the Rich get Richer

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Viewpoint 02/17/2010

the Rich get Richer

Location.  Location.  Location.

The 3 most famous words in real estate.  In business, the right location can be the difference between expansion and closing up shop.  In housing, the long-term effects of the right location can be even more powerful, shaping your children’s education, friend-base, and future retirement.  Our current Great Recession has not affected everybody equally, and your location probably has something to do with how you’re feeling about today’s economy.

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True story.

2 members of my family bought & sold Phoenix real estate within similar long-term time periods, yet their results were very different.  Let’s look at their scenarios:

Family A bought a 2,100 sqft home in 1973 in a (at the time) recently developed suburb.  Shopping & dining were close by; so were the edges of town to the north and east.  My family lived in the home for 32 years, eventually selling it in 2004.

Family B bought a 2,200 sqft home in 1977 – a brand-new subdivision in an up & coming family-oriented neighborhood.  Shopping & dining were also nearby; a shopping mall had opened a couple of years earlier with tons of publicity and fan-fare, as it was the first 2-story mall and one of the largest malls in the entire country!  My family called this house home for 25 years before selling in 2002.

Now let’s compare the details:

** note:  the table above is using some guesstimates and rounding, but not enough to have a dramatic effect on the results.

Why would there be such a big difference between 2 seemingly similar neighborhoods?  And more importantly, what can you do when buying a home to give yourself the best advantage you can?

Desirability, Neighborhood Anchors, and the Surrounding Area

• Is there something inherently desirable about the neighborhood, or is it just another neighborhood which happens to be in your price range?  Inherent desirability is less likely to change over time…
• is the neighborhood near a mountain, lake, desert preserve, golf course, 5-star resort, or some other anchor?  (Oftentimes these anchors are what create the desirability mentioned above.)  If the best anchor in your neighborhood is the open field across the street, be prepared for what the neighborhood will look like when that field becomes an apartment complex or another subdivision!
• State-owned preserve is more difficult, and more expensive, to build on than private-owned desert or farmland.  More difficult & more expensive means any future housing, if it comes at all, will he higher-end homes.  Even if you’re in a sea of homes, being surrounded by larger homes is preferable to smaller homes.

In my family example, one neighborhood was anchored by Camelback Mountain, which spurred developments like Scottsdale Fashion Square, The Phoenician, The Biltmore, and the Camelback Financial Corridor.  The other neighborhood was near then-new MetroCenter and surrounded by orange groves, farm land, and desert (all of which was eventually converted into additional homogenous housing.)

How can neighborhoods change?

Momentum can go up or down, and once a neighborhood gains momentum it can be very hard to change its direction.  Unfortunately, momentum is often driven by things outside an individual homeowner’s control.  Our current Foreclosure-driven real estate environment is acting to accelerate some of these trends.

The Rich get Richer (in theory)

Hmmm, let’s see..  We want to live in a good neighborhood, where people take great care of their homes & yards, near a natural anchor (mountain, lake, desert preserve, golf course), near other neighborhoods of large homes.  Sounds expensive – do the rich really have an advantage?

Would you rather live at the base of a beautiful mountain, or across the street from a garbage dump?  Right, so would everybody else.  Let’s assume there are only 2 houses available for sale, equal in all other accounts, and these are their locations.  Since real estate prices are determined by supply & demand, the price of those two houses would not be equal.  If they were equal, the mountain-house would have lots of offers to purchase and the dump-house wouldn’t have any.

Now suppose I told you the mountain-house costs $500,000 and the dump-house costs $200,000?  Maybe some of you can find value in the lower price of the less desirable house, no?  What about if the prices were $1,000,000 and $100,000?  Most of you reading this are saying “I still like the mountain-house better, but I can’t afford it so I’ll have to settle for the dump-house.”

A few factors come into play for neighborhoods like this mountain-house:

1. They are, by definition, more desirable, which means they will always have a higher demand, which means higher prices.

2. Those who can afford higher-priced neighborhoods typically care more about appearances and are going to take better care of their home’s looks.  (front yard landscaping, exterior paint, deferred maintenance, etc.)

3. These higher-end buyers attract higher quality retail and entertainment to their neighborhoods, which again drives up the overall desirability of the neighborhood in an upward spiral motion.

4. This attracts more people with higher income, who develop the surrounding neighborhoods with high-end homes as well.

5. These folks have the income, savings, and credit to withstand some financial bumps in the road (like our current Great Recession.)  This means their homes are less likely to end up as vacant, bank-owned REO property.

6. If financial difficulties take their toll and a vacant REO goes up for sale, the increased demand for the neighborhood means it will not sit on the market very long, because so many other people want to live in this neighborhood.

7. There are fewer rentals in this neighborhood simply due to the price tag associated with the homes.  In addition, the homes which are for rent come with their own steep monthly rate, which once again means the people who live there (this time as tenants) are higher-income people and demand quality and appearances.

8. The homeowners in this neighborhood have the financial means & political know-how to fight any perceived threat to their neighborhood’s well being, such as a proposed unsightly shopping center or a new freeway offramp.

Because of all this, these neighborhoods continue to maintain their relative desirability – given a choice and all else being equal, people would prefer to live in nice neighborhoods.

While the poor get poorer

Unfortunately the opposite of this is also true.

1. Builders buy cheap land on the outskirts of town and build economical, affordable houses.

2. Buyers agree to a longer commute in exchange for a home they can afford.

3. Buyers don’t necessarily LOVE their neighborhood, so their pride of ownership isn’t quite as high.  This causes their yards to not be manicured to perfection all the time.  In addition, some buyers can’t afford the time to do yardwork or the cost of hiring help, so their yards don’t look as nice.

4. These homeowners don’t have the financial reserves to withstand financial hardship.  Many are a couple paychecks away from disaster.

5. These neighborhoods are cost-attractive to investors, which means more rental homes (where tenants might not take as good care of the home) and in today’s market more foreclosures.

6. Vacant homes, tenant-occupied homes without good landscaping, and homeowners who can’t/don’t take good care of their yards make the neighborhood not look very nice, further reducing its desirability.

7. On top of all this, homebuilders are still building homes (that’s what they do!), so potential buyers weigh an extra few miles with having a brand-new home in a brand-new neighborhood.  One more knock on this neighborhood’s desirability.

There are many factors which contribute to a neighborhood’s momentum, and unfortunately once things start moving in the wrong direction it can feel like everything else is piling on.

The Rich get Richer (in actuality)

OK, that’s all great theory, but how does it look in actuality?  Fortunately we can pull some real data to see if my story holds water.

Do expensive neighborhoods really withstand problems better?  I pulled all the Bank REO listings that hit the market on Jan 4th , 5th, and 6th, subject to a couple of criteria to sift through the shoddy data input listings.  There were 310 REOs listed for sale in these 3 days.

(Why 3 days?  I wanted enough REOs to show a pattern, but I also wanted to be able to see the map!  I started by pulling all of January, then removed days until I had a good mix.)

I then asked MLS to plot them on a map for me, below.  (click to embiggen.)

This map answers our questions with a resounding YES!

Notice the big hole in Scottsdale where there weren’t any REOs listed (Red circle below)?  There were only 7 listings in the 125 square miles (approx) surrounded by SR-51, I-10, and Loop 101.

Then compare North Peoria / North Glendale (Blue circle) with South Peoria / South Glendale (Yellow circle).  Similar area, similar number of houses, but far fewer REOs listed in the higher-dollar sections of town.

Finally, notice a few places where REOs are clustered together (Pink circles):  South Surprise, El Mirage, Youngtown, Maryvale, Avondale, Laveen…  Not areas generally associated with upper crust wealth.

These maps help prove my theory that the wealthy, and wealthy neighborhoods, are better able to withstand economic hardship, making them less likely to lose their home to foreclosure.  But what about the other part of my theory – that desirable neighborhoods gain momentum and sustain their desirable-ness?  We’ll have to look at a different set of numbers for that..

A few weeks ago I presented a chart showing the price per square foot, by city, over the last decade, for the 9 cities with the most transactions in 2009.  (Viewpoint 1/6/2010, 3 Directions 2010 could take.)  I’m re-posting the chart below.

It’s obvious to see that all cities showed huge appreciation in the first half of the decade, and all cities showed losses in the latter half of the decade.  However, some cities have fallen further than others, to levels even below the year 2000.

Today we’ll take this chart another step, and break down each city into its primary zip codes.  If neighborhood desirability holds true, we should see some disparity between zip codes even within the same cities..

Chandler & Gilbert are up overall, and they’re up in each zip code.  Scottsdale is up, big time, across all zip codes.

Buckeye is primarily composed of one zip code, and it’s down from the beginning of the decade.  But look at some of the others…

and Eureka!

Glendale, Peoria, and Surprise – Glendale & Surprise are down from 10 years ago, while Peoria is up slightly.  More interestingly, though, is the split within the zip codes.  Across all 3 cities in the Northwest Valley, the northern zip codes (which have larger, more expensive houses) have shown gains while the southern zip codes have shown losses.

Phoenix and Mesa – similar to the NW Valley but not segregated as cleanly along geographic lines, these cities are showing massive differences from zip code to zip code, with the more desirable zip codes showing gains (think Camelback Mountain and Desert Ridge areas) and the less desirable areas showing losses (think Phoenix near lower I-17 and Mesa along the Superstition.)

ps – remember my 2 family members from the top of this email?  Take a look at their zip codes in this chart – 85018 in Phoenix and 85302 in Glendale.  The rest kinda makes sense now, right?

Buying the Ideal House (micro-managing the data)

What we’ve seen here is some cities in the Valley are more desirable, and hold their value, better than others.  And within these cities, some zip codes fare better than others.  I haven’t shown the numbers here today, but I think we can all make the leap of faith that some parts of a zip code can be better than others, and even some subdivisions within a zip-code-section can have a better inherent desirability.

Taken to the extreme, there can be (and usually are) better blocks within a subdivision, and there can even be a “best house on the block.”  You may not be able to control what happens to your particular zip code or even your subdivision, but if you have a desirable house within your subdivision you’ll fare better than your neighbors.

“Anchors” for your home are similar to those for your neighborhood – things which are desirable, impossible or very expensive to change, and which your neighbors won’t have.  Look for home-anchors such as:  larger lot, better views, closer to desert / mountain / golf / greenbelt, extra garage bay(s), perfectly designed backyard, etc.

Related topics we’ll cover in future Viewpoints:

I could have written several more pages, but this is already a rather lengthy newsletter, and it’s time to send it out.  I’ll circle back to these topic in the coming months:

Do the neighborhoods which have been hit harder (the less desirable zip codes) have more upside appreciation potential today?

How does this information relate to a Buy vs Rent decision, or to investors as a “where should I buy” decision?

How can a neighborhood change its momentum to become more desirable?  What does a desirable neighborhood have to watch out for to avoid gaining negative momentum?

I hope you enjoyed this e-newsletter and found something of value you can take away from it.  You can leave a comment on something you read or add to the discussion by clicking here and using the comment form at the bottom of the page.

All else being equal, wouldn’t we all prefer a home that backs to the white sands of a Caribbean beach?  Cheers.

Chris Butterworth

Chris & Heather, The Phoenix Agents

at Thompson’s Realty

http://thephoenixagents.com

623-570-9940

Chris Butterworth and Heather Barr are The Phoenix Agents at Thompson’s Realty.  The Phoenix Agents are Realtors in the Greater Phoenix area, who have built a loyal following over the years by offering superior service levels coupled with a low-pressure approach.  You can visit http://ThePhoenixAgents.com online to learn more about Chris, Heather, and the Phoenix-area real estate market.  If you have real estate questions or needs, please contact us anytime; we’d love to hear from you.

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