Million Dollar+ Madness

Navigating expensive real estate markets

A million dollars is not enough.

That is my thought on real estate as I stroll with my daughter along a barely level path in my neighborhood.

I used to spend all of my earnings when I was younger, because I didn’t see the point of holding onto the little I had. Now I am accounting for every dollar I earn, because money is life energy. I struggle to pass on the lesson of delayed gratification to my daughter, withholding rice crispy treats until the veggies are poked at.

In the US, we are experiencing a substantial rise of million-dollar cities, where a million dollars is the typical and median pricing of homes for a community.

I began my housing search with first-trimester nausea. I wanted a place to call home within an cosmopolitan city. When I toured a rental property in a building with a roof, the guide gave me a strange look while I measured the height of the rails. I thought all parents instinctively did. There were other reasons I wanted to buy instead of rent, so I stumbled through Seattle’s real estate bubble. This is what I learned:

Location, location, and microlocation

Identical to healthcare, real estate is truly local. It is more than just physical positioning. Home desirability is local in its very fabric - who knew that the home built in the 1920s would be more competitive than the home built today?

No matter what the structure of the home is, the pricing is strongly influenced by the location of the property within that locale. You likely know this. I have read about it. But after going through thousands of home listings, I can painfully attest to its timeless truth.

If it is in a blue chip neighborhood, where the demand is so high that small boxes are not just tolerated but desirable, then you will pay to play. This payment can be hundreds of thousands of dollars above what you would traditionally pay for an identical home in another area farther away.

The price is also influenced by other local factors, which community folk have asymmetric information on. For example, an expensive and beautiful home with ocean views is on the market at a certain price. Views are at an average premium of 10-30%.

There is going to be another home a few streets down that will be built at an angle that will block the views within 2 years. Seller is in a very strong position here. Is this even ethical?

There is the physical street as well. Is the home at the corner with more noise and exposure? Is it slightly elevated above the street? Is it actually on a flag lot, where it is built behind another home? Is it notably different from its neighbors? All of these factors influence the price.

In a million-dollar city, you are going to get a crappy home

If the median or typical home is around a million dollars, it is going to be difficult to get a nice home, no matter what your tastes are! You are going to get a home that people in other parts of the world are going to ask “you paid how much - for this?”

When entrepreneur Tom Bilyeu asked young people at his food company what they would want if they had one wish, he was shocked with the consistency and absurdity of the answer: a million dollars. He thought to himself, that won’t even buy a home in Los Angeles.

I became an expert in all the major, minor, and fatal flaws of the million-dollar homes. What was even more absurd was that I had to compete with 10 other families for a crappy home. They are offering more than the listing price, but also are offering more in cash quicker.

I had no idea how unrelenting this market was.  I had to resign myself that I would not get a home that I liked.

Liquidity should be built into your pricing model

Over time, I became both a buyer and a seller in an expensive real estate market. I learned that wherever I had tried to capture value, or get a deal, that it always hurt me financially. The flaw in the property showed up the most when I was trying to sell it.

Because life is uncertain and anything can happen, it is not a bad practice to think about whether you can sell a property the moment you buy it. If you decide to opt out of this million dollar plus madness and go for a nice home to your liking that is fifty miles away from the central areas of commerce and your work, you may not be able to even sell it when you are ready to leave.

If you stick more with the median housing for the locality with its crappy look and high pricing, you are in a much better position to recoup your capital and earn money when you leave it.

I walk down the street with my daughter, and commiserate with another homeowner I run into.  To passer-byers we are complaining. It has taken me some time to figure out that we are trading information tacitly on the management of expensive assets. My daughter starts trying to climb me because of pure boredom. I fish out a rice crispy treat so I can continue complaining about my crappy home.

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