Archive for July 2005

The Rising Cost of Real Estate

The fact that the price of real estate is constantly on the rise is not really a surprise to anyone, is it? After all, everyone knows that they stopped making land a long time ago. In elementary school, we learned about the famous Law of Supply and Demand. As the supply shrinks, the demand always increases. Because the supply has been getting smaller and smaller, since the dawn of time, it makes perfect sense that the demand has been increasing significantly.
As a rule of thumb, the price of real estate doubles every 10 years. So if you buy land today, for $10,000, it’ll be worth about $20,000 ten years from now. Again, this is a rule of thumb, but historically it has proven to be accurate.
One of the major reasons for the rising cost of real estate is the growth of our world population. Take Phoenix, Arizona, for example. In 1940, the population was a small 186,000. By 1994, the population had reached over 1.5 Million. Las Vegas, Nevada, is another fast-growing area. Today, the population is nearly 1.1 Million, up from just 460,000 twenty years ago. Yes, the population more than doubled in twenty years!
You don’t have to look very far to see the effects of rising land prices. How many times have you talked to an old timer who said to you “Twenty years ago, I had the chance to buy that place for only $32,000. And they just sold it for $250,000….” These aren’t rare circumstances. They’re normal, common, everyday events.
In the San Francisco Bay Area, demand for new houses has sent land prices skyrocketing as high as 100% over the past four years. Builders are scrambling for parcels. One such parcel of ground, just 4.7 acres close to the freeway in Del Mar, California, was recently offered at the stunning price of $6.7 Million!!!
There are a few times, however, when land prices tend to stay flat, or even decline. Southern California in the early ‘80s is a good example. During times of severe, and I do mean severe economic slumps, real estate values have a tendency to stay flat. When the economy recovers, and buyers, builders and investors begin purchasing again, the prices quickly increase.
Inflation is another key to the rising cost of real estate. Remember how a loaf of bread used to cost less than fifty cents? Now it's $1.99 or so. The same is true in real estate. The same dollar today just won't buy as much property as it did yesterday. Inflation, especially when combined with rising wages, has created an environment in our real estate markets where the value of the dollar is diminished versus our buying power in times gone by.
Remember the Law of Supply and Demand and inflation, and remember that they quit making land a long, long time ago.


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