How Your Home Price is Affected by Its Location
Not all cities are created equal, especially when it comes to home prices and their valuation. So how do you know if the massive purchase you're making today will be a good investment five years from now?
Well, until we get our crystal ball working again, it's basically impossible to say - though that doesn't stop people from speculating. If the future were so easy to read, then everyone would have bought stocks in Apple back in the '90s, houses in Aspen back in the '80s, and poured some producing money into the film Titanic.
There are certain factors that are surefire indicators that home prices are on the up and up, and it goes beyond just finding where the homes don't have bars on the windows. Buying in a gentrifying neighborhood can be great, but the economy can move swiftly when it reacts to big events (Brexit, anyone?), and you never know how a city will rise or fall as a result.
First up on the list is the most obvious. Beach towns have long been where the rich and famous hang out and buy homes, and with only so much coastline in the world it's no wonder that home prices near the beach are so astronomical. Being close to any body of water raises house prices, but oceans are the best bet.
With more water comes more insurance, though, and many coastal locales are frequently victims of hurricanes, earthquakes, or flooding. If you still want to get a (comparatively) great deal on a beach house, though, you're not totally out of luck. One of these 10 beach towns might work out well for you.
It's impossible to ignore that certain cities are experiencing explosive growth right now. In our very own Denver, we've just gotten used to construction cranes dotting the skyline, and real estate prices are absolutely insane. It seems like everyone has their own story about being outbid on a house by tens of thousands, or how a house was purchased for cash mere hours after being listed in the middle of the week.
And by no means is this unique to Denver. San Francisco, Seattle, Austin, Nashville, Raleigh, Salt Lake City, and many other cities are experiencing unprecedented growth - which inevitably leads to unprecedented traffic and unprecedented real estate prices.
In fact, if you adjust for inflation, here are the average home values by decade since 1940, courtesy of CNBC:
- 1940: $30,600
- 1950: $44,600
- 1960: $58,600
- 1970: $65,600
- 1980: $93,400
- 1990: $101,100
- 2000: $119,600
While you can't be surprised that a house in 2000 cost more than a house in 1940 (though how nice does that $30k house sound?), the scary part is how much house prices have outpaced inflation. In 2016 alone, home prices rose twice as fast as inflation, meaning the dollar was worth less than the year before and you'll need a whole lot more of them to become a homeowner.
In hotspots like Manhattan and San Francisco, a buyer needs to pay between 95% and 120% of their average paycheck to even afford a mortgage payment. Clearly that isn't a healthy market, and you might think it can't possibly keep going this way. And you might be right! According to a recent UC Berkeley study, 51% of voters living in the San Francisco Bay Area have considered moving due to housing costs, and 25% would relocate out of state.
So why are they so high? Who is actually able to pay these prices?
Part of the answer is that there's a huge shortage of homes, and it's been a long time coming, and will take a long time to correct itself since houses don't just build themselves (not yet, anyway). Many millennials are entering their prime homebuying years, and since they're the largest generation America's ever seen, that means there are an awful lot of would-be homebuyers competing for homes.
With a larger demand and a shorter supply, prices skyrocket, especially in cities with strong economies and attractive amenities. It doesn't necessarily mean anyone can easily pay those prices, but when it comes down to either pay an insane price for a home or don't buy a home at all, they manage to make it happen.
Buy Close to Whole Foods
In general, having a house within walking distance of retail is a good thing. People like being able to walk to shopping, especially if it's a store they would already seek out. Because of this, the stores matter as much as the proximity.
Not surprisingly, being close to a Starbucks is a great thing. Moreso than with their rival coffee shop Dunkin' Donuts, homes within 1/4 mile of Starbucks saw greater home value appreciation from 1998-2014 than houses farther from a green mermaid. In Boston, Starbucks homes appreciated 171% vs. the average of 126%. With a Starbucks seemingly on every corner in most major cities, this stat might seem absurd, so how about grocery stores?
Trader Joe's and Whole Foods also boost home values just by being nearby, and if you've ever been to either store you shouldn't be surprised. With a focus on organic and healthier food, Trader Joe's and Whole Foods both have higher prices than your average grocery store, and not just any neighborhood could keep one of them in business. Contrary to what you might expect, though, the chains don't just pop up in already-booming neighborhoods. They either have a crystal ball of their own or are just really great at finding neighborhoods on the verge of gentrifying.
All in all, Trader Joe's seems to be better for home prices than Whole Foods, but not by much. Consider yourself lucky if either one sets up shop near your house.
Last on our round-up of factors helping and hurting your home value is the likelihood of a natural disaster bearing down on it. ATTOM Data Solutions put together its 2017 U.S. Natural Hazard Housing Risk Index, which found that home prices rise twice as fast in U.S. cities with the highest natural hazard risk than in the lowest-risk cities.
Part of the reason is that many cities were formed near natural beauty, and natural beauty often leads to volatile weather. Coastal cities flood and experience hurricanes, and storms near mountains are often stronger than at lower elevations. Another factor is that, looking at ATTOM's map combining the major natural hazard risks, there are very few areas that rank low. Many of them are far north, in some of the least populous areas of the country, and by definition their real estate prices will be lower and more manageable. When it comes down to it, it looks like the best-paying jobs and thus healthiest economies just happen to be in high-risk areas.
Home price appreciation does appear to be slower in certain Florida and Louisiana areas with a history of high flood risk, as the current trend of more frequent and more powerful hurricanes - combined with high insurance premiums - might just be enough to make homeowners second-guess their locale.
In the case of Houston, a lot has been said recently about how poorly the city itself was designed. Given its location, it's inevitable that hurricanes will come, but for a long time city sprawl was left unchecked, and sprawl is no way to combat natural disasters. Texas's relaxed approach to building codes and inspections didn't help, either, but hopefully Hurricane Harvey was the wake-up call city planners needed.