High Profits Even in Slumping Markets

Posted by: Chris Palmeri on November 15, 2006

In October, the average San Diego home sold for $485,000, a 5.5% decline from October of 2005. The actual number of homes sold was down 21% year-over-year. But that doesn’t mean all those sellers were losers. Hardly. According to research from First American Real Estate Solutions, a real estate data unit of title insurer First American, the average home seller in San Diego made a profit of $243,000 that month. That’s the different between the price they bought it at, five years ago on average, and what they sold it for today. First American calcuates that only 6% of San Diego sellers lost money on their homes, most likely because they bought it in just the past year. The story looks even better in other parts of Southern California where home prices have held up better than San Diego. In San Bernadino County, east of Los Angeles, the average home seller made a $203,000 profit on the typical $360,000 home. That’s an average annual return of 25% over the four-year average holding period. The First American data is a reminder that many people still have a tremendous amount of equity in their homes, even if some their neighbors have had to lower their asking prices.

Reader Comments

drbrightside

November 14, 2006 11:59 PM

I think that is great perspective, especially if you consider the leveraged return is much higher. Even in the "frothiest" of markets, 94% of the sellers are making over $200k. Tough to beat that in the stock market.

I linked this article to my blog. I try to discuss some of the good things going on out their in the economy.

http://drbrightside.blogspot.com/

Brock Harris

November 16, 2006 3:19 PM

You made a very common error in calculating return on investment when it comes to real estate. A $203,000 profit in four years with a downpayment of 20% (and most people in the last few years are putting down 10% and even 0%) has a higher return than 25%. 20% of $360,000 is a $72,000 downpayment. So these sellers turned $72K into $203K in four years. I don't know what that return is compounded, but they almost tripled their money. And those people who put 5% down, well, they made almost 12 times their money in four years.

lizziebeth

November 17, 2006 1:21 PM

The key to this article is that those homes that are lucky enough to sell in this market are making a killing. Some areas of Florida, only 4% of listed homes sold in October. So, 4% of the sellers made a killing. The article just proves that housing is way overpriced! There are no fundamental reasons that homes should have doubled or tripled in 4 years time! What goes up most come down. Those that are selling at the peak and as it comes down are making a killing! Unfortunately, the people that buy these homes may find themselves under water. For every victory there is a loser.

RonG

November 17, 2006 3:34 PM

"That's an average annual return of 25% over the four-year average holding period."

I did better on my stock and bonds over the past 4 years. S&P was in the 800's in 2002 and now sits at near 1400.. thats 75% return.

That 25% does not include property tax, maintenance and does include exclusion of $250K for single tax payer.

As real estate prices decline, the paper gains will be flat if anything.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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