What is the Metamorphosis theory of recaptured equity? This theory is based on two logical principles regarding real estate:
- For decades real estate has appreciated an average of approximately 5% per year.
- According to the Case Schiller price index, prices today in most real estate markets have dropped to approximately the same prices in 2001.
There’s a disconnect, or inconsistency, with the two points above. There should have been price appreciation of 5% per year since 2001. This projected appreciation was negated by the explosion of prices during the boom years of the real estate bubble. The unrealistic rapid of appreciation of prices during those boom years, ultimately led to an overcorrection in prices.
Consider the attached charts. Prices should be significantly higher than they actually are, if 5% per year appreciation is reasonable.
Consider The $100,000 purchase price in the attached spreadsheet. A house valued at a $100,000, in 2001 (which is the same price today), at 5% appreciation per year, should be worth $157,000. It’s possible that someone buying today, over the next 5 years could realize an addition 57% increase in value, plus an addition 5% per year.
If the theory of recaptured equity is accurate, we should begin to see significantly higher than 5% appreciation per year as the market returns to normal. In fact this has already begun to happen in many markets nationwide that have already experienced greater than 8% appreciation so far this year.
A buyer can replace the $100,000 price in the attached spreadsheet by typing in the value of the house their buying and the formula in the spreadsheet will automatically recalculate the recaptured equity they may realize over the next several years.