Our actions are motivated by specific needs. Maslow’s hierarchy of needs is a popular theory of motivation containing five distinct levels:
You must meet the lower-level needs before moving onto the next level. And maybe you guessed it, but shelter (housing) is part of the physiological needs that humans often seek out first.
As real estate professionals, this is what we have built our careers and businesses around, whether we knew it or not. Physiological needs (food, water, breathing, clothing, shelter) are all basic needs that you must meet to fulfill the ultimate need for self-actualization.
Housing and real estate has had a pretty incredible 18 months, and it’s not over yet.
Real estate has a significant effect on social, economic, and environmental issues and innovation, productivity, obesity and more.
Although this might seem dramatic, for me, it’s just another reason I believe real estate is the most fantastic industry. We not only impact the lives of our clients on the most significant financial (and often emotional) decisions of their lives, but also what we do has an actual impact on the world at large.
Consumer products are getting better, cheaper and more widely available while home prices are rising. Is it a bad thing? Consumers seem to think so. It’s critical that agents can navigate the current market’s statistics and what they mean for their clients, the industry and the economy. Here’s how.
Goods stay low as housing prices rise
Let’s take a look at some recent housing information and statistics and discuss what they mean precisely.
Housing prices have risen dramatically over the past 40 years. According to Works in Progress editor Sam Bowman:
“The average New York City metropolitan area house prices are up 706% since 1980 (or 376% more than US consumer prices, and 326% more than US wages). For San Francisco the rise is 932%.
London house prices are up over 2,100% in that period (or around 1,500% more than wages). Prices in Sydney, Australia, have risen by 1,450% (compared to hourly wage increases of 480%).
In Ireland, prices have risen by about 800% in that period. Rents show similar, but less extreme, trends, because they are not directly affected by interest rates.”
More expensive housing means people have less to spend on other things. Higher prices also impact behavior and everything, including:
- Home location
- Family size
- Day-to-day lifestyle choices
- Your job
- Whether you walk or drive to work
- And so much more
When one of your most basic needs is significantly more expensive, it changes things. Interestingly, Bowman wrote:
“Almost every other household product has become better and less expensive since then.
Compared to 1975, the number of hours a median American worker would have to work to buy a television fell from 60 hours in 1975 to 7 hours in 2013; to buy a fridge-freezer, it fell from 65 hours in 1975 to 20 hours in 2013; to buy a manual exercise treadmill, from 18 hours in 1975 to 6 hours in 2013; and to buy a washer-dryer, from 67 to 30 hours.
Even cars are three times’ cheaper’ in terms of hours worked on an average hourly wage now than they were in 1964. And none of these estimates accounts for how much better most of these products are now than they were in 1975.”
The housing prices mentioned above range from about two times to four times the cost of building new homes of equivalent value and specs.
What’s holding us back
As we know, over the past year and a half, lumber and building material costs have skyrocketed, making homes even more expensive to build.
In addition, many cities and states have strict zoning and development restrictions on new construction that makes building more difficult (and often more expensive for the developer) or impossible altogether.
These restrictions may hinder the developer in the short term. New construction prices increase, which can also drive up the cost of existing homes in the area, making housing less affordable all-around. But, ultimately, builders pass on increased costs onto the buyer client, which is often the exact opposite intention of state and municipal regulatory bodies.
In short, consumer products are becoming more innovative and more widely available and less expensive, while the exact opposite is happening with housing — which is becoming more scarce and more costly.
But this isn’t necessarily a bad thing.
Why prices must rise
If housing prices came down as much as consumer products have over the years, a new home would cost about $4,000. That is just not realistic because, at the same time, we have fluctuating building material prices, increased fees for construction and even growing land costs.
If pricing and economic models for housing break, everything breaks (just like we saw in 2008). Housing prices must continue to increase in the long run. If they didn’t, banks would break, people would lose equity, and many people’s retirement would be gone.
I believe housing prices are just about their height, and we’ll see them course correct a bit in the next 12 to 18 months. But our systems are designed to increase over time. Real estate markets are cyclical.
We’ll have cycles where the market corrects itself, but again, over time, housing prices must rise. It’s simply important to understand and to be able to navigate what that inevitability means for consumers, the real estate industry and the economy as a whole.
As one of our most basic human needs, housing will always drive our actions and behaviors. It’s an exciting opportunity and a big responsibility that we can’t take lightly as real estate professionals. But I know we are up to the task.
Adam Hergenrother is the founder and CEO of Adam Hergenrother Companies, the author of The Founder & The Force Multiplier, and the host of the podcast, Business Meets Spirituality. Learn more about Adam’s holistic approach to business here.