Do you ever wish you could invent a time machine that would take you back just far enough to make those great investments that you missed? I would like to suggest that your fantasy has come true, if you can only imagine that you have just stepped out of your time machine from the future.
I was about 13 years old, riding in the car with my dad through our Los Angeles neighborhood adjacent to the airport, listening to him talk about how much had changed in the last 30 years. Thousands of homes had been built in the years immediately after World War II, and the pace of commercial developement was picking up dramatically.
"I remember this area in the 1930's," Dad said. "It was all underdeveloped land, most of it for sale at $40 an acre."
"Forty bucks an acre!" I was incredulous. "Why the heck didn't you buy some?"
He didn't have to think before answering seriously, "It was too expensive."
Dad had become a real estate agent when I was 10, so my view of trends in California real estate is becoming a long one. I can clearly remember a dinner table story of the prospective buyer who decided not to buy because "no one in his right mind is going to pay $20,000 for a home in Los Angeles."
In a 1969 article about escalating home prices, a Business Week reporter wrote: "The goal of owning a home seems to be getting beyond the reach of more and more Americans. The typical new house today costs about $28,000."
Eight years later, National Business magazine reported: "The median price of a home today is approaching $50,000 ... Housing experts predict price rises in the future won't be that great."
After our value slump of the early 1990's, the San Francisco Examiner opined in 1996: "A home is where the bad investment is."
Historically, it has made very good sense to buy real estate during the "bad times." Try to find a Bay Area homeowner who bought one of those bad investments in 1996 and regrets the decision today.
The biggest problem I see with the current decline is that so many buying decisions of the last several years were based on short-term thinking, relying on the false assumptions that appreciation always continues in a straight line and that big value gains should be made in two or three years. It is true that the overall trend is upward during the 45 years that I've been paying attention, averaging about 7.5 percent annually during all that time. But values decline and flatten with some regularity. If you examine the curve, it looks like a staircase with treads that sag. We're standing on a seriously sagging tread right now.
Looking back over previous cycles, it seems to me that eight years is the magic minimum holding period. I can't find an interval of more than eight years where even the unluckiest local investor hasn't come out ok. However, if great timing is important to you, consider that the average duration of a downturn in Bay Area real estate is 27 months, according to a California Association of Relators study. We are now 24 months into the current decline. Your time machine may have brought you to the right moment.
