Wednesday, August 5, 2009

Should You Invest in California or outside California? Part 3

Let’s compare the property value and appreciation between California and states outside California.

Home Price Index AZ CA FL NV
Home Price Index NY UT
Home Price Index GA NC TX

Here, I put nine states into three groups:
1) Group 1: California, Arizona, Florida and Nevada. These are states with high population growth. Properties here have potential of high appreciation. Speculators love these states.
2) Group 2: New York, Utah. States with modest growth. The characteristics are between Group 1 and Group 3.
3) Group 3: Georgia, North Carolina, Texas. Property values in these states are more stable, it goes up slowly, and are more resistant to the up and down of the economy. Conservative investors will look for cash flow here.

The next graphs will show you annual growth rates, 5-year growth rates and 10-year growth rates for the three groups.

Annual Growth AZ CA FL NV
Annual Growth NY UT
Annual Growth GA NC TX

Look at the annual growth rates graphs above. While real estate in California, Florida, Nevada and Arizona are able to yield more than 20% annual appreciation, during troubled economy, properties are also possible to shrink in value up to 20% annually. On the other side, real estate in Texas, North Carolina and Georgia, will not increase as much in value during the boom, they also will not drop in value as much as the hot states.

Timing is very critical for speculators in states located in Group 1. You are either extremely lucky and make instant fortune, or you are screwed if you are wrong. For investors looking for cash flow, properties in Group 3 will always be an opportunity and timing is not as critical here.

5-Year Growth AZ CA FL NV
5-Year Growth NY UT
5-Year Growth GA NC TX
10-Year_Growth AZ CA FL NV
10-Year Growth NY UT
10-Year Growth GA NC TX
Look at the 5-year & 10-year growth rates graphs above. Properties in Group 1 reached the peak in late 2006. If you bought property during the peak, you may have to wait for a long time for the value to get back to previous peak. The history taught us that California reached the peak in late 1990, and it took 8 years to go back to the value in late 1990.

Properties located in more stable states in Group 3 have more predictable growth rates. There was energy crisis and banks failure in Texas during 1980s. According to one of FDIC economist, in 1988 and 1989, failed banks in Texas comprised over 80% of total US failed-bank assets. However, it seems that Texas has learned its lesson well.

The source of data is Freddie Mac’s repeat-transactions house price index for existing homes.

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