I’ve been tracking our net worth since 2007, and I include real estate equity in the total. But what is that equity exactly? That’s the question today. The debt tied to your house is easy to know. Your bank politely reminds you of it each month! But what the heck is the value of what you actually own?
We bought our house in 2008 for $130,000, and since then, I’ve only updated its value once: When we refinanced the mortgage in 2012 and the bank re-assessed it at $139,000. OK, so that was six years ago now. I like to be conservative in determining our net worth, but I think I’ve been doing it a disservice by not trying to come up with a more accurate number. I’ve been thinking recently about ways to re-calculate the value of our home (and our two rental properties) without putting in too much work. Since I do have net worth goals every year, it’s worth at least trying to keep the real estate value up-to-date, even if we have no plans to sell them.
I toyed with the idea of doing a market analysis and trying to find comparable sales in the area (too much work) or including the amount we’ve spent on upgrades we’ve done to the house over the years (who knows how accurate that would be). Finding comparables is especially difficult because our house is one of very few single-family homes in a very small mixed-use downtown area. I could probably count the number of downtown homes like this on two hands.
Both methods would involve too much guesswork and time for me. In the end, I think I’ve settled on using a simple 2% annualized gain. Sound like too little? Maybe a little conservative for real estate? Let me show ya something.
Below are charts of the median sale price of various locales, all taken from the Market Trends pages at Trulia.
Here’s Boston’s median real estate value over the past 18 years. It remains pretty steady throughout the housing boom and financial crisis, then things start to get hot around 2012, and the median sale rises from the high $300’s to the high $500’s in 2018. That’s a 7% annual gain over the last four years, and about a 6% annual gain over the whole 18 years.
A little different is Atlanta. There is no peak, just a trough. It looks like if you held out through the financial crisis until the recovery, that property you held in 2007 would be worth the same in 2013, and it’s just continued on the same steady track since. It looks like about a 3.8% annualized gain over 18 years.
Now for some weird outliers. I wanted to see what Detroit’s housing situation looked like, and it is not pretty. Despite having cheap housing to begin with, the prices fell off a cliff in 2008 and never fully recovered. The median price in 2018 is the same as what it was in 2000, a 0% annual gain over 18 years.
I wanted to see the situation where our friends the Planting Our Pennies people live, and it is definitely freaky. That run up from 2000 to 2006 is something like a 16% annualized gain! Then the crash happened. In the end, what you have from 2000 to 2018 is a very a reasonable 4.5% annual gain.
Of all the real estate markets, the ones I figured would be most similar to Albany would be places like Rochester and Pittsburgh, some of our Northeast rust belt neighbors.
Despite a strange 2016 and 2017, Rochester has seen an increase from $80,000 to $130,000 over 18 years. That’s almost a 3% annual gain.
How’s this for a steady market? Pittsburgh may as well be a straight line. Doing a little math, it looks like this represents a very consistent 4-5% return in Pittsburgh. No peak, no trough, no surprises at all. Is this what Albany looks like?
Now let’s look at where we live!
Wow! Isn’t that boring!
I have been trying to find a more boring real estate price chart, and I don’t think I can. I knew Albany was a fairly predictable real estate market. We don’t get any big run-ups or dips in price. But I had no idea it was this boring. A small increase from 2000 to 2005, then stagnation until a very recent uptick. As it stands, it looks like a 4% increase over the 18 years.
This is why, in 2008, when we bought our house and several of our friends were buying houses, none of us felt like we overpaid, nor did we get a great deal. The market was collapsing across the country, and there just wasn’t any sign of it here. Real estate speculation isn’t in our vocabulary.
Of course, that’s not to say that last decade’s Naples couldn’t be next decade’s Albany! Maybe the 2020’s will see the boom times begin! (Ha ha…)
Now the median price is not the selling price of the same median house every year. With expensive new construction going up and older houses falling into disrepair, that median house will change every year, but I think using these median price charts as a guide tells you about your market.
I have no doubt that the house you bought in Boston in 2005 would sell for much more today. Of course the neighborhood makes a difference (maybe a few neighborhoods are really driving a change in the median) and the updates you’ve done to your home make a difference, too. But I like the ease of applying a simple annualized gain.
So you can see why estimating a 2% return might make sense, if you want to be conservative. Starting from our 2008 purchase, that gets us to right around the 2012 re-assessment. There’s been an ever-so-slight increase in prices over the last year, but who knows if that will continue.
Our Net Worth
I’ve gone back and forth over whether to go public with our net worth. On the one hand, numbers like that are integral to determining if you’re ready for early retirement, and I like using real life examples when showing calculations. I also think people in general should be more comfortable discussing their finances instead of acting like it’s too taboo to talk about.
On the other hand… it just feels weird! So I decided to split the difference. Our net worth is now out there, specifically on the Rockstar Finance Directory. So if anyone is so very inclined, they could find it, but I won’t be listing it here right now.