Many California markets, including San Diego, Los Angeles, and San Francisco, continue to struggle. While markets in other areas seem to elude scathing, including San Antonio in Texas. Still, researchers from Columbia University and the University of Pennsylvania contend that San Diego, Los Angeles, and San Francisco are "superstar cities." San Antonio ranks among the bottom 10. Huh?
What does superstar city mean, and how should you adjust business strategy? If your city is not a superstar city, should your strategies differ?
More simply, in superstar cities, rising home prices are the result of increasing incomes coupled with limited supply of housing stock. As incomes rise, housing costs go up faster.
Why? Buyers in these cities are apt to spend a bigger chunk of their income on housing as a result of having higher incomes, believing values will rise faster than in non-superstar cities. As demand increases and supply is fixed or limited, price is the clearing mechanism. Where supply is not constrained, there is little upward pressure.
Appreciation is greater in superstar cities; lower in non-superstar cities. "Metropolitan areas where demand exceeds supply and supply growth is limited" are superstar cities. In addition, they are "the ones in which residents are willing to pay a premium to live and into which high-income superstar earners disproportionately sort."
If you build in a superstar city, consider the realities. "Developable" land is in short supply, limiting the housing stock. Price appreciation above the national average will be the long-term norm. And, as the population grows, it will lead to an even greater increase in price appreciation.
Over time, land prices should appreciate at a greater rate than housing prices, as land is the residual component. Also, the market will continue to shift towards affluent buyers. If you can build affordable homes, you should have a "gold mine," as lower-income families struggle to find affordable housing rather than being forced to leave as prices appreciate. San Francisco, San Diego, Seattle, Boston, and Portland, Ore., are such cities. In addition, many coastal locations exhibit "superstar city" characteristics.
How about non-superstar cities such as San Antonio, Las Vegas, Phoenix, or Cleveland? Developable land is plentiful, therefore spikes in land prices should be short lived and feared. Buyers will continue to seek affordable housing as they are priced out of more expensive cities. Finally, business practices and strategies should be based on low levels of expected price appreciation.
Strategies for non-superstar cities include managing land on a "just-in-time" basis. In addition, builders should not build financial models that factor high levels of house price appreciation into land investments. Results will fall short.
Add "constraints" to a non-superstar city, and you've got a superstar city. Initiatives that halt growth–political or geographical–can alter supply.
Today, superstar cities and coastal areas are struggling as a result of overbuilding. Still, these markets will rebound and enjoy higher price appreciation than the national average. In non-superstar markets, builders cannot get caught up in a brief frenzied market–or they'll suffer as a result.
–Jamie M Pirrello is CEO and president of Vision Homes USA, a Fort Myers, Fla.-based home builder.
Ranked by growth in housing prices from 1950 to 2000:
- San Francisco
- Oakland, Calif.
- San Diego
- Los Angeles
- Portland, Ore.
- Bergen-Passaic, N.J.
- Charlotte, N.C.
- New Haven, Conn.
- San Antonio
- Dayton, Ohio
- Albany, N.Y.
- Rochester, N.Y.
- Youngstown-Warren, Ohio
- Syracuse, N.Y.
- Buffalo, N.Y.
Strategies for Success
- Invest in long-term land positions.
- Develop move-up product catering to higher-income buyers.
- Search for creative ways to build affordable housing.
- Minimize long-term land positions.
- Do not pro forma house appreciation to make land deals pencil.
- Minimize invested capital per dollar of revenue.