Dr. Mike Walden
North Carolina Cooperative Extension
One of my wife’s and my favorite TV programs is “House Hunters” on the HGTV network. It’s a program about first-time homebuyers navigating their way through purchasing a home. The ultimate decision comes down to three homes, with the suspense culminating in the final choice.
Each show follows a similar pattern. Buyers begin with a list of all their wants and desires along with a price cap. Inevitably as the episode progresses, it becomes obvious the budget won’t support the wish list. A level of disappointment and frustration sets in as the buyers – with gentle nudges from the real estate agent – begin to realize they can’t have it all. Tradeoffs have to be accepted, and some items have to be dropped from the wish list.
The fact that most of us have to accept less than we want in a purchase is not unique to the housing market. It’s just, perhaps, more obvious for homes. In a typical “House Hunters” presentation, the buyers want a certain number of bedrooms and baths and a certain sized yard, but they also usually want accessibility to work, shopping and entertainment.
Quickly the buyers find they can’t have the size of home in the close-in location they desire and at the price they can afford. Here is where the realtor reveals the “iron rule” of real estate: The top three factors in real estate are, No. 1, location, No. 2, location, and No. 3, location!
The point is, when people purchase a home, they’re not just buying the walls, floors, roof, rooms and yard, but they’re also buying a specific site. And with that site comes distance to shops, places of work, schools, parks and many other venues that people use.
Of course, everyone doesn’t shop at the same places, work at the same businesses or send their children to the same schools. But if enough people do interact with a particular location, the prices of home near those locations will reflect the value of the access through higher prices.
A good example of this relationship is schools. In many school districts, families have their children assigned to the closest school. Numerous studies have shown that the value of homes can be influenced by the performance of the neighborhood school. Schools in which students perform better academically – as measured by grade-point averages or standardized test scores – can cause local housing prices to be higher, sometimes by tens of thousands of dollars. Importantly, studies find this result after adjusting for all the other neighborhood factors that can influence home prices.
Once homebuyers in “House Hunters” realize the importance of location and its influence on home prices, it’s interesting to watch the compromises and adjustments they will make. Some will opt for less square footage and a smaller yard to be closer to activities and venues they value. Others will go for the larger home and accept the longer trips to work, shopping and restaurants. The most interesting episodes depict times when one member of the couple wants a bigger home farther away while the other favors the smaller unit closer to centers of activity. Then the tension can mount!
This iron rule of the real estate market – that location matters, and price per square foot is lower for homes located farther from economic centers – can also be observed by comparing home prices between cities. A home in Raleigh will cost more than the exact same one in Ahoskie. This is because living in Raleigh gives a person more accessibility to shopping, jobs, universities, sports, air-flights and many other activities people value than does a home in the beautiful northeastern North Carolina town of Ahoskie.
However, residential prices in Manhattan are in the stratosphere compared to those in Raleigh. Why? Because Manhattan provides even more access to businesses, entertainment, air-flights and the culture of New York City. And although the lifestyle offered by Manhattan certainly isn’t everyone’s “cup of tea,” it is for enough people in the country (and world) to support those lofty prices.
In a way, people who don’t want what the big city has to offer, who value the peace and quiet of the small town or rural countryside and who are able to prosper and grow in those areas live the dream – economically speaking. They live exactly where they want and they pay much less for shelter than their fellow city dwellers!
But for most of us, the real estate market can be an unyielding example of what pervades economics: tradeoffs. Economics, often called the science of choice, wouldn’t exist unless we were confronted with choices about how to use our limited resources.
So, the next time you buy a home or rent an apartment, go into the process recognizing the iron rule of real estate. You’ll start out more ahead in the game, and you’ll save yourself a lot of agony, confusion and frustration. Still, however, you’ll have to decide!
Dr. Mike Walden is a William Neal Reynolds Distinguished Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of North Carolina State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks.
Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide
Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective