Tag Archives: investment

Move at the right time to reap the benefits of an American boomtown

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At the end of a listing of the “Top Boomtowns in America” in 2022, here is some advice about timing a move to one of the boomtowns:

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“Moving to a boomtown at its earliest stages can be a great opportunity for entrepreneurs and investors, as there’s still plenty of room for growth. And for those who are looking for a job, there are usually plenty of opportunities available in rapidly growing cities,” says Edith Reads, senior editor at TradingPlatforms. “However, if a city has already reached its peak, it may be too late to get in on the action. In this case, it may be wiser to wait until the city’s growth slows down before making the move. This way, you can avoid getting caught in the midst of a housing or job crunch.”

In other words, a resident or business wants to get in on the earlier parts of the boom, not in the latter stages or after it is over. Why? A few reasons listed above:

  1. There is money to be made. Whether owning a business or a home, an investment early on could pay off down the road. (For more on American homes as investments, see this earlier post.)
  2. A growing community means numerous job opportunities.

Mess up your timing in moving to one of these boomtowns and these two opportunities are not as good.

Another thought that is not accounted for in this ranking: how does the community change because of the boom period? Is it just as an attractive place to live and work after the rapid population growth? How do the old-time residents view the change? If the community grows enough, it will not exactly be the same place. Ultimately, other boomtowns will reign in future years. Will the boomtown be a good place to be in a few decades?

The suburbs are about homeownership but some property owners see more money in rental units

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The American suburbs revolve around single-family homes. But, in recent years some property owners see more money to be made in converting housing units into rentals. Here is a recent example from Arlington Heights, Illinois:

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Interra Realty, a Chicago-based commercial real estate investment services firm, announced this week it brokered the transaction — equating to $242,500 per unit — for the property at 1 N. Chestnut Ave. The firm represented both the seller, the Chestnut Street Condominium Association, and the confidential buyer, according to the announcement…

“As long as there remains potent rental demand in desirable communities like Arlington Heights, I expect to see continued deconversion opportunities in select Chicago suburbs,” Interra Managing Partner Patrick Kennelly said in the company announcement. “This submarket, in particular, has become more of an investment target following headlines related to Arlington Park.”

If homes, single-family dwellings and otherwise, are now primarily about financial investments, is this one of the logical consequences?

Suburbanites can often have negative perceptions of renters and apartment-dwellers. How do residents of Arlington Heights feel about more housing units becoming rentals? Does it matter if the conversions are happening in or near suburban downtowns compared to in single-family home subdivisions?

If this continues to spread – and I saw numerous stories in the last few years about single-family homes turned into rentals as well – I would imagine there will be some concern and attempted regulations.

Rising property values and “passive income, which is the real American dream”

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Why do so many homeowners care about protecting their property values? While recently reading about social class and Hollywood, I found this observation:

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That passive income, which is the real American dream, is no longer something that the actual artists—not just actors but writers and directors and everyone else who ever made a dime off of residuals—involved in the entertainment business get to enjoy.

The context here involves the actors and others involved with long-popular television shows that could reap the financial benefits for decades.

Isn’t this passive income also what American homeowners in the early 21st century expect when they purchase a residence? Scholars have noted the shift to Americans viewing their homes as a positive investment. Instead of needing a home for shelter and enjoying that residence while there, homes and residences are now supposed to make money for their owners. In this arrangement, property owners are not expected to be completely passive; they should maintain their property or possibly even improve it. In return, their property values go up and they can cash out in the future. A loss is very undesirable and even staying roughly at the same value over time is not much help given expenses. A nice profit requires a decent uptick in value. Such a profit can help owners climb the economic ladder, have a comfortable retirement, and pass along wealth and advantages to children and family.

This can help explain why so many homeowners fight against perceived threats to their property values. People want to change the use of land or alter the neighborhood in ways that might limit the rise of property values. It is a threat to passive income. (Whether those changes to the neighborhood and/or community actually lower property values is another story.)

Buy self-storage for Christmas

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Need a gift for Christmas 2021? Self-storage is a hot commodity. Here is how it can enhance the holiday season:

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  1. Give someone or yourself the gift of self-storage. Instead of purchasing a bigger house to store all that stuff, gift a self storage unit. Buy a month, several months, or even a whole year!
  2. Buy stock in a self-storage company. American is #1 in self-storage and you can ride the investment train.
  3. Take the long view and take those gifts and turn their value into your own self-storage property. Then, you gain from others who need to use your facility.

This may not be what your family and friends want for Christmas but it could be useful and/or valuable down the road.

Big drop in construction of starter homes of under 1,400 square feet

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For younger adults looking for smaller homes to purchase as their first home, there at least one reason they are not easy to find: few have been built in recent years.

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The supply of entry-level housing, which Freddie Mac defines as homes up to 1,400 square feet, is near a five-decade low, and data on new construction from the National Association of Home Builders shows that single-family homes are significantly bigger than they were years ago.

Homeowners from previous generations had access to smaller homes at the start of their financial lives. In the late 1970s, an average of 418,000 new units of entry-level housing were built each year, according to data from Freddie Mac. By the 2010s, that number had fallen to 55,000 new units a year. For 2020, an estimated 65,000 new entry-level homes were completed…

“What was really striking to me was the consistency in the decline in the share of entry-level homes, irrespective of geography,” Mr. Khater said. “The thing that struck me the most was that really, it’s all endemic. It’s all over the U.S. It doesn’t matter where.”…

Homeownership leads to greater wealth for those who buy earlier. An analysis from the Urban Institute estimates that those who became homeowners between the ages of 25 and 34 accumulated $150,000 in median housing wealth by their early 60s. Meanwhile, those who waited until between the ages of 35 and 44 to buy netted $72,000 less in median housing wealth.

Three things stand out to me from this article:

  1. The decline in the construction of these smaller homes is real. The numbers cited above suggest roughly 15% of these smaller homes are constructed now compared to the late 1970s.
  2. At the same time, the definition of an entry-level homes is contingent on square footage. These days, 1,400 square feet is not that large for a home. These standards have changed over the decades; new homes in the 1950s in Levittown were more around 1,000 square feet while many new homes today are over 2,500 square feet. As builders construct larger homes (presumably making more money) and some buyers want larger homes, what is now an entry-level home may have changed.
  3. The final paragraph above considers the wealth implications about being able to buy a home earlier on. This is important: homes are one of the biggest generators of wealth for Americans. Yet, this also marks a shift in viewing homes as investments as opposed to good spaces for people to live.

Homes as investments in continually increasing national median home values

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The national median house value kept going up through November 2020:

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Despite a global pandemic and an economic downturn, U.S. home prices pushed new boundaries last year: The national median sale price for existing homes hit $310,800 in November, marking 105 straight months of year-over-year gains, according to data from the National Association of Realtors.

This could reinforce the now common viewpoint that homes are investments. Increasing median values for over eight suggests reinforces the idea that homes generally go up in value. Except for big economic crises – think the burst housing bubble of the late 2000s – houses accrue value over time. Even COVID-19 could not derail this.

This is often viewed as a good thing. Homeowners like that their homes are increasing in value because they can make more money when they sell. Communities take this as a marker of status. Realtors and others in the housing industry benefit. No one wants a drop in housing values across the board. (Of course, this is the median so the values can differ a lot by location.)

The commodification changes how owners, developers, and communities think about houses. They are not just the private spaces to escape the outside world – an established idea in the American Dream – but goods to profit from. An increasing value must be good and steps in other areas should be taken to protect home values.

This has numerous effects. It encourages Americans to invest resources in buying housing when that money could be put to use elsewhere. It contributes to single-use zoning where homes are protected from any other possible uses. It can exacerbate the inequality gap between those who can buy homes and those who cannot or between those with homes in places where the values keep going up versus those with homes in places with stagnant values.

McMansion values still slow to recover in one wealthy Chicago suburb

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The values of McMansions may be proportionally down and evidence from one well-off Chicago suburb suggests they are selling at similar prices to 15 years ago:

In South Barrington, home to swathes of McMansions, the market has been slow to recover. There, large single family homes regularly hit the market at the same prices they sold for in the ’00s, indicating an enduring lack of demand in the northwestern suburb.

Despite the risk that these homes presented leading up to the recession, it would seem they’re a more sensible investment today — so long as buyers know what they’re getting into. Pound for pound, McMansions are a ton of house for the money. But they’re not speculative equity, and they’re not a retirement account.

It would be helpful to see more data across suburbs. Without such figures, it is hard to know if:

  1. Is this an issue related to Barrington and its location and amenities? The suburb is almost all white and Asian and has a median housing value of just over $800,000. Is there less demand for housing in this particular location?
  2. Is this a problem for all McMansions in the Chicago area? If people are indeed seeking more “surban” locations or Baby Boomers are all trying to unload their McMansions at once, there might be relatively few buyers for such homes in a region of over 9 million residents.
  3. Are the particular features of these homes limiting the value? This could be due to particular features of the homes or many are now up for updates that have not been done.

The issue may not be McMansions at all: perhaps it is the mindset common among Americans that houses should be investments that increase significantly in value.

American homeowners with $5.8 billion of tappable equity

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A new statistic hints at the shift of homeownership from having a piece of private property to the home as an investment: Americans have nearly $6 billion in home equity.

Homeowners now have a collective $5.8 trillion in tappable equity, the highest volume ever recorded and 16 percent above the last home price peak in 2006. The average homeowner with a mortgage gained $14,700 in tappable equity over the past year and has $113,900 available to draw. This is the amount over and above 20 percent of the value of the average home…

More borrowers are doing cash-out refinances, even at a higher interest rate, because they are leery of the variable rates on HELOCs. But overall, just 1.17 percent of available equity was tapped in the first quarter of this year, the lowest amount in four years. Why? They may not know just how rich they are.

What good is an investment if the owner is not cashing in on it? Seriously though, suggesting that Americans are sitting on a pot of gold – their own homes – is an odd proposition. Should they all sell at once? Already, some have wondered what happens when large numbers of Baby Boomers want to be out of their homes. All get home equity lines or credit or cash out refinances? This could drum up more business for lenders but may not necessarily be good for the homeowners. Or, the as the article hints at, what if housing values drop after large numbers of people tap into their equity? We have seen what can happen there by looking back at the late 2000s with many foreclosures and underwater homes.

All together, all that equity may actually be fairly hard for everyone to benefit from.

Two new options for those aspiring to a mortgage: take on an investor or list on Airbnb

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Axios highlights two businesses trying out some models that could help potential homeowners acquire a home:

James Riccitelli, CEO of Unison Home Ownership Investors, says in an interview with Axios that he is consistently surprised that nobody in the decades-long history of U.S. housing finance had thought of the company’s business model. Unison co-invests with prospective homebuyers—typically putting 10% down along with a bidder’s own 10%, helping them qualify for a standard 20%-down home loan. Depending on the lender Unison partners with, a homebuyer can end up putting as little as 5%:

  • Unison’s investors—who Riccitelli says are typically large pension funds with long investment time horizons—realize a profit only when the home is sold. The product is attractive to such investors because they need assets that match their liabilities, i.e. pension payments sometimes 30 or 40 years away.
  • Other than a few private equity funds that bought up cheap single family homes at the housing market’s bottom between 2010-2012, there are few ways for investors to own a diversified pool of residential real estate, a market that at $30 trillion is more valuable than the U.S. stock market
  • A homeowner can buy Unison out at any point after three years—as long it recoups its original investment. A homeowner can sell the home to another party at any point, however, even if it results in Unison taking a loss.
Loftium has an alternative strategy. It will will contribute $50,000 for a down payment, as long as the owner will continuously list an extra bedroom on Airbnb for one to three years and share most of the income with Loftium.

This strategy might be particularly appealing in booming markets like Seattle, where rent prices are rising even faster than home values themselves, and which are popular tourist destinations.

These present alternatives to the traditional mortgage market with one emphasizing long-term payoffs (and assuming that housing values continue to rise at investment-level rates) and the other trying to capitalize on rental opportunities in the next few years. It will be interesting to see if such options (1) become popular (and if so, how traditional lenders fight back) and (2) whether there are negative consequences to such alternatives (and reactions to them including regulation).

American homeownership was originally not about an investment

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One writer suggests Americans have bought into the lie that houses are good investments:

Would it surprise you to know that if there are two equally expensive houses—one for rent, one to buy—the person who buys will pay 40 percent to 50 percent more each month? That’s what happens when you factor in property taxes, insurance, maintenance fees and assorted fees like repairs—which almost nobody does…

The truth is, most of what we’ve been raised to believe about owning a house simply isn’t true…

Run the numbers. Yale economist Robert Shiller found that from 1890 to 1990, the return on residential real estate was just about zero after inflation.

ZERO.

This trend toward seeing homes as a good return on investment is a recent development. Perhaps it hints at the commodification – and a need to see a potential return on investment – of everything.

But, if owning a home is not a great investment, why do Americans still privilege homeownership? Here are some historic reasons:

  1. Land is valuable. In the past, people needed land to some degree to survive. Think of all those tenant farmers in the Middle Ages who always had to pay someone else. Or think of sharecroppers in the United States. Land equaled food or the ability to run a business on your property. Additionally, having your own piece of property meant that you could get away from others as well as the government. It is that the home is your castle thing.
  2. Owning a home is a sign of material prosperity. When you are a homeowner, you have made it enough to be able to own and maintain your own property. In other words, you have the resources to waste it. This is the realization of the American Dream as George W. Bush once put it.
  3. Additionally, homeownership is a sign of dedication to your local community. Renters are assumed to be lower-income, transient, and not committed to civic organizations. Homeowners have a stake in their community because they (1) will be there for an extended time and (2) want to protect their property values (though this is also a more recent development).
  4. Combining #2 and #3, homeownership was assumed to keep people invested in capitalism as opposed to socialism. Again, if you own your own property, you want to see it do well rather than hand it over to an outside manager (the state or a landlord).