the last 20 or 30 years. It's
very similar to the stock market. If we look at a graph of how the stock market
has changed over the last week, month, or the last quarter you may see a lot of
volatility and instability. However, if you look at that same information but
over 30-year time span, you will see a persistent trend in the increase in
value of the stock market, and generally individual stocks.
Similarly, if you looked at the short-term trends in the
value of residential real estate, you may get a misinterpretation of what is really
happening over the long term. Just like the stock market, if you look at the
long-term value of real estate you will also see a trend of increasing value.
I'd like to show you this with two graphs for our own area; the
Frederick-Gaithersburg-Rockville Maryland area. This information was put
together by the Federal Housing Finance Agency.
The graph to the right shows an upward trend over the last
20 years where the increase in value of
residential real estate has gone up 149.4%.
Yes indeed, there were periods where there is a decrease in value, and to be honest,
became a real problem for many people. However, those who able to stick it out,
were handsomely rewarded.
To the left, the graph shows similar information, in a
slightly different format and over 30 years. As you can see there is some
volatility over the years but on average there's an annual appreciation of 4.4%
in the area that we live in.
Financial advisors used to frequently use the metaphor of a four-legged
table to build a financially stable wealth plan. One of those legs was and
still is Real Estate. As your assets increase, you do want to spread them or
diversify them to build additional stability. Consulting a certified Financial
Advisor to build a strong plan is essential.*
Another way to grasp the concept, long-term appreciation is
like being paid interest on a bank account of someone else’s money; the home
was bought with a lender’s money. Nevertheless, the homeowner retains the new
equity (value) of the property.
Residential real estate is an excellent way to begin working
toward building wealth for your family. It is well worth the effort to get skin
in this game for the health and prosperity of our families. If you are
preparing to purchase your first home, now may be the time to make the
requisite sacrifices to get there. Work that extra job, sleep in your parent’s
basement, have a smaller wedding, drive used cars, etc. Getting trapped in the
rental cycle can be difficult to recover from.
* I am not a
Financial Advisor, I am licensed to help people buy and sell Real Estate. Consulting a certified Financial Advisor to
confirm this information and to build a sound financial plan is advisable and
highly recommended.
