Why Are Real Estate Values So Important?
Recently, I was invited to speak to high school business class students on the topic of real estate, home values, the economy in general, home financing and more.
To start my presentation, I asked for questions from the students. I asked them what questions do they have about real estate, etc.? What do they want answers to?
One young man spoke up: “What’s the big deal about home prices? I keep seeing it on the news that home prices went up or down, but so what? It doesn’t mean anything to me because I don’t own a home.”
“Great question!" I replied, "Let me collect a few more questions and I will come back to that one.” I gathered a few more questions from the audience and began presenting some basic information about buying a home, how important maintaining a good credit rating is and how to choose a Realtor, what they would need to provide a mortgage lender to obtain financing and how to choose a lender. Eventually, I came back to the question the young man had asked at the beginning.
“Why are home values important to you?” I repeated. "Let me answer that by first asking you a question: “Do you have a job; do you work part time after work?” “Yes,” he replied, “washing dishes at the restaurant down the street. Been there since I was fifteen.”
“Ah, you’ve been there a couple years now,” I replied, “Have you been working as many hours lately as you were, say, three years ago?”
“Not really,” he said, “about half as many as when I started. I used to work the breakfast shift from 5:30 till 7:00 but I don’t any more.”
“I see,” I continued, “and why don’t you work the breakfast shift any longer?”
“Well, because the guys who used to come in before work aren’t coming in.”
“What did these customers do for a living?”
“Construction guys, mostly -- builders, carpenters, drywallers, painters.”
“Uh-huh,” I continued, “and why aren’t they coming in now?”
“They haven’t had any work.”
"Do you have any idea why they haven't had any work lately?" I asked.
"I dunno," he responded, " I heard a couple of them say something about all the foreclosures and people not building homes right now because it was cheaper to something beat up and fix it up themselves."
“Hmmm,” I replied. “So, let me get this straight. Building trades workers are out of work because nobody is building new homes. Why? Because it costs less for home buyers to buy a foreclosed property really inexpensively and renovate it themselves -- or hire tradesman on an "as needed" basis -- than it would cost the home buyer to build a brand-new home, right?"
"Sounds about right," he answered.
"There's more to it, though," I went on, "A large percentage of home buyers are home sellers, too. However, home values have dropped significantly so the house they need to sell in order to buy a new home may not hold enough equity left to put down on their next home."
"What is equity?" he interjected.
"Equity is the money left over after you sell a home, pay the closing costs and pay the outstanding balance of the mortgage. Historically, if you owned a home for a period of time -- several years, let's say -- the home would have enough equity left after you pay the mortgage and closing costs to provide money to make a down payment on your next home. When homeowners lose the equity in their homes because home values have declined, they can’t “buy up” or downsize. They must stay put and the real estate market stagnates."
"Homeowners don’t go out to the hardware store to fix their home up to get it ready to sell – paint, carpet, countertops, new cupboards, etc. – nor do those who buy homes go out to the appliance stores to buy new refrigerators and furniture for their new home. People who work for those retailers get laid off, too, so they can't buy houses, or cars, or appliances, or go to breakfast or dinner at your restaurant.
"So those construction guys who are out of work don’t have the money to come into your restaurant for breakfast so YOU GET LAID OFF. Are you starting to see why home prices are important not just to you but to everyone in our economy?”
When real estate grinds to a halt, so does a multi-billion dollar segment of our nation’s economy. It impacts everything from retail sales, to jobs, to new home starts, construction projects (like finishing a basement or adding on a room). It causes companies engaged in those businesses to cut back on personnel and people without jobs don't have enough money to spend on necessities let alone dinner out at a restaurant or breakfast before they head off to the job site."
“Now do you see why home prices are important to YOU?” I asked.
"Wow, I never thought of it that way," he answered.