Social Trends, part 2: Return to Normal
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Viewpoint 6/23/2010
Social Trends, Part 2: Return to Normal
“Don’t hit at all if it is honorably possible to avoid hitting, but never hit soft.” – Theodore Roosevelt.
This is a difficult newsletter to write, as it requires taking a good long look in the mirror – both for myself and for ourselves as a society. I’m going to try to avoid hitting, but if something I write hits home with you, it might not be soft.
New Service – Zip Code Reports! This month we began offering a terrific new service to our friends & clients, and the response has been great. Here is an example of what they look like. Send me an email (chrisb@thephoenixagents.com) if you’d like to see your zip code’s activity each month!
Is a Return to Normal a good thing? I guess that depends on what normal is and what we’re able to do with it. Today I want to explore a few of the topics we’ve touched on over the last 6 months to see if we can figure out how to best position ourselves in the real estate landscape to come. Lots to write about today, so let’s get started.
Larger Houses
A couple of weeks ago I showed the numbers trending towards people buying larger homes (Social Trends, part 1: Bigger Houses).
*note: Housingwire.com reported last week that the average size of new construction homes has fallen slightly this year. I think this is more a sign of the times than a long-term trend. I also think it will take years of smaller new-homes to offset the larger homes that were built over the last decade, but it’s something to keep our eye on.
In 2007 I wrote “5 Criteria to Consider When Buying a Home.”: Price, Size (# of Rooms), Condition, Lot, and Neighborhood. Lately I’ve been grouping them down to 3 conditions: Price, Neighborhood, and House (combining size, # of rooms, conditions, and lot). The short version is very few people get what they want on all 3 criteria – the perfect home in the perfect neighborhood at the perfect price. Something usually has to give: pay more for the right house/neighborhood, or downgrade the neighborhood, or buy a smaller home.
Our current trends show people are choosing larger homes in the suburbs; keep this in mind, we’ll come back to it later.
Taking Our Medicine
It’s no secret that we struggle to do what is good for us – the whole immediate-gratification, bigger-newer-better, there’s-gotta-be-a-pill-for-that mentality. Examples?
1. I know plenty of people who talk about their diets &/or their weight, but I only know a handful of people who were able to make the lifestyle changes necessary to actually lose weight & get healthier over a long term horizon. (my wife & broker are 2 of them, and I couldn’t be more proud of them both!)
2. Our National Savings Rate has declined steadily over the years. (graph below)
chart courtesy of dinomite.net
The chart shows spikes during the 1970’s, early 80’s, early 90’s, and today. We tend to save more during economic downturns, but once the economy recovers we revert back to our prior levels, with a long-term trend of eroding savings.
Saving is harder than spending, and like eating, exercise, and smoking – it’s very hard to change habits, even when we know it’s the right thing to do. On top of that, the new products and fancy marketing aren’t making it easier on us.
3. Consumerism. There are more things to buy than ever before, with better advertising hitting us through ever more marketing channels. They’re everywhere!
Take the iPhone as one example; it didn’t even exist until 3 years ago – the phone-game changed with its release on June 29th, 2007. Since then we’ve bought about 55 MILLION of these little techno-gadgets, with no sign of sales letting up anytime soon. (and at about $400 each, that’s a chunk of savings!) Version 4 of the iPhone was just released, and AT&T’s website shows demand has been so great they’re now on backorder!
We all know we should save more money and live more conservatively, but like quitting smoking or losing weight, it’s easier said than done. My guess is very few of us will be able to commit ourselves to a higher than normal savings rate once the economy gets better.
Different Appreciation for Different Neighborhoods
Earlier this spring I wrote The Rich Get Richer and Value Neighborhoods, Cheap Neighborhoods, and Momentum between the Two. In these articles I looked at why some neighborhoods seem to be more desirable than others, especially over the long haul. They’re both worth reading, but I wanted to pull out 2 key points for today:
A. Appreciation isn’t distributed equally. It can (and will) vary greatly within each city, zip code, and neighborhood. And more importantly, the difference in appreciation between two seemingly similar neighborhoods can be staggering over time.
B. A neighborhood’s momentum is not easily changed – it’s almost a self-fulfilling prophecy. Desirable neighborhoods become more desirable over time, while undesirable neighborhoods become even less desirable.
Here is an example with numbers: 2 people buy similar houses in different neighborhoods. They each spend $250,000 and get identical loans. Over time, one neighborhood turns out to be desirable and appreciates at 4.5% per year over a 20-year period. The other neighborhood is less desirable and appreciates at 3% per year.
In 20 years, one house is worth $455,000 – not bad, eh? Well, the other house is worth $614,000. (that $455k doesn’t look so hot anymore..)
If everything else is equal, one homeowner has $159,000 more equity than the other! That would go a long way towards retirement (travel, funding an annuity, selling to buy a smaller house, etc.) or getting out of a tight spot (medical issues, paying for college, etc.)
Timing of Recovery
I wrote in detail last fall why I think the housing recovery won’t really start until late 2011. (The 2010 Recovery has been Postponed.) I’ll address this again in a future Viewpoint, but my opinion hasn’t changed much so far.
What does this all mean?
So, if we’re going to see more normalcy in 2012, and people like bigger homes, and some neighborhoods appreciate faster than others, and people don’t save as much as they used to… What does this mean to me?!
Let’s walk through some of these facts again and connect a few dots:
* The trend is towards buying larger homes, which have predominantly been built in the suburbs, often without an “anchor” to hold the neighborhood’s value.
* The trend is towards saving less money. This causes a whole host of problems…
** Less savings can mean a smaller down payment, a more expensive loan, and possibly the difference between a cheap neighborhood and a value neighborhood.
** Less savings can mean you’re relying more heavily on your home to fund your retirement.
* Buying in the right neighborhood can have a dramatic impact on your future bottom line.
This won’t have a huge impact on the high-income buyers’ primary residences. If you’re choosing between the expensive golf course community and the expensive mountainside community, you’re going to be ok. The right choice will have a bigger impact on their investment properties, though…
This won’t have a huge impact on the low-income buyers’ choices, either. Buying beats renting over the long term, even if you can only afford a small house in a less desirable neighborhood.
But to the Goldilocks buyers in the middle class – choosing the right neighborhood is more important than it’s ever been! We’re saving less, we’ve lost our jobs & burned through our 401Ks, and we’re going to need our houses to do as much heavy lifting as possible for the future.
Everybody is different and has different needs and wants from their home. But all else being equal, of the 3 Buying Criteria I highlighted above (price, house, neighborhood), I would advise being most choosy about your neighborhood.
Don’t blow your budget – you’ll never be able to save money if you can barely make your house payment.
Don’t buy a house way smaller than you need just to get into a better neighborhood – you’ll be miserable the whole time you wait for your appreciation!
But when you’ve narrowed your choices down to a short list, choosing the neighborhood with the best long-term potential is the smart choice.
Additional Reading (not necessarily related to this topic.)
Here are some other articles we’ve written over the last couple of weeks:
Bank of America’s No Job No Payment plan
New Distressed Listings by Month – new charts & new methodology!
Happy Independence Day everyone! Until next month,
Your hoping he can practice what he preaches Realtor,
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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