WHY HOUSE PRICE INFLATION ISN'T ALL IT SEEMS
by Catherine Ross
“What’s happening in the market?” is perhaps the most frequent question a realtor has to answer. Everyone from buyers, sellers, invesors, trade-uppers or downsizers wants to know how prices are moving.
The discussion, whether with a realtor over the dinner table or in the media, typically focuses on house price inflation as if the underlying houses were a standard commodity like gold, or oil. But there is a big difference with residential property, and in particular single family homes, where there is continuing investment and improvement, so that the houses for sale today are often bigger and almost always to a higher specification than in the past.
Anyone who lives in a big city will be used to almost permanent remodeling somewhere or other nearby – the effect in action. Almost every family home that has been owned for more than a brief period will undergo some form of remodel with new owners. A typical “refresh” of tired areas including kitchens, bathrooms and floors is a significant expense. Then once an owner has embarked on a remodel it often makes sense to upgrade the underlying systems like electrical, plumbing and HVAC, and incorporate the latest technology. Owners are also investors and seek opportunities to add square feet, for additional space to enjoy, and to help the economics. The end result is a much better, and more expensive home. When that home is next sold, it will command a higher price, and the price appreciation will reflect the substantial investment made, as well as market movement.
As a homeowner, this can be a virtuous circle. Where house prices are high and rising, it makes sense for you to invest more (and you get to enjoy the results). Then house prices go up again and the next buyer takes the house to another level, a pattern which can drive house price growth for many years as the housing stock is gradually upgraded.
As a buyer, it can appear as if prices are running away from you. However in periods of more modest price appreciation, inflation may largely reflect the improving housing stock, and it remains possible to find sensibly priced houses if you look. For example, you may pay a higher price for a recently remodeled home that has all the latest accoutrements and will last your family for a long time. Or you may also find a lower priced home in need of quite a bit of TLC. This latter option can make particular sense if you are prepared to take on a “project” and contribute time and energy to the remodeling to manage the costs.
This effect is clearest with tear-downs, where older, smaller houses are often sold for the price of the “dirt”. The new owner or developer transforms the lot, with a new build often a multiple of the square feet and with all the latest fixtures and finishes. The end result will sell for a totally different price.
Of course investment in the housing stock is only part of the story. There has been underlying house price inflation over the last 5, 10 and more years. Higher prices help to justify ever more ambitious development and remodeling, and observed “inflation” rates conceal a great deal of underlying investment.
Your real estate agent should bring a helpful perspective to consideration of value, both the quantitative and qualitative aspects. I would be delighted to assist buyers or sellers in the process, and can give my views, act as a sounding board, or provide a second opinion as you wish, with no obligation. You can reach me by email at [email protected] or by phone on (310) 882-9589 and for some further insights please visit TheRipeFig.com.