You may have heard the phrase before â€“ all real estate is local. But why do some markets perform better than others? How do areas that were once in demand become less so, and what factors contribute to a rising real estate market? A local housing marketâ€™s success is based on a mix of many characteristics and attributes.
To determine the future potential of any given market, National Association of Realtors Chief Economist David Lereah recently proposed examining its DNA. Just like our genetic material, a communityâ€™s DNA makes it unique, but unlike that of humans, market DNA can change over time.
In his recently published book, “All Real Estate is Local:What You Need to Know to Profit in Real Estate in a Buyerâ€™s and a Sellerâ€™s Market”, Dr. Lereah looks at why some local markets perform better than others, and the various market conditions and influences in local towns and neighborhoods that consumers should examine as they make that decision to buy a property. His new book dispels the notion of a unified national real estate market.
A marketâ€™s DNA can influence the type of inhabitants it attracts. For example, younger households need access to a diversified economy with plentiful job opportunities. Older retirees may place a priority on access to and availability of leisure activities and health care.
Whatâ€™s Your Marketâ€™s DNA?
Most real estate professionals will tell you that the three most important factors influencing property values are location, location and location. But location does not tell the whole story. Home prices are obviously influenced by the local economy, climate, and other characteristics. But just as success in adult life draws from a mix of abilities, characteristics and personal experiences (education, parents, upbringing, friends), so too does a local housing marketâ€™s success. Each local market has a set of attributes that, to some degree, predetermines future performance. This is called a local marketâ€™s DNA. And, as is the case with living organisms, some cities are blessed with better DNA than others.
The Role of DNA â€“ deoxyribonucleic acid â€“ is the molecule that contains the genetic information in the nucleus of every living cell. It determines the structure,function and behavior of each cell. Every living organism has its own DNA. It is our DNA that makes each of us unique in physical make-up and to some extent, behavior. Similarly, every local real estate marketâ€™s DNA makes that market unique. Before modern advances in transportation and technology, cities that were built beside lakes, rivers and oceansâ€“ and consequently had ports to ship from and receive valuable products â€“ had a comparative advantage over inland cities in terms of attracting people. In other words, cities located on or close to water had better DNA than those not on the water.
Two hundred years ago, Boston became a populous major city while Atlanta was a sleepy town because Boston was on the water and Atlanta was not. Being a major port was no longer the only attribute that attracted people to a particular city as trains, trucks, and airplanes replaced boats as the major means of transportation and commerce. Boston, while still benefiting from its location by the waters of Massachusetts Bay and the North Atlantic, took great advantage of the interstate rail, air, and highway systems.
When the Atlantic Railroad laid tracks in Atlanta in 1869, it helped make the city a major distribution hub for the South.Then trucks complemented trains and Atlanta took advantage by building a major interstate highway system. That made Atlanta even more accessible to more people and businesses. And Atlanta was the first major southern city to build an international airport when other southern cities chose not to, thus becoming a major hub for air transportation. This helped draw even more people, jobs, and services to the city and its environs. Both cities changed their DNA. Although human beings have their DNA for life, Real Estate DNA can change over time.
Each city has its own DNA with its own unique features and characteristics. There are a number of characteristics that affect a marketâ€™s Real Estate DNA: topography, climate, downtown amenities, and sports franchises, just to name a few. Each characteristic weighs in a buyerâ€™s desire to purchase property in a particular market. For each local marketplace, it is the mix of DNA characteristics that determines the likelihood of people being attracted to that city or region.
For example, West Palm Beach, Florida, is composed primarily of a large retiree population seeking warmer weather and the ocean, as well as younger households who provide services (merchants, health and financial service providers) to those retirees.
Charlottesville,Virginia, on the other hand, is composed primarily of a young population of students, professors, and young professionals who are attracted to a town dominated by the University of Virginia and the cultural activities that go with that. Letâ€™s look at a few of those characteristics that help determine a marketâ€™s DNA.
Climate: If you prefer a warmer climate with little or no snow during the winter months, Florida markets may be more attractive to you than, say, Duluth, Minnesota. By the same token, if you are an avid skier and want to live close to mountains that have real snow during the winter season, you may be drawn to markets in Utah, Idaho, or Colorado. Climate helps inform the DNA of those markets.
Water: Many towns and cities are located by lakes, rivers or oceans. And while people flock to beaches in the summer, many Americans also crave the water in wintertime as well. Weather is less of a factor when a real estate market is situated close to water. Chicago is a perfect example. Its location on Lake Michigan has helped propel property values on Lake Shore Drive to some of the highest in the city, despite Chicagoâ€™s reputation as cold and windy in the winter.
Diversified Economy: A local market needs some favorable DNA in order to build a robust and diversified economy.Those areas that can weather the vagaries of economic shifts will continue to attract households in spite of any cyclical downtown. New York, San Francisco and Chicago are examples of cities that have diversified economies.
Jobs: Job creation is a key characteristic that contributes to a marketâ€™s DNA.A healthy diversified local economy usually provides a favorable backdrop for job creation.
Transportation systems: During our history, major railroads helped determine the success of a local economy and real estate market. Railroads not only moved goods, but also people.Today, the airline industry takes center stage.When Delta Airlines located its headquarters and training operations in Atlanta, the cityâ€™s population grew, its economy revived, and its real estate market blossomed. The Atlanta airport also â€œblossomedâ€, drawing more visitors and residents to the area which, in turn, helped grow the cityâ€™s economy even more â€“ and helped to push real estate values upward. And itâ€™s not just air travel. Areas located at major highway intersections make them convenient for traveling and commuting.
The Eye of the Beholder
Real Estate DNA is also determined by who you are, what your needs are, and possibly your place in your career path.Young households, for instance, are in the early stages of their careers.They are likely to be attracted to markets with a diversified economy with lots of job opportunities.While entertainment, transportation access, and even professional sports franchises may also be a factor for young households, employment opportunities are key to these consumers. At the other end of the age scale, retirees are likely to look for markets where health care is accessible.
Comparing Real Estate DNA
One way to compare local markets is to compare notable characteristics influencing Real Estate DNA. Listed below are examples of some characteristics and their local markets.
Mountains/Rocky Mountains: Colorado
Water/ocean/river/lake: Myrtle Beach, South Carolina (beach resort)
Climate: San Diego, California (mild climate)
Resources: Houston, Texas (oil)
Diversified economy: New York City
Job situation: Detroit, Michigan
Exciting downtown: San Francisco, California
Hospital/medical services: Minneapolis, Minnesota (Sinai Cancer Hospital)
Recreation/parks: Park City, Utah (skiing)
Transportation systems: Denver Airport
Government: Tallahassee, Florida (state capital)
Professional sports teams: Philadelphia, Pennsylvania (Eagles, Flyers, 76ers)
Culture/ethnicity: Washington, DC (Smithsonian Institution)
Entertainment: Las Vegas, Nevada (entertainment, gambling)
Affordability: Buffalo, New York
Safety: Minneapolis, Minnesota
â€œXâ€ or undefined factors: Miami (international banking)
By looking at the attributes that help determine a marketâ€™s DNA, property buyers can make better-informed decisions about their real estate purchases.
Excerpted from: All Real Estate is Local:What You Need to Know to Profit in Real Estate in a Buyerâ€™s and a Sellerâ€™s Market
Author: David Lereah, Chief Economist, National Association of Realtors