The long-term consequences for those benefiting from buying a home during a recession

Thinking more about yesterday’s post on cooling home values in certain housing markets, how many people benefit from the lower prices? The typical emphasis in such economic times is to note the difficulty of buying a home when interest rates are higher and there is economic uncertainty.

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But, lower prices means some might be able to buy when they could not otherwise. The hottest markets in good economic times have high prices and lots of competition. Even as borrowing money is harder in a recession, prices can be lower and the competition might not be as stiff.

Some people are still buying and selling homes during economic downturns. This leads to a long-term question: are those who buy during a recession more or less likely to hold tightly to the idea of a home as an investment? Is buying at the height of the market – famously, such as right before the housing bubble burst in the late 2000s – tied to a deeper focus on property values and a strong return on investment? Or, because a home purchased during a recession might emphasize scarcity and economic uncertainty, might this lead to more concerns about property values?

The housing market giveth, the housing market taketh away

Where are housing prices dropping the fastest in the United States? They tend to be places where prices were zooming up not long ago:

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Top 10 cities where housing markets are cooling the fastest in 2022

  1. Seattle, WA
  2. Las Vegas, NV
  3. San Jose, CA
  4. San Diego, CA
  5. Sacramento, CA and Denver, CO (tie)
  6. Phoenix, AZ
  7. Oakland, CA
  8. North Port, FL
  9. Tacoma, WA

This raises multiple questions:

  1. While housing values are going down, how long before they stabilize and head back up? After all, these are places with higher demand and rising prices over time. At least, that is what a lot of homeowners are planning on.
  2. How are residents of these places feeling? American property owners like it when property values are going up, even if they are not ready to sell. When prices go down, I assume they are not feeling as good. (This could be true even if housing values today are higher than they were not long ago; the immediate feeling of loss is strong.)
  3. Is a local market with higher highs and lower lows in housing prices one where more growth is happening? Looking at the list above, it would appear these are fairly popular places with a steady demand for housing. The alternative to the yo-yoing in the housing market is a market where prices do not rise much or lose much. Such markets also exist in the United States, but they are less desirable.

Multiple factors behind the decline in starter homes in the United States

The starter home has disappeared from many housing markets:

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The affordable end of the market has been squeezed from every side. Land costs have risen steeply in booming parts of the country. Construction materials and government fees have become more expensive. And communities nationwide are far more prescriptive today than decades ago about what housing should look like and how big it must be. Some ban vinyl siding. Others require two-car garages. Nearly all make it difficult to build the kind of home that could sell for $200,000 today…

Nationwide, the small detached house has all but vanished from new construction. Only about 8 percent of new single-family homes today are 1,400 square feet or less. In the 1940s, according to CoreLogic, nearly 70 percent of new houses were that small…

But the economics of the housing market — and the local rules that shape it — have dictated today that many small homes are replaced by McMansions, or that their moderate-income residents are replaced by wealthier ones. (A little 1948 Levittown house on Long Island, the prototypical postwar suburban starter home, now goes with a few updates for $550,000.)…

The simplest way to put entry-level housing on increasingly expensive land is to build a lot of it — to put two, three, four or more units on lots that for decades have been reserved for one home.

The costs – financial, regulatory – are too high for the construction of lots of starter homes. The proposed solution is to try to reduce those costs by placing multiple residents on one lot and/or increasing density in communities and developments.

How to change all of this is difficult given the difficulties of addressing housing in the United States. The need is great, particularly when affordable housing is not aimed at a larger percentage of the population who would benefit from a cheaper residence.

I wonder if the best path forward is for certain communities to pursue starter homes successfully and show that it is possible. Of course, one danger is that even if it works well in some communities, other communities might leave the burden of such housing to a small number of communities. However, if starter homes can be constructed in such a way that they are perceived as an asset to the community and not a threat to property values, they might catch on. Are there several communities that would fit the bill?

Compared to homeowners, renters stay in a residence for a shorter time

I recently read how long homeowners and renters stay in a residence:

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Redfin reported that in 2021, the typical U.S. home changed hands every 13.2 years. According to ResidentRated, a renter satisfaction survey company, a typical renter will stay in a multi-family building for 27.5 months, or just over two years.

How might this be interpreted? Here is what came right before the data:

Although the rules have been relaxed and tightened over the years, the secondary mortgage market in the U.S. requires condo buildings to maintain a certain level of owner-occupied units in order to fund mortgages for buyers purchasing in those properties. If buyers can’t get mortgages easily for a condo unit, they will look elsewhere. That can depress prices for the entire property. (Over the years, the percentage of allowable units that may be rented has fluctuated from 50 to 80%. Fannie Mae’s current rate of allowed rentals in a condo building is 50%. )

Also, renters may be wonderful people but they don’t always make great neighbors. They may not take care of the overall property as carefully as a unit owner would, and the length of their tenancy tends to be shorter than the amount of time a unit owner lives in a home they own.

Are renters less desirable because too many rental units can affect property values and renters may not care for the residence and they do not stay as long? Having seen such arguments in my research on suburban settings, there are both perceptions about renters and systems regarding properties that contribute to the overall preference for homeownership. Renting may be necessary for some and/or for a time and/or in particular markets, but Americans overall privilege owners who in contrast to the sentiments above presumably stay longer, care more for their properties, and promote higher property values.

If renting is going to be more common in the United States – homeownership is down or stable in recent years, it is difficult to purchase homes or units in many markets – then it will be interesting to see if these ideas about renters change or if it only reinforces decades-long ideas.

Measuring the value of a housing investment in “2022’s best real-estate markets”

WalletHub recently looked at the best real-estate markets. Here is how they described their rankings:

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Whether you’re joining the real-estate business or just looking for a place to call home, it’s important to get a handle on the housing markets you’re considering before investing in a property. This year, the housing market is skewed much more toward sellers, with mortgage rates having nearly doubled in the past year and home values having risen nearly 21% on average.

If you aim for long-term growth, equity and profit with your housing purchase, you’ll need to look beyond tangible factors like square footage and style. Those factors certainly drive up property values. From an investor’s standpoint, though, they hold less significance than historical market trends and the economic health of residents.

To determine the best local real-estate markets in the U.S., WalletHub compared 300 cities of varying sizes across 17 key indicators of housing-market attractiveness and economic strength. Our data set ranges from median home-price appreciation to job growth.

This is very different than Money’s best places to live or other rankings that consider communities. This is about rising property values and return on investment. This is about making money by purchasing property. This is about demand and sales.

What would be interesting to consider is where this consideration of return on investment, a growing concern among American homeowners, overlaps with quality of life or desirable communities. Homeowners often have options about which communities or neighborhoods to select, whether they are looking within a metropolitan region where there might be dozens or more options or if the COVID-19 work from home options now mean people do not necessarily have to live near work. Would a return on investment beat out good schools or proximity to work or affordability?

Separating McMansions from luxury homes

What is the difference between a McMansion and a luxury home? Here is one viewpoint:

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So, what exactly is a luxury home, Michael, you ask? Some people classify it by the style of the house, or perhaps by its finishes, or by the product brands in the home. So, how do we define a luxury home from a price standpoint? I know different brokerages and different real estate firms define luxury real estate differently. Many define a “luxury home” as a property that is priced at $1,000,000 or higher.  For the purposes of this article, we’re going to define a luxury home as a home that is listed for sale at at least three times the average sales price for that market. (There are four primary price points in most markets: starter-/entry-level, average, high-end and luxury pricing. I define high-end homes as homes that are two times the average sales price for that given area.)

Luxury is relative to that specific market. Most markets have luxury homes based on our definition; it’s all relative, however, because when people think of luxury, they often think of McMansions or estate homes, and that’s not always the case. To take action, you need to develop graphs and other visuals that can articulate the data for luxury and high-end real estate for/in your marketplace: Are you in a buyer’s market or a seller’s market? High-end and luxury homes start at what price point for your market?

I am interested in the ways the dimensions of a luxury home are different than those of McMansions. This is based on my four traits of McMansions.

  1. The absolute square feet of the home is not mentioned above. Presumably, both McMansions and luxury homes are large.
  2. The relative square footage is also not mentioned above. Perhaps luxury homes are generally larger than McMansions?
  3. The architecture and design is mentioned as luxury homes may have particular features and/or finishes. While McMansions are often criticized for mass produced features and/or poor architectural choices, luxury homes stand apart from this.
  4. The luxury home is more expensive, whether over $1,000,000 in price or some multiplier above the market or in a tier above others. McMansions are more expensive than small homes or starter homes but they are not as pricey as luxury homes. The luxury home is then a true luxury good available only to a few while McMansions are meant to appeal to a broader audience.

If the description above is correct, luxury homes are mostly different because of their price at the top end of the market. McMansions are not that; they may aspire to be luxury homes but they are for a different price point and have different features that have less to do with square feet and more to do with design elements or features.

(The next step might then be to provide advice for real estate agents and others who want to appeal to McMansion buyers and owners. How to stay away from luxury home territory and above more typical homes?)

Historic preservation, the ways cities and suburbs resist development projects, and property values

In a discussion of how historic preservation aligned with particular political interests in cities, a scholar describes how suburbanites resist development compared to those in cities:

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The peculiar yet profound way in which historic preservation bound together issues of aesthetics, finance, and urban change is key to understanding why its popularity grew so rapidly in the middle of the 20th century. It also explains why a culture of historic preservation took root in some places more than others. Most suburbs—like the one on Long Island where Geller I once stood—relied on a different set of tools to stop development, such as open-space requirements and zoning codes that limited the number of new homes. To this day, historic preservation remains a less potent force in such places, largely because these other rules ensure that homes like Geller I are unlikely to be replaced by anything but McMansions. In cities with significant numbers of old buildings, however, preservation became an essential part of the process by which communities fended off urban-redevelopment projects.

While historic preservation does take place in the suburbs (and will come for McMansions at some point), it does not occur at the same level as in cities. As noted above, suburbs are not likely to approve significant changes to local zoning or buildings. Neighbors and residents will complain about changes to traffic, noise, lighting, and the character of a neighborhood in a way that tends to limit what a redeveloped property will be.

Cities also have zoning regulations and NIMBY responses to new structures but the presence of more buildings and uses in denser areas can make this all more complicated. Particularly in areas where redevelopment is hot, a new building might be very different than what has stood there for a long time.

But, as the article notes, historic preservation can be a tool used in a lot of places to halt plans:

Historic preservation not only gave this process of hyper-gentrification an imprimatur of political and legal legitimacy it might otherwise have lacked, but also continues to enable it in the present day. The LPC’s own website still notes that one of the purposes of New York’s landmarks law is to “stabilize and improve property values.” While the commission’s press releases paint an image of a body focused on protecting a diverse new array of buildings, the historic districts that already exist are, right now, a significant intervention in the city’s real-estate markets, whose main beneficiaries are the people who own land within them. Nor is this dynamic unique to New York. In California, wealthy cities like Pasadena and Palo Alto have recently tried to expand their landmarking powers in order to circumvent a new state law encouraging the construction of sorely needed housing. Simsbury, Connecticut, which is 87 percent white, just finalized a sale of nearly 300 acres to a land trust—killing an affordable-housing project in the process—on the premise that the site is historically significant because Martin Luther King Jr. once worked there. In Washington, preservationists have long tried to block the redevelopment of a water-filtration plant that hasn’t been used in 35 years on the basis that it is historically significant.

And perhaps this gets at the heart of the matter: whether using zoning or historic preservation, one of the goals of American residents is to enhance property values. Sonia Hirt argues that protecting single-family homes and their values is a primary goal of zoning in the United States. In a system that prizes the growth of home values, perhaps historic preservation plays a similar role.

Purchase your home to live in it…and consider its long-term investment potential

In a story about how to buy a home amid a hot housing market, one expert offers this advice:

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Herbert recommended a different way of thinking about the timing of buying a house, one that I found much more comforting. “You ought to be making this as a housing decision and not an investment decision,” he said. If you’re buying a house, he advised, it should be because you want to live in it for at least five years, and ideally many more – which also will mean that even if prices fluctuate, you have a better chance of your investment appreciating over time. “The longer you stay in the house, the [less] your timing in this particular house-price cycle [will] matter,” he said.

This quote interested me for two reasons. First, Herbert says this is about buying a house and staying long term. Sure, the housing market might be crazy right now but a buyer should be thinking about living in the space for a while. But, then the advice pivots a bit to noting how this long-term view can pay off financially. The particular financial circumstances at purchase will fade away if the price of the home increases.

That financial considerations matter as people consider home purchases is certainly true. At the same time, the shift from seeing a home as a place for long-term living to primarily a financial investment is on display here. There are features about homeownership that Americans tend to like – you own the property, there is often some outdoor space, it is more private, it is a marker of success, and so on – that transcend financial conditions. Houses are more than just the dollar signs attached to them…right?

Perhaps it would take an extended period of a cooler housing market and other positive economic stability for houses to not just be financial investments. Or, the costs of homeownership in many places are already at a point where homes can only be viewed as financial objects.

For five years running and the highest priced real estate by close to $2 million: America’s most expensive zip code

One way to consider the geographic concentration of wealth in the United States is to look at the most expensive zip codes. The leader is both persistent and has housing costs significantly above others on the list:

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“Reaching a new record median sale price at $7,475,000, Atherton’s 94027 remains the #1 most expensive zip code in the U.S. for the fifth consecutive year — nearly $2 million ahead of the runner-up,” the real estate property firm said in a news release. “Not only that, but the billionaire favorite also saw its median rise 7% year-to-year, suggesting that this exclusive enclave may continue to retain its leading position in the future.”…

The list of the ten most expensive zip codes includes several locations in the Bay Area, one in the Boston area, one outside New York City, one in Miami, several in southern California, and one outside Seattle. These are not surprising given the money in such locales plus the high real estate values in these markets.

At the same time, the Atherton zip code stands out. The housing is almost $2 million higher than other desirable locations. This does not necessarily it has the most expensive properties in the United States but it does speak to the uniformity across the zip code. And this has been the most expensive zip code for five years running. There is consistency which could be related to development activity (or a lack thereof), demand for housing in that particular place, and local regulations and zoning.

Even as numerous scholars have studied the concentration of poverty in certain locations or gentrification and changes in particular locations, I have not read as much on the concentration of wealth. How often does top-end wealth change locations? I would guess at least some of the zip codes in the top ten have been significantly wealthy for a long time. However, locations can change, new industries arise, and capital can move and real estate fortunes change. How different would a similar list be several decades ago or a century ago in the United States?

Rising real estate values in affordable markets make it harder to enter that market

Whether reading about rising real estate values in Elkhart, Indiana or Chicago area locations, this has an effect on who can enter the market as homeowners:

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But after prices soared during the COVID-19 pandemic, even the lower-priced homes became out of reach for many low-income households, according to a recent report from the Joint Center for Housing Studies of Harvard University…

In June 2020, a home slightly below the median price was comfortably in that range, selling for $196,450, Hanifa found.

But one year later, a home that was 80% of the median price would sell for $220,562, meaning even lower-priced homes were no longer affordable for low-income buyers.

The loss of affordability was not limited to Chicago. Hanifa found low-income families could afford a home in just 20 of the country’s 100 largest metro areas in 2021, down from 39 the year before…

The hot housing market has had a trickle-down effect on neighborhoods such as Garfield Park, Humboldt Park and Belmont Cragin, he said. As buyers have been priced out of more expensive neighborhoods, they begin looking at a lower or middle-income neighborhoods where they can make offers over asking. Then residents of those neighborhoods can’t afford the homes for sale.

Rising home values are often viewed very positively. Those who own homes can benefit from the increase in prices without much work of their own. Over time, homeowners hope prices go up and they can get a strong return of investment at a sale.

But, this data is a reminder of the flip side of those same rising prices. If prices go up faster than other factors including accessing mortgages and rising incomes, those who want to enter the housing market – and reap the benefits of increasing real estate values – have a harder time doing so.

This dynamic is recognized in particularly expensive real estate markets. When people discuss Manhattan, San Francisco, Seattle, Los Angeles, and a few other locations, people know there is a limited or nonexistent cheaper market for homeownership. This does not come up as often in cheaper markets, often in the Midwest or South, where prices are not as high and there are more options. If prices increase there as well to beyond what lower-income residents could afford, then what happens?

My quick takeaway: the need for affordable housing is great all over the place. If Americans continue to think that homeownership is a laudable goal, there is a lot to do to help make that possible for all.