Home Value = Science + Emotion
Welcome, friends. We’re officially into a new presidential administration. This is a time of optimism. We hope for sound federal policy regarding the pandemic and continued rollout of the vaccines. We hope for political stability and progress in the economy, social justice and the environment. And we hope for unity and peace, abroad and within our nation’s borders, as we’ve recently learned how precious those truly are.
And with that, let’s move on to the markets.
The markets
As I’ve said in previous posts, the markets have responded positively to the prospects of stability and experience in our government and leaders. I believe we’ll experience relative calm as investors assess the Biden administration’s early actions; earnings season is ramping up, too. Along with this, seasoned investors and media are finally questioning the logic (or lack thereof) of skyrocketing stock prices. (For more on this, see the article, “When Investors Forget Fundamentals, the Market is Broken ” in the Wall Street Journal.”)
If we finally see moderation in the markets as the Biden administration rolls out policies, I think it’s positive in every sense: we need some normalcy in the markets, we need stability and we need reason and reality in investing again. Still, there are infinite challenges that face the new administration.
For example, to reach Biden’s goals, the vaccine rollout needs to be improved. Whether Biden’s team takes into account some innovative approaches to solving that—such as Governor Inslee’s call out to Starbucks and Microsoft for logistics help—remains to be seen. Washington State is leading the way with this kind of thinking, looking at what national and global businesses do best by way of logistics and distribution and asking for guidance and help.
Imagine if Amazon, Costco, Walmart and the like were to develop plans and vaccination centers? The potential for public/private partnership and common good is staggering. Oh, wait, Dave Clark, CEO of Amazon’s Consumer Business, reached out in a letter to President Biden, saying (as reported by GeekWire):
“We are prepared to move quickly once vaccines are available. Additionally, we are prepared to leverage our operations, information technology, and communications capabilities and expertise to assist your administration’s vaccination efforts. Our scale allows us to make a meaningful impact immediately in the fight against COVID-19, and we stand ready to assist you in this effort.”
Keep in mind, too, that rolling out the vaccine doesn’t mean that life will return to normal immediately. This year, 2021, is hopefully a pandemic plateau in the first half and a platform back to some new normal in the latter quarters. In my opinion, if we get most of the country inoculated by summer, it will still be too late to plan major events for 2021.
For that reason, I think 2022 is a good bet for significant returns to travel, office work, restaurants, sports venues, brick-and-mortar retail and other major leisure industries.
Residential real estate valuations
Speaking of industries, with so many things out of our control for the past year, I thought I’d focus on the investment over which we have the most control: our homes.
I’m asked all the time whether it’s wise to add this room or improve that one or whether it’s worth it to buy in a certain geographic area. These issues are both financial and emotional: are improvements worth the financial investment (and how far should you go?) and can a home be enjoyed without them (the emotional impact).
SOURCE: CNBC
This is dear to my heart and head: between 2008 and 2018, during a time when most real estate markets tanked, our brokerage sold approximately $30 billion in homes. This isn’t a brag so much as an observation: I threw myself and my team into the market then because I’m fascinated by so many behavior-driven aspects of this industry and I loved seeing how they played out.
Now, as managing director and co-founder of Plunk—we’re developing an app to help homeowners figure out the true value of home improvements and potential investment potential.
Through AI, machine learning and neural networks we’re working to effectively make determinations on a granular basis. We want to help homeowners get a truer sense of the costs and value of home projects and to gain real-time ROI insight to make smarter decisions with home improvement investments, while also offering ways to infuse homes with personal design sense that won’t harm or hinder future salability.
Majority of home valuation is science in my opinion
Here’s a simple truth: Home renovations impact home marketability. Thus, there needs to be more buyers than sellers for the specific “improvements” that you’re making. Significantly, these are influenced by geography (an inground pool will have higher value in Tucson than Syracuse); media (for example, the “HGTVing” of home renovations, where every redo resembles a Magnolia/Property Brothers episode); and money—your finished home needs to fit in with what the neighborhood will bear.
The other is emotion in my opinion
Even with amazing technology and data, we don’t always have the full picture. The variance is out of our hands because it represents the emotional and subjective nuances that make buyers greenlight sales or go elsewhere.
After witnessing the sales of thousands of homes in Southern California, I can tell you that emotion is the one factor that AI may never truly recreate, but we will get close. However, you should always take emotion into account when purchasing or improving residential real estate.
It’s as simple as this: imagine two houses next door to each other. Both are exactly the same on the inside and on exactly identical lots, but one’s exterior style is Georgian Colonial and the other is Mediterranean. Chances are that one exterior style appeals to you more than the other and thus, everything else being equal, you’ll pick the one that you like the best.
Given this, if you’re investing for the shorter term, it’s always best to go the more moderate route: moderate in terms of the financial investment and moderate in terms of decor and upgrades. This is why homes renovated in HGTV-based styles receive multiple offers above asking price while homes with more to offer languish longer if, for example, their walls are orange and cerulean blue—while a seller sees a Caribbean-colored paradise, a buyer sees too many weekends spent repainting.
Pandemic home improvements
This brings us to the plethora of pandemic-inspired projects.
It’s fair to say that nearly all homes are functioning in ways that they hadn’t before: as offices, schools, gyms, bars, sports venues, camps, country clubs and more. And as people fled urban areas for suburban and rural homes with more square footage, indoors and out, there’s been a corresponding uptick in additions and amenities that enable them to live, work and play in one place.
But life won’t always be as we know it today. So, how do you know which investments are worthwhile for the long run and which to scale back on (or skip altogether)? Here’s a list of considerations to help you get started:
SOURCE: Lending Tree
Consider the intrinsic value of the land: How much does it cost to buy into the neighborhood? In demand areas, land valuations increase over time; in markets that have experienced population, economic or amenity loss, land will either hold or lose value. Sometimes, too, the land is worth more than the existing home on it, which gives you financial breathing room when considering renovations and upgrades.
Define the purpose. Investors know fix-and-flips must sell quickly; if, however, your family plans to stay put for years, recovering costs may be secondary to enjoyment. And if you moved in response to Covid and it’s likely that in a year or so you’ll be itching for urban life again, think twice: What you see as an improvement may just be unnecessary expense and upkeep to the next buyer, no matter how nicely that gourmet kitchen or clay tennis court turns out.
Review reports like this, “Survey: Nearly Half of Americans Ready to Move to Reduce Expenses,” from LendingTree, to gauge desirability. They can help you see which improvements give the best ROI, which are in highest demand overall and other information that can help guide your home improvement dollars. Currently, available information like the chart below is significantly flawed. When Plunk’s technology is ready, we will produce information through our algorithms that will be much more granular and accurate and take into account - emotion.
Review comparable home sales (aka, comps) in your neighborhood that include homes of similar size, location and upgrades. In your immediate market, what sold the quickest? The highest?
Other ways to benefit from home improvements
As you’re considering home improvements, consider the investment opportunities in companies and industries related to residential real estate.
For example, we already know that one of the primary challenges driving high sales prices is unmet demand, so it’s reasonable to think that anything related to new home construction should be good bets for several years to come: Wood, steel, glass/windows, major appliances, paint, fixtures, roofing. All of it.
So, too, are all the forward-looking systems and amenities. Green home improvements, for example, and technology intended to make homes safer: Post-pandemic, will we see temperature readers at our entrances, viral-load readers in our bathrooms and sanitation stations near the kitchen sink?
Keep an open mind and look for opportunities, both obvious and less likely: If we’ve learned anything from the last year, it’s that anything’s possible.
