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Real Estate Glossary

Times changes. What buyer wants?

Topic: Home selling

Rising home prices and mortgage rate trends put a damper on home purchases. Really, the profile of home buyers is changing. Although higher housing costs also discouraged home buyers at the low-end of the market, first-time buyers increased their share of home sales. The primary reason for this increase was the higher number of single, divorced, and widowed buyers who entered the housing market. For all types of home buyers, however, the average monthly mortgage payment demanded a larger portion of their income.

The trade-up market has been the key to this growth. Trade-up buyers represented a growing majority of all home buyers. They demanded bigger and more luxurious new homes, driving new home prices up rapidly. While the trade-up market remains the strongest sector for new-home construction, higher mortgage rates and growing concern over the economy have made upscale purchasers more cautious.

As prices and interest rates rise, however, potential home buyers will find it more difficult to afford the space, amenities, and design features they want. Despite the additional cost, consumers continue to demand more space and more amenities. Faced with affordability constraints, however, consumers would sacrifice size rather than amenities when purchasing their next home.

Given a choice of two features among five, half or more of all prospective home buyers prefer an extra bathroom, an extra bedroom, or a fireplace. More than half of all move-up buyers preferred 2 1/2 bathrooms or more in their next home. Whirlpool tubs and volume ceilings were not considered necessities by either group.

Storage space is a priority for home buyers. Pantry, medicine cabinet, and linen storage closet are among the most frequently preferred kitchen and bath items. Ceramic tiles are the floor covering of choice for the bathroom, and vinyl is the preferred kitchen flooring.

Although family size has been declining steadily for the past twenty-five years, the desire for more space and additional amenities continues to grow. This trend reflects changing tastes at all income levels, regardless of physical needs. Demographics will accelerate this trend, however, as the baby-boom generation moves rapidly into the higher income-earning years.

Corporate real estate holdings have ceased to be merely operating assets. They are becoming pawns in different games The potential strategic importance of corporate real estate decisions is increasingly recognized. But surprisingly few of those important decisions are made by upper operating managers.

Instead, they are left to real estate professionals. How can operating executives learn to think effectively about the real estate they use in their operations? How can they integrate the complex web of operations and strategic and financial considerations that make up every decision? How do they get beyond the simple alternatives of sell, buy, or lease?

Smart managers are learning to use simple capital-budgeting routines to assess different real estate alternatives that will affect stockholder value. Here they learn to assess the impact of a real estate decision on overall corporate risk, analyze the variations in capital investment required to operate in different locations, compare the increase in stockholder wealth gained by different real estate alternatives, and decide whether the lowest cost location is necessarily the best strategic move.

Managers across the United States are discovering that they are in at least two businesses -- their primary industry and real estate. In 1985 alone, companies as diverse as the Tribune Company, International Paper Company, Carson Pirie Scott & Company, Security Pacific National Bank, and Flexi-Van Corp. raised capital, recorded extraordinary income, and even fought off hostile stockholder takeover bids by managing their corporate real property assets judiciously.

In response, companies have set up separate real estate departments or subsidiaries to handle corporate leases, development, property management, and disposition of excess real estate. Others, reluctant to admit that real estate is an integral part of their businesses, prefer to leave these considerations to outside professionals. Both of these approaches are adequate as far as they go but will not work well in the long term because they do not integrate the impact and importance of real estate into the broader decision-making processes.

Home buying is not only the money - operations and strategic considerations are also matters. We have found that managers can adapt a capital budgeting approach to meet the challenge real estate presents. The approach is both valuable and practical because it integrates strategic, operating, and financial considerations within one decision-making framework already familiar to managers.

10/13/2007

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