Recently Ryan and I went to see the movie, The Big Short. For those unaware, it’s a story on the origins and mechanics of the 2002-2007 housing bubble and its aftermath. It is true that many lost a great deal of money. But as the movie shows, some gained spectacularly.
There is an extensive section in the movie on the south Florida market, complete with “therapist” investors and a couple of mortgage brokers whose depiction I am certain horrified my friends in the Mortgage Professional Association.
I think it’s helpful, especially as high season gets rolling, to remind ourselves of the backdrop of The Big Short. Courtesy of our friends at the Federal Housing Finance Administration, the chart here shows a very long term (40-year) view of Broward real estate prices.
From 1999 to the peak in 2006, prices here tripled! Some neighborhoods and property types, of course, had even greater appreciation. Then the music stopped, and it all came crashing down. But only to a point. Not to zero – just to roughly the 2002 level.
From the 2011 trough, prices (through 3Q15) are on average up about 30 percent, as I have shown in my Broward’s Real Estate Yearbook (available online at issuu.com/jamesoaksun/docs/2015_yearbook). Again, some neighborhoods (including most of the Island City) have seen even greater appreciation.
Why did I title this column, The Big Long? (Get your minds out of the gutter.) In investing, a “long” position is an ownership position that will increase in value if prices increase (as opposed to what was shown in the movie, where the investors made huge gains when prices collapsed).
Real estate turns out to be an outstanding investment in two, distinct situations as seen in this chart as well as in recent market activity among property sellers (as I mentioned in the last column).
First, those who had the wisdom (or good luck/timing) to buy in 2011 have made a very tidy return. Assuming 30 percent investor leverage, selling for a 30 percent profit after four years equates to a gross return before taxes and expenses of 100 percent. We see a lot of these people now selling.
Another group of sellers (also shown on the chart) would be people who bought as prices started to rise in 2002 up to maybe 2004, but before the absolute peak. These people are now able to sell for about what they paid for their properties.
The final group of sellers are “really long longs” who have owned for 30 or more years.
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