🚜 Nobody Knows Anything, the ROI of Everything, and AcreValue

Remember: ‘Nobody Knows Anything’

When making predictions about the housing market in the coming year(s), it is helpful to recall the comment Oscar-winning screenwriter William Goldman made about his Hollywood peers: “Nobody knows anything.”

Like Hollywood, what drives the housing market is somewhat mysterious. Only a prescient handful bet against the market before the crash in 2008-09, and few predicted the runup in home prices when the Covid-19 pandemic hit. From the first quarter in 2020 to the fourth quarter of 2022, median home sales price rose 46% from $329,000 to $479,500, according to the St. Louis Fed. In some cities, those jumps were even higher, but are now coming back to earth. 

Business Insider listed 11 cities where home prices have fallen the most from the end of 2023 to 2024, and the list will look familiar to those who have watched the exorbitant price hikes over the past several years. They include biggest loser, San Francisco, down 10.9% to a median of $889,500; Miami, down 9.9% to a median of $522,500; Austin, down 7.7% to $498,500; Tampa is down 6% to a median of $395,000; and Phoenix, which saw one of the biggest pandemic bumps, saw median prices fall 5.1% to $499,995.

There are other data points that paint a troubled picture:

• Mortgage applications have dropped by 63% since their pandemic peak, surpassing the declines seen during the 2008 financial crisis, according to Mortgage Professionals of America (MPA). 

• Compared to pre-pandemic levels, applications are down by 52%.

• Nearly 73,000 homes were pulled from sale after they failed to find a buyer in the final month of last year, Corelogic data shows.

• December saw 1.15 million U.S. homes on the market, a 16% increase from a year ago, according to the National Association of Realtors. But demand has been week.

• Existing-home sales (4.06 million) fell to the lowest level in nearly 30 years, while the median price reached a record high of $407,500 in 2024, the NAR reported.

And there are some resorting to hyperbole, who may not have the credentials of William Goldman, who wrote the screenplays for “Butch Cassidy and the Sundance Kid” and “All the President’s Men,” and the novels “The Princess Bride” and “Marathon Man.”

One of those who has dire things to say about the housing market is Michael Eisenga, president and CEO of First American Properties, who recently said: “We’re witnessing the biggest collapse of homebuyer demand in US history.” 

To us, collapse feels to be a bit of an overstatement.

Proptext has interviewed numerous investors — both large and small — over the past six months or so and one common theme has emerged: properties are too expensive. It’s harder than ever to find a deal that pencils as profitable. 

The combination of relatively higher rates of around 7% on 30-year mortgages and even higher sales prices may have finally hit the wall where sellers are going to sit on the sidelines and wait it out. (We feel compelled to point out the rates of 7% and above were the norm from 1971-2000. The 3% rates of the early 2020s were historical abnormalities.)

More than one investor has told proptext that the market needs a correction, or even a mild recession. But regular readers know that there are opportunities for investors in tertiary markets, and we looked past cap rates in Issue #20 to name some of those cities all over the country, which include Valdosta, GA, California, MD, El Paso, TX, Grand Forks, ND and Las Cruces, NM.

There are several factors that will influence the housing market over the next several months and one of them is the inflation rate, now hovering near 3%, which the Fed has been trying to drive down to 2% with limited success. (Again, it’s worth pointing out that the inflation rate was above 3% more often than not from 1971-2000.) Many economists are expecting just one cut to the overnight rate by the Fed this year, and though mortgage rates are more closely linked to the 10-year Treasury bill, it's unlikely mortgage rates will move down substantially this year.

The Trump administration’s plans for tariffs and immigration have generated uncertainty around the housing market. A trade war with Canada would raise the price of building materials like lumber, cement, appliances, tools and fixtures. The National Association of Homebuilders says that 32.5% of tradesmen are immigrants, so any moves to deport these workers would drive up construction costs at a time when the industry needs more hands.

Two bits of news this week, the report housing starts due Wednesday that details the number of new homes that began construction in the previous month and the report on existing home sales for January 2025 on Friday, could offer some insight going forward.

But it’s important to remember, nobody knows anything.

Dispelling Stock Market Myths: Real Estate Wins in the ROI of Everything

An oft-repeated “truth” over the last three decades that has taken on mythological status is that stocks outperform real estate. Google “stock vs real estate” and this Investopedia conclusion or something similar will pop up:

What happens when you zoom out? What happens looking at the return on investment (ROI) of everything starting in 1870? That’s just what some researchers did, and published their findings with the San Francisco Fed titled The ROI of Everything. The research tells a different story. Housing — not equity — is the asset class that outperforms. When zooming in on a specific time frame, say 1950 to today, is a period when equities have outperformed housing. But if one looked at the ROI of housing from 2019-2022, the story would be real estate’s outsized returns.

1950’s to Today: The Rise of the Management Class

In the period after World War Two up until the first election of Donald Trump as president in 2016, the managerial class dominated the American and global economy. It encouraged free trade. Globalization. China entered the world economy. All of those forces were uniquely beneficial to equities, since cheap labor, largely in the form of China’s billion or so people, fueled cheap goods to be sold in global markets. 

Does the populism and anger of the working class, who were largely excluded from the benefits of globalization, that fueled Trump's election spell the end of the managerial class? Trump has extolled the wonders of tariffs, which would severely impact global trade. Will equities continue to outperform real estate moving forward? 

The forces that propelled equities to outperform real estate in the post-war period may no longer be extant. It’s possible that in the next 10 years it won't be technology or equities that lead the way, but real estate.

Inflation: Demographics Are Destiny

The past decade has been characterized by persistently low inflation rates in many parts of the world, particularly in advanced economies. However, recent trends and historical patterns suggest that we are entering an era where inflation might become stickier. This shift is influenced by demographic factors, among other economic and structural changes.

Demographic shifts, such as an aging population, have been linked to inflationary pressures. Research indicates that a population with a larger share of young and old individuals correlates with higher inflation, while a larger working-age population is associated with lower inflation. This relationship is rooted in the life cycle hypothesis, which posits that different age groups have varying consumption and savings patterns. For instance, older populations tend to consume more than they save, increasing demand and raising prices.

In recent years, global demographic trends have been marked by falling fertility rates and rising life expectancy. Initially, these trends led to increased savings relative to consumption, favoring lower inflation. However, as the proportion of retirees grows, they consume more and an inflationary cycle can take hold. Additionally, the decline in the working-age population can lead to higher wages. Labor shortages are also inflationary by nature.

Look at the chart below, during the high inflation periods of the 1970s and 1980s, real estate outperformed equities. 

Lower labor force participation rates, lower birth rates, lower total working populations in the West, trade wars, aggressive government action against large enterprises — all these factors aren’t going to disappear in the next election. Most of these issues are issues developed economies will have to deal with for the next 20 years. All of these trends look more and more unfavorable to equities. Proptext believes the better bet will be property investments, not stocks.

Income: The Productive Asset

The geometric mean is a more accurate reflection of actual investor experience than the arithmetic mean because geometric mean captures the actual return investors experience when compounding over decades. The arithmetic mean makes returns seem higher than they really are because it doesn’t account for losses compounding negatively. The geometric mean shows the real return investors would experience over the long run.

For housing, capital gains are only 49% of the total returns for the entire sample of the study. The larger portion of returns are from rental income: 51% of returns. 

Real estate investments offer several income streams that significantly enhance the overall ROI for this asset class. These income streams include rental income, capital appreciation, tax benefits, and leverage. Understanding how these components work together is crucial for maximizing returns in real estate.

1. Rental Income: 51% of returns — Rental income provides steady cash flow, which can increase over time as rents rise. For example, in the US, the average renter pays about $1,326 per month, while those renting single-family homes pay an average of $2,018 per month. This predictable income stream is attractive because it can help offset mortgage payments and operating expenses, strengthening cash flow over time.

2. Capital Appreciation: 49% of Returns — Capital appreciation refers to the increase in property value over time. Historically, real estate values tend to rise, allowing investors to sell properties at a profit. For instance, if a property is purchased for $100,000 and later sold for $200,000, the capital appreciation is $100,000. This aspect of real estate investing can significantly boost the overall ROI.

3. Taxes: Depreciation — What this study doesn’t consider are the tax benefits: depreciation, key benefit for real estate investors. It allows property owners to deduct a portion of the property's value each year from their taxable income, effectively reducing their tax liability. This deduction is based on the property's depreciable value, which excludes land, and is spread over the property's useful life — 27.5 years for residential properties and 39 years for commercial properties

How Depreciation Enhances Returns

• Reduces Taxable Income: By deducting depreciation from taxable income, investors lower their overall tax burden. This can result in significant savings, especially for those in higher tax brackets.

• Improves Cash Flow: Lower taxes mean more cash available for reinvestment, debt repayment, or operational expenses, thereby improving cash flow.

• Offsets Rental Income: Depreciation can offset a substantial portion of rental income, allowing investors to retain more of their earnings.

• Offsets Non-Passive Income: For qualified real estate professionals, depreciation losses can offset non-passive income, such as W-2 income or investment income.

Depreciation Recapture and Taxes on Sale

When a property is sold, the IRS requires depreciation recapture, which taxes the previously deducted depreciation amounts. This is typically taxed at a rate capped at 25%, which is higher than long-term capital gains rates but lower than ordinary income rates. Despite this, the years of tax savings from depreciation often outweigh the recapture costs.

Portfolio Construction: Enhancing Returns and Lowering Risk

David Swensen, the chief investment officer of the Yale University endowment from 1985 until his death in 2021, was revered for his innovative investment strategies, which included a significant allocation to real estate as part of a diversified portfolio. The Yale Model Portfolio he oversaw generated an annualized return of 12.5%, outperforming the S&P 500 index and turning it into one of the world’s best-performing endowments.

Here's an overview of his approach to real estate allocation within the context of his broader portfolio construction:

• Swensen recommended allocating 20% of a portfolio to real estate, typically through Real Estate Investment Trusts (REITs) for individual investors, as direct real estate investment is often less accessible. 

• In later years, Swensen adjusted this recommendation to 15% for real estate.

• He emphasized the importance of diversification to reduce portfolio risk. Real estate, particularly through REITs, offers a diversification benefit as it tends to have a lower correlation with traditional stocks and bonds.

• Swensen aimed to create a portfolio that could withstand market volatility better than one heavily reliant on stocks.

Both Swensen and the Fed study on the ROI of Everything reached the same conclusion: real estate belongs in a larger portfolio — perhaps an outsized share of a portfolio. In many periods of history, real estate has out performed equities. 

Only time will tell if in the next 10 years equities will outperform real estate. With today’s market valuation, Goldman Sachs published a research note at the end of last year projecting the next decade won’t be as friendly to investors in the benchmark index. Propext lives by the credo that the best time to buy a property was 20 years ago, and the next best time is today. 

What are you waiting for?

Shelby, North Carolina

Under an hour to downtown Charlotte and less than 1.5 hours to Asheville, Shelby represents an affordable market in an otherwise expensive state. With its inexpensive properties, stable rental demand, a diversified economy, a reasonable cost of living, and an evolving housing market, Shelby presents compelling opportunities for single-family rental (SFR) investors.

The Zillow Home Value Index places Shelby’s median home value at $198,993, reflecting only a 0.1% decrease over the past year, suggesting relative price stability. (Zillow)

Employment & Economic Drivers

A crucial factor for real estate investors is the presence of employment opportunities, which drive housing demand. Shelby benefits from a diverse economic base, with strong employment in healthcare, manufacturing, and education. Median household income stands at $64.3k based on the US Census Bureau American Community Survey. 

• Healthcare is a dominant sector, with Atrium Health Cleveland and Cleveland Regional Medical Center each employing more than 1,000 workers. 

• Manufacturing is another significant driver, with Hanesbrands Inc., PPG Industries Inc., and Curtiss-Wright Flight Systems Inc. This sector provides steady blue-collar employment, which supports rental demand.

Undervalued Market

With the median household income at $64,300 and the median home value at $198,000, fundamentals favor this market as an undervalued market compared to household income. Net rental income for the area is estimated at $13,500, translating to a cap rate of 6.8% for Shelby.

1309 Dodd St

This new construction home in Shelby, NC, has 2,204 square feet, 4 bedrooms, 3 bathrooms, and a 2-car garage. It includes a large bonus room downstairs that can be used as an additional bedroom to potentially charge additional rent.

The Investment Thesis

→ New construction for only $278k
→ $2,016 / month estimated rent
→ Undervalued market close to the fast growing metro area Charlotte NC

 Property Details

 Financial Projections

Interested in Learning More?

*Appreciation based on 4% growth rate. 

In Just 13 Years in the US, She Built a Portfolio of 10 Units

At only 43, Angelica Baez is a mother, grandmother and savvy real estate entrepreneur with a portfolio of 10 properties that she has accumulated since 2016.

“At the first auction I went to with my father, the woman who was supposed to give me the list of properties told me that I wasn’t going to be able to do it because I didn't speak much English and it was a lot of work,” Baez said. 

But that didn't stop her. 

“I knew I could do it,” remembers this Dominican woman who arrived in the US in 2012 and after a few difficult years living in Queens, NY, discovered the potential that Scranton, PA, offered in the real estate business.

She bought her first house for $17,000 in 2016.

“It needed a lot of repairs, but my dad helped me financially and my husband helped me with the repairs because he works in construction.” She invested $70,000 in the 4-unit building over several months before she was able to rent it out. She estimates it’s now worth about $300,000.

Her personal story as an investor began at Scranton’s auctions, where properties that the government has repossessed are sold to the highest bidder. Her family all attends: her father, her mother, her brothers and her husband are all invested in real estate.

Her most recent investment was $12,000 in a property that required a lot of work to renovate. “It took me two years to finish that house, but it's already rented,” she said. “I can fix any house even if it is damaged. In my mind, before buying a house, I see it ready as I want it to be.”

“I'm always looking at Zillow, Trulia and other sites like that, but where I bought most of the properties at auctions,” Baez said. She and her husband have set up Limited Liability Companies (LLC) for the properties, and she self-manages the mix of multifamily and commercial space she has in her portfolio.

“I wanted to buy in other places because the taxes were better, but Scranton has a lot of potential,” Baez said. She started out as a businesswoman by buying four colmados (grocery stores) little by little in Santo Domingo, where she moved from the small city of Tenares in the north central part of the Dominican Republic when she was 15.

She’s always looking for her next deal, especially during auction season.

“A four-apartment house produces $5,000 a month in income for me,” she said. “I save that for March and April when the auctions are.” 

She finances the renovations with her credit cards.

“The trick is to never stop paying, don't fall behind,” Baez said. “I don't go to restaurants or treat myself to luxury all the time, because I don't like having debt and I have a clear goal.”

This interview was originally conducted in Spanish. It has been condensed, edited and translated.

What is your special real estate superpower?

I never have any fear and I always consult with my dad, Emilio Baez. He is my rock.

What was the hardest lesson you learned early on in your real estate journey, and how did you overcome that and persevere?

When that lady told me when I went to see the list of houses up for auction stuck with me. She belittled me, but now she calls me “Ms. Baez” because I showed her that I could do it.

What advice would you offer to somebody looking to get into real estate or grow a portfolio?

It's not easy and you have to be careful about where you spend money. Yes you can, but you have to have discipline and control. For example, my son wanted a new, more advanced computer for his classes at one time and I couldn't buy it for him. We couldn't buy many things, but now we are doing better.

Among the strategies a property owner could pursue — long-term rental, mid-term rental or short term, (Airbnb), co-living — what works best for you, and why?

Long-term rentals, six to 12 month contracts, work better for me. That gives you a secure income every month and you have a guarantee. You know you will get your money if they damage your property.

What do you think is the biggest issue investors face in 2025 and beyond?

Now people are saying the economy is going to get worse and property prices are going to fall, but you always have to keep in mind that the best investment you can make is in properties. Your money will always grow.

AcreValue

For landowners, farmers, investors, and real estate professionals, AcreValue has become a cornerstone resource for evaluating farmland, timberland, and rural properties. As part of Ag-Analytics' portfolio, AcreValue delivers high-quality insights into land valuation, ownership trends, and market conditions. Now, with Ag-Analytics recently acquired by CoStar Group, AcreValue’s advanced analytics are set to be incorporated into Land.com, further enhancing its reach and capabilities in the land sector of real estate.

The Power of AcreValue in Land Valuation

AcreValue serves as a comprehensive land intelligence platform, offering tools that help users analyze land values based on market trends, soil productivity, and ownership records. By aggregating publicly available data with proprietary models, AcreValue provides a robust decision-making tool for:

• Farmers & Landowners: Access land value estimates, soil reports, and historical transaction data.

• Real Estate Investors: Evaluate land price trends and potential investment opportunities.

• Lenders & Appraisers: Gain accurate insights for loan assessments and property appraisals.

• Ag Industry Professionals: Leverage GIS mapping and land data for better strategic planning.

Ag-Analytics & CoStar Group: Expanding the Reach

The recent acquisition of Ag-Analytics by CoStar Group marks a significant shift in the land data industry. CoStar, known for its extensive commercial real estate intelligence, plans to integrate AcreValue’s insights into Land.com, which already serves as a leading platform for buying and selling land.

AcreValue’s core offering lies in its ability to provide detailed parcel-level insights that streamline land transactions for investors, farmers, and brokers. By leveraging big data analytics, satellite imagery, and machine learning, AcreValue delivers granular property details, including historical ownership records, soil composition reports, yield projections, and estimated fair market values. The platform allows users to conduct comparative land analysis, track land appreciation trends, and identify high-potential investment properties based on localized economic conditions.

For investors, AcreValue also offers risk assessment tools, helping to evaluate potential returns on farmland acquisitions and lease arrangements. The integration into Land.com will further enhance discoverability for buyers and sellers by merging listing data with real-time analytics. This means smarter land transactions, greater efficiency in deal sourcing, and a competitive advantage for investors looking to optimize their land portfolios.

The Future of Land Intelligence

For real estate investors, this integration means greater transparency, accuracy, and efficiency in land transactions. Access to real-time market analytics and more precise land valuation tools will enable investors to make better-informed decisions, identify undervalued properties, and capitalize on emerging trends. Whether assessing land for long-term appreciation, development potential, or income-producing opportunities, AcreValue’s enhanced data capabilities within Land.com will provide a critical edge in navigating the evolving landscape of rural real estate investing.

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