Mike Walden's You
Decide: What are the tradeoffs where we live?
Dr. Mike Walden
North Carolina Cooperative
My wife and I enjoy watching the TV program
“House Hunters” on the HGTV network. It’s about
first-time homebuyers navigating their way through
purchasing a home. The ultimate decision comes down
to three homes, with the suspense culminating in the
Each show follows a similar
pattern. Buyers begin with a list of all their wants
and desires, along with a price cap. Inevitably as
the episode progresses, it becomes obvious the
budget won’t support the wish list. A level of
disappointment and frustration sets in as the buyers
– with gentle nudges from the real estate agent –
begin to realize they can’t have it all. Tradeoffs
have to be accepted, and some items have to be
dropped from the wish list.
The fact that
most of us have to accept less than we want in a
purchase is not unique to the housing market. It’s
just, perhaps, more obvious for homes. In a typical
“House Hunters” presentation, the buyers want a
certain number of bedrooms and baths and a certain
sized yard, but they also usually want accessibility
to work, shopping and entertainment.
Quickly the buyers find they can’t have the size of
home in the close-in location they desire and at the
price they can afford. Here is where the realtor
reveals the “iron rule” of real estate: The top
three factors in real estate are, No. 1, location;
No. 2, location; and No. 3, location!
point is, when people purchase a home, they’re not
just buying the walls, floors, roof, rooms and yard,
but they’re also buying a specific site. And with
that site comes distance to shops, places of work,
schools, parks and many other venues that people
Of course, everyone doesn’t shop at the
same places, work at the same businesses or send
their children to the same schools. But if enough
people do interact with a particular location, the
prices of home near those locations will reflect the
value of the access through higher prices.
good example of this relationship is schools. In
many school districts, families have their children
assigned to the closest school. Numerous studies
have shown that the value of homes can be influenced
by the performance of the neighborhood school.
Schools in which students perform better
academically – as measured by grade-point averages
or standardized test scores – can cause local
housing prices to be higher, sometimes by tens of
thousands of dollars.
studies find this result after adjusting for all the
other neighborhood factors that can influence home
Once homebuyers in “House Hunters”
realize the importance of location and its influence
on home prices, it’s interesting to watch the
compromises and adjustments they will make. Some
will opt for less square footage and a smaller yard
to be closer to activities and venues they value.
Others will go for the larger home and accept the
longer trips to work, shopping and restaurants. The
most interesting episodes depict times when one
member of the couple wants a bigger home farther
away while the other favors the smaller unit closer
to centers of activity.
Then the tension can
This iron rule of the real estate
market – that location matters, and price per square
foot is lower for homes located farther from
economic centers – can also be observed by comparing
home prices between cities. A home in Raleigh will
cost more than the exact same one in Ahoskie. This
is because living in Raleigh gives a person more
accessibility to shopping, jobs, universities,
sports, air travel and many other activities people
value than does a home in the beautiful northeastern
North Carolina town of Ahoskie.
residential prices in Manhattan are in the
stratosphere compared to those in Raleigh. Why?
Manhattan provides even more access to businesses,
entertainment, air travel and the culture of New
York City. And although the lifestyle offered by
Manhattan certainly isn’t everyone’s “cup of tea,”
it is for enough people in the country (and world)
to support those lofty prices.
In a way,
people who don’t want what the big city has to
offer, who value the peace and quiet of the small
town or rural countryside and who are able to
prosper and grow in those areas live the dream –
economically speaking. They live exactly where they
want, and they pay much less for shelter than their
fellow city dwellers!
But for most of us,
the real estate market can be an unyielding example
of what pervades economics: tradeoffs. Economics,
often called the science of choice, wouldn’t exist
unless we were confronted with choices about how to
use our limited resources.
the next time you buy a home or rent an apartment,
go into the process recognizing the iron rule of
real estate. You’ll start out more ahead in the
game, and you’ll save yourself a lot of agony,
confusion and frustration. Still, however, you’ll
have to decide!
Dr. Mike Walden is a William Neal Reynolds Professor
and North Carolina Cooperative Extension
economist in the Department of Agricultural and
Resource Economics of N.C. State University’s
College of Agriculture and Life Sciences. He
teaches and writes on personal finance, economic
outlook and public policy. The College of
Agriculture and Life Sciences communications unit
provides his You Decide column every two weeks.
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