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| The Real Estate Food Chain |
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The beginning of the economic recovery may currently be under way. Even though no official reports or numbers have shown this recovery, the first step of the recovery is here. Reports of agents active in the market say that the first time home buyers are out shopping and buying homes. These first time buyers are the essential component of real estate recovery. Their demand for homes creates the possibility for more homes to be purchased by the next category of buyers. Similar to the food chain seen in nature, there is a food chain in the real estate market. Understanding the food-chain of real estate is important to understanding the economic process that is beginning to take effect in the market. By my estimation there are about 5 levels or links to the real estate food chain. The first category of buyers is what is commonly known as the “first-time buyers”. These buyers typically shop for homes priced <$200k. These buyers tend to be younger professionals that have rented for a few years and are established enough in their career to be confident that they will be staying put for a while or maybe even be considering “putting down roots.” These buyers are frequently singles or young couples who have just started life together. Many of these buyers have decided to wait out the downturn in the economy for various reasons including lack of employment security. The second category of buyers is the seller of the first time home. You might call these people “Expanders”. Typically the first-time buyers’ needs have changed and the space that was previously sufficient no longer works for either their lifestyle or the number of occupants. Generally speaking, this category of buyer purchases homes priced from $200k-$350k. These buyers are often recently married or established domestic partnerships. Sometimes younger children are involved in the need for more space as well. The third category of home buyers is what we might call, “Move-Up Buyers.” These buyers have typically worked in their jobs for about 10 years and have established themselves in their career. These buyers have typically purchased a home or two and have built a fair amount of equity. These buyers seek a more luxurious and a more prestigious location than their previous homes and often are looking to “keep up with the Jones”. Often times the buyer considers school districts as well as the social circles in which they are involved. These home buyers typically look for homes from $400k-650k. Buyers of these homes tend to stay put for longer periods of time and look for houses that represent their accomplishments or provide their family the space necessary for prosperity. The fourth category of buyer is what is called the “Luxury Buyer.” These buyers have, “arrived” or “made it big”. This buyer is looking for a home that represents their accomplishments in life. Their home is a both a place to reside as well as a status symbol. Premium finishes and first-class locations are important to these buyers. Homes priced from $1M+ would fall into this category of home owners. These people often work to accomplish a goal rather than necessity of survival. The fifth category of buyers is what we might refer to as, “Empty-Nesters” or “Downsizers.” These buyers have typically lived in their houses for several years, built substantial equity, and typically have more space than is needed by their family’s requirement. These buyers are often approaching retirement and are looking to simplify their life. These buyers tend to look for low-maintenance lifestyles so they can spend their time enjoying free time rather than mowing a large lawn or cleaning space that is no longer used. Often, these buyers look for convenience to grocery shopping and dining for the sake of simplifying their life. The price range of homes for these buyers depends on the nest-egg of the individual and the amount of equity built in their previous home. “Well”, you might be thinking, “that’s really nice-- So what?” The relevance to the economy is that the first-time home buyers are the essential first step of this process of recovery. If first time buyers don’t purchase, then Expanders can’t buy the homes of Move-Up owners. The process is circular and this process was largely stopped in the 3rd quarter of last year when many first-time buyers in Charlotte decided to wait out the down turning economy. Uncertain of stability of employment and not wanting to “catch a falling knife” many buyers renewed leases and stayed put. Now motivated by the tax credit, many buyers are out shopping and finding their homes. While no authority has complied all the data and synthesized it into a report, the early indicators support the assertion above. The National Association of Realtors released survey results from nearly 3,000 real estate offices that indicated that buyer traffic had increased nearly 100% over the last three months. Furthermore, the number of contracts reported in Mecklenburg County for the month of April was up 12% over the previous month with an average sales price of $201k. While the number of sales are notably down in the higher priced categories, sales are increasing in the <$250k categories. The growth in sales in the lower price ranges provides hope that the coming months will bring activity in the other sections of the real estate food chain as the buyers trickle up. The hope being that activity will produce activity and the economy can get moving again. |
