Luck decides real estate winners, losers
By Del Jones, USA TODAY
Posted 11/27/2005 10:23 PM
VIENNA, Va. — People have made a lot from rising home values, some more than others. If my experience is at all typical, it's happenstance that separates the homeownership winners from the losers.
In 1992, I was a reporter at the El Paso Times when USA TODAY hired me. At the time, the new job had one drawback: It forced me, my wife, Dianna, and our kids Ciera, 5, and Douglas, 2, to move across country into a crummy house in a Washington, D.C., suburb.
We sold our 1,600-square-foot house on a cul-de-sac in El Paso for $94,400. We bought a 1,540-square-foot, run-down house on a cul-de-sac in Vienna, Va. We negotiated it down to $185,000, but the price was nearly out of our league. The first two years, we had to scrimp to make payments.
We left behind an adobe-style, custom home built in 1980 with high ceilings, Santa Fe-style viga beams, a two-car garage and a small yard of superlative desert landscaping. We moved into a tract house built in 1982. It had a one-car garage, and we needed a jackhammer when we tried to fix up the small, ugly backyard. By every measure, it was a step down. Any fool could see that we had bought into a real estate bubble.
Put down the violins.
Re/Max International says we could sell our Vienna house for about $620,000. We figure that's a low-ball estimate, because we've been conditioned by a real estate market on steroids for five years. There are recent signs that the market is finally cooling, but a larger home in our neighborhood that sold in 2000 for $353,000 just sold again for $724,000. Another almost identical to ours sold for $373,400 in 2000, for $449,500 in 2003 and again in September for $620,000.
As much as we liked our old house back in El Paso, Re/Max says its market value now is just $123,750, or $29,350 more than what we sold it for 13 years ago. Much of that appreciation came in the last year or so with the news that the Fort Bliss Army base could have 16,000 more soldiers by 2011 and that the world's largest inland desalination plant is being built to solve a water shortage. The bottom line: The El Paso house appreciated at a 2.1% compounded annual rate, far less than you could expect to get from a CD. The Vienna house appreciated nearly five times as fast, averaging 9.7% a year.
Of course, there is a lot more to life than home appreciation. Traffic, weather, friends and family are among the countless intangibles. When I travel West, I notice that people are nicer. But pinch me. Our net worth is $406,000 more than had we stayed in El Paso. Most of that has come in the past five years.
I'd like to take credit for selling in El Paso, which The Local Market Monitor newsletter says was until recently the No. 1 most-undervalued U.S. real estate market. I'd like to take credit for buying a house in Vienna, a town that Money magazine ranks No. 4 on its 2005 list of Best Places to Live because of good schools, low crime, etc.
But it's a fluke that has been repeated over and over across the USA. More than 10 million people have sold, moved across state lines and bought in the 13 years since I left El Paso. We are a transient nation of homeowners and, therefore, a nation of winners and relative losers.
Our profit is on paper only. Dianna and I will never see any real money unless we one day sell and move somewhere where houses cost less. If we were to move to another high-priced market, it would probably be a wash at best. But our options are much broader than they would have been if we had never left El Paso, one of the many slow-appreciating markets that the real estate boom has left behind.
Another side
Bob Locke became city editor of the El Paso Times in 1988. He sold his factory-built house in Poway, Calif., near San Diego for $219,000. That was $69,000 more than he had paid for it five years earlier, and I remember the sage reporters on the Times business staff marveling at his West Coast windfall. Back then, the IRS required home sellers to buy another house of at least equal value or pay capital gains taxes. That sent the Lockes to the El Paso Country Club district and a 3,700-square-foot monster with two acres and a pool. It cost the Lockes $190,000 and was so big they had trouble furnishing it. Bob hosted a lot of newsroom parties, and visiting them was like walking onto the set of The O.C.
Seventeen years later, the Lockes' former house near San Diego is "conservatively" worth $925,000, says San Diego Re/Max agent Lyle Caddell.
This is what I mean by happenstance: Had the Lockes stayed in California and the Joneses stayed in El Paso, the Lockes would be worth $706,000 more and the Joneses $406,000 less. Two moves have resulted in a swing in family net worth of more than $1 million.
"That is almost painful to think about," says Locke, who now lives in Austin. "It's mind-boggling. My son just started working in Santa Monica as an architect, and I cannot imagine how he will ever be able to afford a house there. You don't get do-overs, and I rather like the way our life has gone. But that would have been one helluva 401(k)."
I wonder if there are a million such relocation wealth swaps, and whether they are in some way influencing the dynamics of the economy. Re/Max CEO Daryl Jesperson tells me to quit wringing my hands and assures me that there are far more winners than losers, because most people who move long distances have moved into appreciating markets. Companies no longer even feel compelled to pay a cost-of-living differential to get people to move to places such as San Francisco, Jesperson says, because transferees willingly commute hours to afford a home that they figure will command a much higher selling price later.
Randall Guttery, an associate professor of finance and real estate at the University of North Texas, says he's been unable to sell his Dallas home for $10,000 less than he paid for it seven years ago.
"Congratulations for moving to a bubble city," he tells me, and says people in Dallas are sick of hearing from their friends on the coasts. Relative newcomers to Dallas who were all abuzz at how much house they could afford when they transferred from California two or three years ago are now "bummed" as they join those being left behind by the lack of real estate appreciation, Guttery says.
The speed at which winners can swing into the losers column is frightening. The 28 households that relocated to El Paso from Fairfax County in 2003 probably thought they had timed it right. They have lost a small fortune as the prices of their former homes continued to soar. Guttery sees no end to escalating prices in so-called bubble cities and predicts the spread between the housing haves and have-nots will only widen.
No financial acumen required
I see no difference in financial acumen between the haves and have-nots. Back in 1977, my parents, Dale and Lois Jones, moved from Albuquerque to Fairfax County when my father was promoted to wildlife chief for the U.S. Forest Service. They bought a townhouse for $77,000, sold it for $110,000 in 1985 and returned to New Mexico to retire. That's a 43% gain, and at the time I thought, "Wow, did they ever time that right."
I had a friend in El Paso who sold pharmaceuticals for a living. He was into personal wealth building, the kind of guy who listened to Bob Brinker on the radio and maxed out his IRA. His parents lived in Connecticut, but he declined to transfer there because his company would not pay him a cost-of-living differential. A comparable Connecticut home was selling for about $100,000 more than in El Paso. He made a financial decision. He's still in El Paso and, so far, that decision has cost him a half-million dollars.
Another former El Paso Times editor called me awhile back about a job opening at USA TODAY. He bought his home in the late 1980s for $140,0000. That's a lot of house in El Paso. He said it had appreciated $20,000 over 20 years. I told him that it would cost north of $1 million to replace it in the D.C. area. I haven't heard from him since.
Home values make haves and have-nots out of entire communities. Because of its lower real estate prices, El Paso charges $3.10 a year in property taxes for every $100 in value. In Fairfax County, we'll pay $1 for every $100 in value this year, down from $1.13 last year.
This is taxation sleight of hand. Our property taxes are really going up because of double-digit appreciation. Last year, we paid $5,330 taxes on the Vienna house where it would have been less than $4,000 in El Paso. There's no Texas state income tax, and I'm not thrilled that my local governments are probably accustomed to automatic increases. But if you were to ever move from one of the nation's poorest counties to one of its richest, you would see a striking difference in services.
For one, schools rely on property taxes. Douglas and Ciera, now a high school sophomore and a college freshman, would have attended Coronado High. It's the pride of El Paso and in the 86th percentile in SAT and ACT test scores, says SchoolMatch President Bill Bainbridge. Madison High in Vienna, however, is in the 92nd percentile and in the highest, 99th, percentile in Advanced Placement test scores, tests that allow students to get college credits while in high school.
U.S. News & World Report says the University of Virginia is the second-best public university in the nation. The University of Texas at El Paso is a "fourth-tier" school.
Locke, the former El Paso Times city editor, has owned seven houses since 1972, in Albuquerque; Aloha, Ore.; West Covina and Poway, Calif.; two in El Paso; and now Austin. He made money on six of them but paid in sweat equity.
In Austin, the Lockes bought 21/2 acres and a partially built house for $66,000 and worked for two years finishing it. After his day job, Bob labored on the house every weekday from 5 until 10 or 11 p.m., and all day on the weekends with the help of his wife, Val, and their two teen sons. They lived the first nine months in the garage of Bob's brother, four in one room with two beds, three computers and a TV.
Locke figures he has at least $150,000 invested in the house, not counting labor. The house would sell for $239,000. A gain of $89,000 isn't bad, but he would have made far more drinking bourbon and watching the weeds grow in the foothills near San Diego.
Locke says building the house was the hardest thing he has ever done. "We never went anywhere," but having the family build something together is unforgettable, and he will always remember things such as where he painted over the blood where his son cut his hand. "I love this house like nothing I've ever known before," he says.
Dianna and I can't say the same for our house, even though last year it appreciated an additional $70,000.
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