Investment or Speculation?

  How much money have investors in real estate lost due to the bust in the housing market? I hear talk about “investment  loss”  and (with the voice in my head) wonder on what these discussions are founded. Maybe we put a little too much stock in media sensationalism instead of taking a look at the the facts.

   Examining a short time back into history will give us  more perspective on this subject. An investor who bought a property five years ago in Miami, FL would be ahead by $200,000 today. The gain would be $150,000 in Las Vegas, NV. In our town, you would see a gain of $84,000 on an average home in the Pagosa Lakes area if you chose to liquidate now after having owned it since 2003. Take a look at my article last week, Real Estate Comparison for 2007, to see similar comparisons.  According to data compiled by the National Association of REALTORS® , the United States as a whole is ahead by $54,000 on the five year mark. Only people who bought in the peak of the market and are forced to sell quickly face a potential loss. That loss on average would be one to two percent. Real estate investors who plan to hold for a reasonable period of time are still in very good shape.

    The rate of appreciation in Pagosa Springs from even one year ago yields modest returns in all categories of properties except for a 20% median “loss” on partial acreage lots. Let’s discuss this supposed loss for a moment. If you have a small acreage lot in the Pagosa Lakes area for sale today you will receive on average $40,000 gross. That may seem like a loss compared to the fact that in 2006 you may have received $48,000 for the same piece of ground. Let’s add a little reality to this discussion and call a spade a spade. By definition, an “Investment” has an element of maturity. The word investment is defined as “The purchase of an asset for example, real estate or shares in order to produce income, or to produce capital gain on resale/maturity.”  (According to  On the other hand, you can Google definitions for the term “speculation” and find that they are riddled with scary little  words such as- risk, hope, anticipation, narrow and my favorite phrase…”Safety of principal is a secondary factor.” In a sentence, those who choose to speculate in real estate for the short term, may be burned.

 Let’s re-focus on our small lot investment for one last moment. In 2003 a raw land lot in the Pagosa Lakes area would bring on average $12,714, and now in 2007 somewhere around $40,000. Four years = $27,286 total net. Break that down and annually and you have $6,822  per year minus holding and closing costs on a principal investment of a little less than $13,000.  Let’s see- 54% annually ROI for four years straight…not to bad. We may never see this dramatic of a return again, but for this moment in time, this is the type of profit that is possible.

   The housing market will remain our bedrock investment through the ebb and flow of current and future real estate cycles. It will continue to produce funds to help us through braces, college tuition, weddings, and retirement long after we have clicked the X on our browser and forgotten what has been written in the sensation-seeking story of the moment.

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