Real Estate, Stocks and Geography

I recently came across the most interesting commentary concerning housing and investments via The Denver Post and NerdWallet site titled Are You Buying a House or a Lottery Ticket.

The author mentions Warren Buffet placing his Laguna Beach residence up for sale. The following is directly from the column:

Buffett bought his Laguna Beach place in 1971 for $150,000 and is asking $11 million. My friend’s parents bought their home for $24,500 in 1965 and just sold it for $104,000. Put another way: If Buffett gets his asking price, his house will have appreciated at an annual rate of 9.79 percent. The Cleveland house eked out a 2.82 percent annual return. Neither buyer could have predicted what their homes would be worth now. One could score a healthy return, while the other didn’t even keep up with inflation. (If she had, her home would have been worth about $190,000.)”

While the author mentions inflation (and how the house in Cleveland did not keep up). Let me take a step back. The $150,000 Mr. Buffet paid in 1971 has the buying power of $902,000+ in 2017 dollars. The $24,500 paid in 1965 would have the buying power of $189,000+ on 2017 dollars. Thus the Cleveland residence was and continues to be a starter home based on price. The Laguna Beach residence in real dollars was expensive in 1971 and in the top 0.01% of prices today for real estate.

The author goes on to suggest if that same $150,000 Buffet paid for the house was invested in the S&P 500, it would be worth $14,5M today (and if invested in Berkshire Hathaway Class A that same investment would be worth $800M).

This brings up one of my sayings of “Could Have, Should Have and Didn’t”.

Granted I am the first to advise never to consider a house as a capital investment. First and foremost it is shelter. Yes there are financial advantages i.e. tax write-offs and related yet maintenance and upkeep probably cancel out the benefits over time. Also, the vast majority of homeowners are buying and selling in 5-7 year cycles based on lifestyle changes.

It is true certain markets i.e. New York, San Francisco, Los Angeles and similar if your real estate was held long enough it may feel like hitting the lottery. In other markets keeping up with inflation is the norm and this accounts for the vast majority of the United States.

This brings up the debate about Denver. Yes I have been considered a pessimist as I have been through 3+ business cycles since Denver became my primary residence in 1989. Looking at the sale of my house which I purchased in 1989 for $140,000 ($275,000 in 2017 Dollars) did beat inflation, however if I factor in maintenance, upkeep and so forth, the returns are far less impressive.

Even more enlightening, when I purchased the house in 1989, the seller had to come to the table with cash as he had paid $200,000 ($469,000 in 2017 Dollars) for the residence in 1984 and sold it in 1989 for $140,000 yet with a mortgage balance of $160,000 plus real estate broker commissions. Not the worry, the seller had a nice loss and I believe is presently a physician in the Bay Area thus most likely financially whole.

If the seller had held onto the residence and sold today i.e. in 2017 he too would have basically kept up with inflation.

The point is we have seen spectacular run-ups in the Denver market since the Great Recession. Even today due to lack of inventory prices continue to rise while incomes are not keeping up with prices. This is not sustainable in the long run. While I have had peers newer to the business advise Denver is the next LA, San Francisco, New York and so forth, I tend to disagree.

First we are inland. We are not geographically challenged i.e by bodies of water lapping at our borders. Thus the Denver metro area can easily expand into the hinterlands where prices are generally lower (and yes I know Boulder has growth controls, however when I first moved to Colorado in the early 80’s the land between I-25 and Superior/Louisville was farm land. Second, in Denver proper revised zoning has allowed for increases in density in many central neighborhoods. I have mixed opinions on this, however in general increased density provides additional affordability in the market i.e. multi-family, slot housing and related as the dirt can accommodate more than a single-family home. Of note, one of the reasons San Francisco is so expensive is the limitation on density and height in the city proper.

I suggest we should look at Denver in similarity to Chicago, Salt Lake, Dallas and similar inland cities. Yes we have a diversity economy, a young and well-educated population and of course lifestyle which cannot be replicated including 300 days of sunshine/year, more days than parts of Hawaii. Yet we are not on a coast, we do not have a port and we have ample land on which to expand even beyond the E/C-470 ring road.

I do believe Denver metro will generally outpace inflation. However my personal residence is the perfect example our its lifespan i.e. if when purchased new in 1984 and sold today, the residence would have mirrored inflation. However due to timing and some good luck, the residence was purchased during a severe downturn in the market and is being sold during an upturn coupled with being within an “in-demand” neighborhood.

Thus, when purchasing a home in Denver, look at what you can afford keeping in mind maintenance and upkeep and understanding your home is shelter foremost and gains beyond inflation will be the icing on the cake. With that said, I plan to buy a MegaMillions ticket later today.

Of note, there seems to be some ambiguities concerning the Buffet house as it seems the house was sold in 2005 for $5.45M. Was then listed in 2011 for $6.495M before a price reduction to $4,995M. Thus did Mr. Buffet repurchase, hold paper or what? Unfortunately I am not an investigative journalist yet I assume the same house? Just goes to show, timing and market conditions can be most influential concerning house values i.e. double the asking in 6 years, now that is hitting the lottery not to mention water views!


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