If everything you know about residential real estate comes from playing Monopoly, this week’s show is for you. As a game, Monopoly contains illustrative parallels with the real estate market, even though the game itself has little practical relevance to the real world—although I did once win second place in a beauty contest. The first hour of today’s show uses Monopoly to explore the world of residential real estate, and the second hour explores how you can win in the real world playing Real Estate Monopoly.
First, consider what a Colorado Springs Edition of Monopoly might look like. You have the Broadmoor instead of Boardwalk, Powers instead of Indiana Avenue. I won’t risk offending anyone in the audience by renaming Mediterranean and Baltic Avenues, but you get the point.
The first thing to consider is why Oriental Avenue is so cheap while one night in a hotel at the Broadmoor might bankrupt most people. Disparities in price are largely driven by demographics: As people mature, they work their ways from Baltic Avenue to St. Charles Place to Pacific Avenue and so on. The younger generations with less disposable income will cluster at the start of the board, while the established generations will cluster toward the end.
On a city level, this has subtle but noticeable affects. Certain qualities or amenities offered by certain neighborhoods will appeal to different demographics at different times, and real estate prices will adjust accordingly. In the 1960s, when families were large, neighborhoods with an abundance of split-level homes and nearby schools were in far higher demand. Today, with people having fewer children, and having them later in life, these formerly hot neighborhoods are seeing prices drop while older neighborhoods with more spacious floor plans and fewer rooms are in higher demand.
On a national level, this has stark and profound effects. Localized real estate bubbles in San Francisco, Washington D.C., and Seattle reflect an influx of young, wealthy professionals, causing formerly lower-middle and middle class neighborhoods to gentrify into high-income neighborhood and house values to skyrocket. You can think of the national real estate market is a bag of popcorn: each kernel, or local market, heats and pops independently of all others. Different factors cause different kernels to expand and explode quickly, slowly, or not at all.
There is a strong correlation between the demographic composition of a market and its general health. Places like Utah and Texas have very young populations and generally healthy real estate markets; Florida, on the other hand, is home to the oldest population in America and, as a result, has found it difficult to recover from its turbulent housing collapse.
These and other factors show how real estate is like Monopoly. Now the question is: How do you win? I offered three suggestions on this week’s show to help you get started and ultimately succeed.
To win at Real Estate Monopoly, you have to understand how it differs from the game, which is what Rule #1 concerns. The key difference between the two is this: Life isn’t about luck. In the real world, people don’t start out with exactly $1,500 a piece; they don’t take turns; they don’t roll dice. Each individual chooses when to move, where to stop, what to buy, how many amenities to add, and so on. Everyone starts with the exact same credit score, which is a great indicator of their general access to credit, and the choices they make in life determine whether they will continue to have this access. With credit, nobody is forced out into the cold, but plenty of people choose to end up there.
The second rule is, incidentally, my approach to both Real Estate Monopoly and regular Monopoly: start the purchase process as soon as you can. I got into real estate early and have bought higher-value homes as I go along. Few people start by buying Park Place; more often they start on Oriental Avenue and work their way up. But the key is to purchase early and stop renting! That’s why I encourage everyone to get the purchasing process started as soon as possible. And understand this: Beginning the purchasing process does not mean you’ll be purchasing soon. For some, they may be ready to by instantly; for others, they may not be ready for a few years. But the key is to start preparing now.
And finally, for rule #3, get a written plan for what you want to do and accomplish for this year. This is your strategy for Real Estate Monopoly and will force you to prioritize your wants, budget your $1,500 in monopoly money, take inventory of the opportunities out there, and ultimately act to accomplish your goals.
This week’s show was stuffed with other parallels and insights. I encourage everyone to listen and re-listen to the show, which, as always, is available in the archives. Over the coming weeks and months, as we enter the spring and summer home-buying seasons, we’ll see hundreds of new players enter the game. While they’re praying for a decent “Chance” card, you’ll be better prepared to make sound, strategic decisions.
3-22-14 Lets Play Monopoly