Thursday, February 2, 2012

Understanding the Levers that Drive Real Estate, part 1: "Households"

So, how about them home prices? Going up? Going down? Like the weather, real estate prices provide great conversation because a) they affect most people, b) the information is publicly available, thus no prying is needed, and c) they change. Because of this, I decided that this might be one of the few economics issues that you might be interested in. :D What a good way to get back in the swing of blogging. Winning! (ish)

Like all markets, to understand the price we need to understand what drives the demand and supply of homes. In order to understand the demand of homes, we need to understand the American household. Hint: It is nothing like Full House or Home Improvement would make you think. There is no way those guys could be brothers, and neighbors have faces.

Households: A household is the place where a person or group of people live most of the time. When you hear someone use the word "household" before quoting a statistic, you should usually start laughing. There are so many shenanigans using household statistics, that you can tell nearly any story you want ("As you can see by these household statistics, the South actually won the Civil War"). However, household statistics are very applicable to the housing market for a number of reasons:

1) More households means more people are demanding more places to live. Population has doubled since 1950 and household size has fallen by a quarter. This has caused an almost three-fold increase in households. Marriage, divorce, moving out, grandparents moving in, etc. all affect the number of households.
2) "How much home you can afford" is directly dependent on household income. The standard metric is a monthly mortgage payment does not exceed 28% of household gross income. If prices increase past this point, a household can't afford to buy, so the price is going to drop.
3) Households have changed over time. For example, a) The percentage of women working outside the home (known as the "female labor force participation rate") has increased by about 50% since the mid-twentieth century; b) People are putting off marriage longer; c) High-income earners tend to marry each other; d) Divorce and marriage rates have changed; e) Non-marital cohabitation has increased.

Because a household can mean anything from a college student in an off-campus studio apartment to a mansion with 10 kids and two sets of grandparents, household statistical shenanigans are rampant. However, in the context of the price of housing they become much more relevant and difficult to finagle.

So, the morals of today's blog post are that you should buy low and sell medium (don't get greedy!), and household statistics are important for real estate.