Money And Investing  -

Real Estate: Increases in Price, Not in Social Status

03 01 07 16 21

-------- Long Timer Reality Check

Real Estate has the habit of increasing in value over time – I do believe in real estate as one of the greatest investments you can have. It has the ability of creating great amounts of wealth with very low initial investment when leveraged by a mortgage loan. In fact, for many people the primary residence is the biggest asset families have.

Real Estate, however, has the habit of staying fairly constant. Lot size, house size, number of rooms and dimensions, number of bathrooms tend to stay the same. As time goes on people from any particular Social Level expect more out of a house. Years ago people where happy with one or two bathrooms in their houses. Nowadays middle class people want two and a half. Rooms where 10 x 10 feet, while 12 x 12 feet is becoming the norm. Real Estate agents still list dishwasher and food disposal machines as features, while most people think is a necessity. In short, a middle class family from today may expect a lot more than what a middle class family expected out of their home 30 years ago.

To make things more complex, new neighborhoods are often the ones in more demand by those who can afford them, and some old neighborhoods start to become less desirable – not as pricey.

This issue becomes particularly evident when an old couple (or single person) has been living on a house for 20 or 30 years. The day they decide to move they face a hard reality: the sale proceeds from their home may not buy a home that reflects the particular social level that the person or couple identify themselves with. The old house will most probably fetch a lot more than they paid for it but, no matter how nicely cared for, it may not fetch enough money to buy the property that reflects the perceived social status.

I have seen this shock to happen to my grandmother, to my in-laws, and today to a relative of my in-laws. In these and many of the other cases I have seen, the individual have come up with extra cash to move to a property in the same city that is comparable in social level and comfort level to the one they bought 20 or 30 years ago. Other people choose to move to less costly places – places where there may not be enough jobs but that suits them very well because they no longer need one. Plain downsizing is another option – especially if the family size has dramatically decreased in the past few years.

I think this particular phenomenon affects people who hold the same property for 20 years or more, and a lot less for those people who hold the property for 10 years or less. I am not sure what the best way to address this is, assuming it should be addressed. But I would throw a few suggestions:

• Upgrade residence once every 10 years – easier to say than to do. Will always require a lot of cash that may be needed for education, fun, or retirement.
• Save a lot of money – again, easier said than done. It is better to be prepared than to face a reality check.
• Buy in a very nice area of town, with very nice schools that produce very successful kids. Great school systems usually tend to attract people, regardless of house conditions. House value, and social level may probably be closely related in these communities – more so than in others.