In Housing, Location Is Key

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Everyone knows the three Ls of housing: Location, location, location. But the Ls might as well stand for something else: Local, local, local. It’s worth remembering when looking at the latest S&P/Case-Shiller home-price figures, which show a disturbing decline nationwide that may not reflect prices in your local market.

“Location” refers to neighborhood, street, schools and the property taxes – the things that factor in a particular property’s appeal. “Local” focuses on the fact that home values, unlike prices on almost any other product, are governed almost entirely by local conditions. In fact, there really is no such thing as a national housing market.

Buy a computer, a car, a basket of wheat or an article of clothing, and the price will be pretty much the same anywhere in the country. But a 2,000 square foot condo in Manhattan might cost 10 times as much as one in a small town in Ohio, Nebraska or Arizona.

That’s because houses cannot be moved – not far, at least. If car prices were 10 times higher in San Francisco than in Little Rock, manufacturers and dealers would haul cars to San Francisco until the excessive supply drove prices down to Little Rock levels. Or San Franciscans would buy their cars in Little Rock, reducing demand in San Francisco until prices dropped.

But if your job or family situation forced you to live in San Francisco, where there’s not much room to build more homes, you’d be stuck with the prices set by local forces of supply and demand. Cheap prices in Las Vegas would have little effect on prices in San Francisco.

The Case-Shiller 20-city index, which serves as something of a nationwide home-price barometer, showed prices falling by 0.8% in the 12 months ending in October, reversing a period of price increases that began early in 2009.

But the city by city breakdown shows lots of variation. Prices fell by 6.2% in Atlanta and 6.5% in Chicago, but rose by 3% in San Diego and 3.7% in Washington, D.C.

The October figures show that prices in Detroit are 30% below their levels of Jan. 2000, while prices in Las Vegas, Cleveland and Atlanta are about where they were back then. At the same time, prices in Los Angeles, New York and Washington are more than 70% higher than they were in Jan. 2000.

If you’re thinking of buying a home, or selling one, it will pay to assess a variety of factors influencing prices, keeping in mind that the local factors are the most important.

Mortgage rates are governed by a national market, since borrowers aren’t limited to local lenders. Low rates tend to drive up home prices because they give buyers more to spend, though this hasn’t happened in the past couple of years because other factors, such as unemployment, job fears and the excessive supply of homes caused by foreclosures have been more powerful.

Mortgage rates are now rising, which could be bad for home prices – unless it spurs people to buy before rates go even higher.

Local factors, as mentioned, are much more powerful in determining an individual home’s value. If falling unemployment indicates the local job market is getting stronger, buyers will feel more confident about making the long-term commitment to purchasing a home, helping to shore up prices.

Your real estate agent should be able to provide data on the number of homes on the market and how long it takes the average home to sell. Together, those figures show how many months it would take to sell all the homes offered. If that number is stable or falling, it may help home prices recover. If it’s rising, prices may fall, as an oversupply of homes drives values down.

The agent should also know how many of the homes in the local area involve foreclosures, short sales or lender-owned properties. In these cases, properties often go for fire-sale prices that undermine other homes’ values.

Finally, whether you are buying or selling, look carefully at the “comparable sales” data which shows typical prices in the neighborhood. Be wary of data more than a few months old, as conditions may be changing quickly.

You might double-check the realtor’s “comps” by looking up recent sales on sites like Zillow.com. In addition to current listings and recent sales, Zillow can display foreclosed homes for sale. If there’s a cluster of those in your neighborhood, it’s sure to damage prices.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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