Tag Archives: property values

When the values of homes quintuple over 5 decades by just being there

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I recently saw a house near me that was for sale. Checking the online property history, I found that the home is now worth roughly 5 times more than what it sold for in the early 1980s. By just being there for the last four decades, the home has quintupled in value.

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This is not a phenomena restricted to our suburban area. Recently following an Internet rabbit trail, I was looking up property values in Levittowns on the East Coast. I remember seeing that their values had at least tripled or quadrupled over a similar span. What were once cheap and simple suburban homes became homes with values significantly above the median value for owner-occupied homes.

Homeowners would likely say that the values have increased because of the maintenance and upgrades in the homes and properties. There has been change; the homes near us have been updated and added to over the last fifty years while the Levittown houses have been transformed in numerous ways over the decades.

But, those positive changes do not add up to such an increase in value. Much of the increase in value has come from just being there. Being in the right location. The owners who lived in such homes benefited financially from a positive return on investment and could roll that new found wealth into other homes, investments, or opportunities.

How might a prediction of a crash in housing prices in specific cities affect behavior?

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Goldman Sachs is predicting a big drop in housing values in four American cities:

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In a note to clients earlier this month, Goldman Sachs forecasted that four American cities in particular should gear up for a seismic decline compared to that of the 2008 housing crash.

San Jose, California; Austin, Texas; Phoenix, Arizona; and San Diego, California will likely see boom and bust declines of more than 25%.

Such declines would rival those seen around 15 years ago during the Great Recession. Home prices across the United States fell around 27%, according to the S&P CoreLogic Case-Shiller index…

In 2023, the investment bank expects home prices to barely fall in cities like New York (-0.3%) and Chicago (-1.8%) while predicting higher prices in Baltimore (+0.5%) and Miami (+0.8%).

It make sense that a company interested in investments and finance would want to make such a prediction. Will it change people’s behavior? A few ways this might matter:

-Local homeowners try to sell now before the big decline or prepare to stay put longer so they can see an increase in values. Either way, the supply of homes for sale is affected.

-Builders and developers reduce their construction and plans. They wait to see how long such a decline lasts. They hope to weather this and have higher profit margins later.

-Local governments steel for the impacts to tax revenues and population growth.

-People who might consider moving to or investing in the area reconsider. Would lower housing values make the area more attractive? (This might conflict with fewer homes for sale.)

Does such a prediction become a self-fulfilling prophecy to some degree as people wait for the drop in home prices?

Outside of governments, which actor owns the largest amount of land in the world?

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According to a story from the University of Notre Dame, the answer is:

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the Catholic Church is the largest nongovernmental property owner in the world

While there are no numbers on the number of properties, acres, or value, I would guess that it adds up to a lot. To serve over 1.3 billion adherents around the globe – 2019 pre-Covid figures – requires a number of buildings and properties all over the place.

Asking questions about how much property a religious group should own is another matter. Is one interested in efficiency and how many people are served through each property? Is there a religious group has too much property? Does it matter if the property serves the community as well as religious adherents? All of these could factor into whether the amount of land owned is seen as a moral good or a moral problem.

American households lost trillions in 2022 due to stocks and inflation yet also gained trillions due to housing equity

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A recent report detailing wealth losses in the United States also found housing equity increased in the first three quarters of 2022:

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American households lost about $6.8 trillion in wealth over the first three quarters of 2022 as the stock market shed more than 25% of its value, the Federal Reserve reported Friday in the government’s quarterly financial accounts.

Nominal net worth fell 4.6% to $143.3 trillion, as the market value of assets fell by $6 trillion and liabilities rose by about $900 billion. Households’ balance sheets were propped up by a 10% increase in home equity, which is the greatest source of wealth for most American families…

Homeowners, in particular, were in good shape financially as September ended, with the equity in their houses rising to a near-record 70.5% of market value from a record low of 46% in 2012. But if home prices continue to fall as they have done in the past several months, homeowners without much exposure to the stock market will begin to feel poorer. What will happen to home prices as mortgage rates rise is a major unknown facing policy makers and homeowners alike.

Homeownership continues to bolster wealth. This fits with the emphasis on homeownership as an investment. And if people cannot purchase homes, they will not be able to build wealth in the same way.

Thinking out loud: after what happened in the late 2000s with housing prices, how would people respond to a significant reduction in housing values? Or, how would this be received if inflation is ongoing and the stock market struggles? For now, some can rest assured that their homes will retain value. But, this is not guaranteed.

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

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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

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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. —
  7. Phoenix, AZ
  8. Oakland, CA
  9. North Port, FL
  10. 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

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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

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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”

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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

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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?)