8/12/2019 1-s2.0-S0007681312001188-main

1/3

EDITORS PERSPECTIVE

The real estate boom

Marc J. Dollinger

Kelley School of Business, Indiana University, 1309 E. Tenth Street, Bloomington, IN 47405-1701, U.S.A.

1. Little pink houses, for you and me

In my part of the world, the real estate segment ofthe economy is in recovery. New housing starts areup. Prices are firming for both new construction andre-sales. Home decor and furniture sales are im-proving, too. This is the evidence of economic re-covery. But as many folks know, recovery is also aterm used for people emerging from rehabilitation.Will the housing industry recover in this sense? Willthe folks who build, develop, design, buy/sell, andlend also enter recovery? Will they be able to see theprevious errors of their ways and behave with more

rationality and

deliberation?

They

may

feel

thatthey have 6 years of recession to make up for in avery short time. This could promote the excesses ofthe 2000s. Who knows?Housing is an important industry for employment.

Think of all the elements required to build a newhome. You need excavators, foundation experts,concrete guys, framers, electricians, plumbers, car-penters, floor installers, roofers, landscapers, andof coursegovernment code inspectors. All of thesejobs necessitate suppliers for the material inputs.The workers will be managed, supervised, regulat-ed, and paid wages and benefits; when injured on

the job, they receive medical treatment and work-ers compensation. The volume of hands-on employ-ment, as well as the flow of money and credit,makes each new home built a microcosm of theentire economy.

To investigate this recovery phenomenon, I re-

cently went undercover

(not

really)

to

immersemyself in the intricate insidedealings (not a chance)of the housing market (we were house shopping). Inthe spirit of inquiry, I will bare my own subjectiveexperience as a set of lessons learned on thesubject of recovery.

2. Here is my story

My wife and I have lived in our current home for25 years. The house itself was built in 1968, the same

year I graduated from high school. We bought it in1987 for less than $100,000 from another professorwho was retiring. I was an associate professor at thetime, and the cost of the house represented nearlytwotimes my annual salary. It has been referred to asa traditional mid-century home: a nice bi-level withfive bedrooms, two of which were converted tooffices for my wife and me, and a full basement forthe family room. Here, we raised our three childrenand lived the best years of our lives. . .so far. It wasfrom this house that I managed my career, wrote mytextbook, and entertained friends and family for a

quarter century.

My

youngest

was

born

here,

and

Ithought that I would eventually die here. I neverimagined we would move again, even though thechildren are grown and we never go downstairs any-more. We just live on the one level.Sometime in 2011, my beautiful wife of almost

40 years said, Why dont we look for a new house?(You have to know that the real estate bust is overand the new boom has started when I get into the

Business Horizons (2013) 56, 13

Available online at www.sciencedirect.com

www.elsevier.com/locate/bushor

E-mail address: mdollinge@indiana.edu

0007-6813/$ see front matter # 2012 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.http://dx.doi.org/10.1016/j.bushor.2012.08.003

http://dx.doi.org/10.1016/j.bushor.2012.08.003http://dx.doi.org/10.1016/j.bushor.2012.08.003http://dx.doi.org/10.1016/j.bushor.2012.08.003http://dx.doi.org/10.1016/j.bushor.2012.08.003http://dx.doi.org/10.1016/j.bushor.2012.08.003http://dx.doi.org/10.1016/j.bushor.2012.08.003http://dx.doi.org/10.1016/j.bushor.2012.08.003http://dx.doi.org/10.1016/j.bushor.2012.08.003http://www.sciencedirect.com/science/journal/00076813mailto:mdollinge@indiana.eduhttp://dx.doi.org/10.1016/j.bushor.2012.08.003http://dx.doi.org/10.1016/j.bushor.2012.08.003mailto:mdollinge@indiana.eduhttp://www.sciencedirect.com/science/journal/00076813http://dx.doi.org/10.1016/j.bushor.2012.08.003

8/12/2019 1-s2.0-S0007681312001188-main

2/3

market.) She offered up the usual reasons for folksof our age and situation:

Things were starting to break and need extramaintenance, and that was getting expensive.

The kids were gone and we had too much extra

room.

We never used the lower level of the house,except for the garage and laundry room.

Eventually, going up and down the stairs wasgoingto get more and more difficult.

We had too much stuff and needed to downsize.

These are all good reasonstoo good, indeed, tosimply argue against. Therefore, I needed a differ-ent strategy.

Iama supportivehusband (at least thatismy imageofmyself) so I said, Sure, lets start looking around.But I didnt want to move. I loved my house. It wasfamiliar and not so big that my wife and I werebouncing around like pinballs; we just didnt godownstairs much. We had expended a lot of effortgetting the old place just so: the televisions are wellplaced, the internet works, the screened-in porch isperfectfor sittingandtalking,andthehot tubsoothesthe pains of my aging and aching back. I foresaw aperiod of window-shopping and then settling into theposition that there was just nothing out there that

met our

needs.

I

hadmy

own

requirements,andthesewere going to protect me from change:

1. Relatively new construction, less than 10 yearsold.

2. A compact, manageable lot, so I didnt have thearduous maintenance of a big yard.

3. Smaller than our current house, but not too tiny,either. I am a Goldilocks kind of guy.

4. Buried power lines, so we didnt have toreset our lives and clocks every time lightningstruck.

5. Single-floor living space, to remove the shadowof a future with too many stairs.

6. Not too expensive. Who wants a big mortgage intheir senior years?

I thought these demands would save me. I thoughtthey were impossible to fulfill. I was wrong.

Wecasually browsed during most of 2011. As 2012burst on the scene, however, my wife and her realestate agent became a bit more serious. We lookedat older homes, but this violated my requirement#1. We looked at houses that were too big. . .andhouses that were too small. We were shown homeswith one level, two levels, and three levels. All the

homes that

met

the

first

five

criteria

seemed

to

missthe last: they were too expensive. My wife and I arevictims of the Midwestern House Price Syndrome.Over the past 25 years, our place never went downin value, but still only managed to climb a fewpercentage points at a time. The estimated valuewas about $200,000. In Los Angeles, this housewould have been a multi-million dollar legacy. Butnow, as we looked around for a home to meet mycriteria, we found that only really expensive (to us)properties were in the ballpark for quality. Theirpriceswere shocking. It finally dawned on us that weshould have moved at least twice during the past

25 years, and each time we would have sold the oldhouse for more and paid more for the new. Then wewould have been proper modern real estate buyers,rather than early 21st century real estate dinosaurs.Price-wise, I suffered Boiled Frog Syndrome. You

know the (contested) theoryIf you put a frog in apot and slowly raise the temperature, the poor thinggets used to the heat and eventually cooks to death;but, if you throw a frog in an already-boiling pot ofwater, it jumps right out. My wife and I looked athouses that were $50,000, then $100,000 more.Every week the prices kept going up. We looked

at houses

that

would

have

required

selling

our

carsand our cat just tomake the down payment. Finally,we stumbled onto the house that was exactly rightfor us: it met my wifes good reasons and my ownrestrictive criteria, and it turned out to cost exactlytwice my annual salary.We found a neighborhood where they were build-

ing new homes. We found a house design that fit theimpossiblecriteria Iset to avoid having to go throughwith the deal. We found a lot on a street thatseemed just about right. We went to the modelhome and it was very nice, probably the nicest placein which any of my family has ever lived. And thenwe found Peg, the developers selling agent.

Me: So Peg, hows the market for new houses thesedays? I dont think the real estate bust is quitefinished yet, do you?

Peg (Laughing): All markets are different. Ive beenin this business a long time.

Me: So Peg, how much real negotiating is there withthe builder? I saw in the County Records that the

2 EDITORS PERSPECTIVE

8/12/2019 1-s2.0-S0007681312001188-main

3/3

already-sold-homes in this development have quitea price range.

Peg (Smiling): Its all about the upgrades. The priceof the house is fixed. We have to keep the valueshigh for the previous buyers. (Laughing) I have beenin this business a long time.

Me: So when do we get started? Whats the processlike these days?

Peg (Knowing grin): Dont worry about a thing. Ihave been in this business a long, long time.

Other discussions with Peg proved more informa-tive.Once I stopped worrying about how much it wasgoing to cost and focused on the home, she wasquite forthcoming. To summarize the lessons Ivelearned via this experience, there are three homesout there for anyone shopping around:

1. There is the house you want. It has the featuresthat you will need and use. It offers you thepleasures that you will take while at home.The house you want is where you will live as yourbest self.

2. There is the house you can afford. It doesnt haveeverything. You make compromises. The floors,counters, lighting, appliances, bathrooms, andclosets are okay, but not thrilling. Just knowingthis is somewhat depressing. But even really rich

people who

live

on

both

coasts

at

the

same

timemust have something or other that they cannotafford.

3. There is the house you can re-sell. This is not thehouse you want. It is not the house you canafford. It is the house for the next buyer, thenext homeowner, the not-you. It has featuresyouwont use but which everyone insiststhe nextbuyer will want. It has all upgrades because thenext buyer is a fancier person than you are. Do

not build

this

house.

Because

the

buyer

whowants all the features and upgrades is not inter-ested in your old, rundown, obsolete home. Theywill build their own.

As for housing, the industry is doing just fine. It isrecovering. The real question is: Will I? Will my bankaccount ever recover? Will I be able to replicate theManCave/Office that I had in the old house? Will theinternet still work and will cable television be avail-able? Who will deliver the newspapers and pick upthe garbage? Will I find myself locked out in themiddle of the night, having mistaken the front door

for the loo? Calm down, I remind myself; this is aprocess.We have put down the earnest money and signed

the contract. Now the fun begins (not really). But Icannot tell you about that because it has not hap-pened yet. We will probably move into our newhome sometime between November 2012 and Janu-ary 2013. As I write this, they havent even brokenground. To paraphrase a favorite Indiana author,Kurt Vonnegut: And so it goes.

EDITORS PERSPECTIVE 3