John Burns Real Estate Consulting works with a lot of home builders. Their economic analysis is usually very good.
In a recent e-newsletter, John said;
“… we expect more price appreciation in outlying areas than in better locations.”
His thesis is that the better locations have already recovered in price and that outlying locations tend to be slower to recover.
There’s a lot of truth to that but on the other hand during the bubble home prices increased the most in the outlying locations. Using peak prices as a baseline for actual value, isn’t a good idea.
Say you bought a new home in Maricopa and then the builder increased the prices of new homes – a scenario the played out many times during the boom – you have immediate equity, big equity. The word gets out and everyone wants to buy in Maricopa.
Back then in Maricopa and the outlying areas home prices – both new and resale – were determined by a few homebuilders, it was oligopoly pricing so prices increased much more strongly than demand justified.
There was a time in 2005 when new home prices were going up $10,000 per month.
You did not see such drastic swings in home prices in established neighborhoods because the home pricing decisions were made by thousands of homeowners with little market power, not by a handful of home builders who essentially set the prices for all homes – new and resale – in their communities.
Nevertheless, John Burns’ point is intriguing, that there’s more upside for home prices on the periphery than in the center.