One of the most eye-opening books I’ve read in the past few years is Coming Apart: State of White America 1960-2010 by Charles Murray, a sometimes controversial scholar at the American Enterprise Institute. This is not a full book review, as there have been dozens of them already done, and there will be hundreds of discussions started throughout the country because of this book.
But there were a couple of items that really piqued my interest as it relates directly to the real estate industry. Since I know that real estate economists from NAR, Zillow, Trulia, and others sometimes read this blog, I’d like to pose the questions and ask them for some answers after crunching their data.
SuperZips and the Isolation of The New Elites
Murray’s basic theme is that Americans are dividing along class lines. While there has always been elites in America, they still shared the values, assumptions, social mores, culture, and most of all, geography with the rest of America.
He tells the story of his childhood home of Newton, IA, where the heir to the Maytag Company (a Fortune 500 company back in 1960’s) lived with other wealthy Maytag executives, side by side with other elites and non-elites:
Within three blocks of Fred Maytag’s home in each direction lived the owners of the second-largest company in town (the Vernon Company), several Maytag executives, several physicians and attorneys, the publisher of the local newspaper, and two owners of local auto dealerships. Other residents within that three-block radius were the sheriff, whose wife gave piano lessons, the city employee who ran the town’s waterworks, a couple of insurance agents, the proprietors of a drugstore, a dry-goods store, and a lumberyard, the high school band teacher, and many low-level white-collar workers and factory workers. There was also the dilapidated house of a recluse known as Over the River Charlie, who kept chickens in his backyard. (Coming Apart, p. 74)
Murray then points out that by 2010, most of the senior executives of Maytag had moved out of Newton completely (to affluent neighborhoods of Des Moines) or into high-end housing developments “populated exclusively by people who could afford to buy the large homes in them, which meant no factory workers, no low-level white-collar workers, and no high school band teachers.” (p. 75)
To trace the concentration of the new elites geographically, Murray comes up with something he calls “SuperZips”, which combines median income of a zip code with the percentage of residents who have at least a bachelor’s degree. SuperZips are those zip codes who are in the top 5% of all the zip codes in the United States if you combine income and education levels. According to Murray, there are 882 SuperZips, out of roughly 43,000 total zip codes in the United States.
Murray then uses the SuperZips to analyze the degree to which Americans are becoming strangers to each other. One of his basic points is that back in 1960, both the elites and the non-elites shared culture, social mores, community activities, and so on, while in 2010, the elites live in a world with beliefs and views that are not shared by the non-elites.
There’s a whole bunch of things Murray gets into that I’m not particularly interested in exploring, so I invite you to read the book and go check out the various book reviews of Coming Apart.
SuperZips and Real Estate
What I am interested in exploring on this blog is the very obvious connection to real estate. There are a few.
First of all, I’ve been trying to reconcile the numerous statements about the Millennials (Gen-Y) and how realtors have to change their business practices to serve that critical generation of homebuyers with known facts about them. For example, take a look at this webinar from CRS from the smart and compelling Travis Robertson (I’d link to the website, but Google tells me it’s “compromised”?):
On the other hand, we also know from official facts that Millennials have the highest student debt load in history, can’t find jobs, are moving back home to live with mom and dad, aren’t getting married, and so on and so forth. But real estate brokers tell me that they’re working with Gen-Y buyers all the time, and that they really are demanding in ways that older generations are not, and so on.
Second, we now have a whole lot of concrete data supporting the idea that the real estate market has bottomed. Buyer demand is up, way up. And I’m hearing things from brokers and agents all over the country that multiple bids are becoming commonplace, that inventory is way down, and so on. And that made me scratch my head wondering where the heck all these buyers are coming from.
The answer to these seeming dichotomies, I’m thinking, may be these SuperZips.
Even if unemployment is high amongst Millennials as a whole, the highly educated new elites (who are concentrated in high-paying careers demanding cognitive abilities) are not having problems finding jobs. Even if large percentages of Millennials are moving back home, these new elite Millennials are not, and have been renting while stacking up cash. Even if family formation is way down amongst Millennials as a whole, the new elites are still getting married, albeit later in life, and looking to buy nice homes in desirable neighborhoods. (One of Murray’s main points is that marriage rates amongst the elites remain high, while the marriage rates amongst working class people have collapsed.)
In other words, the flurry of activity in real estate is coming from basically two places.
First is investor activity. As NAR has reported, a third of all home sales in 2011 was to investors.
The second may be from members of the new elite who do in fact find themselves in a once-in-a-lifetime opportunity for homeownership: historically low interest rates, and prices that are way off the highs of the Bubble Years.
How Economists Can Help
So here’s how I’m thinking real estate economists can help analyze this. If the hypothesis above is correct — that the bulk of the non-investor buyers are coming from this new elites especially amongst Millennials — then two things should be true.
First, if we could break down all of the sales in 2011 into zip codes, we should see a significant concentration of activity in and directly adjacent to the 882 SuperZips of Murray. Those are the most desirable neighborhoods in the country, where the new elites congregate. Those are the places like Weston, MA, Los Altos, CA, New York City, etc. The 32-year old corporate attorney and his 30-year old marketing executive wife are not going to be looking to buy homes in Irvington, NJ (23%) where only 12% of residents have college degrees and median income is $53K. They’ll be looking at Short Hills, NJ (99% – the third highest SuperZip) where 80% of residents have college degrees and the median income is $261K. Having lived in that area, I don’t know that I’d want to drive through Irvington if I could avoid it, nevermind actually live there.
What percentage of non-investor sales in 2011 were concentrated in and directly adjacent to the 882 SuperZips? That is the question. The answer could be illuminating.
Second, if investors are motivated largely by the rise in rental rates, then we should see more of that activity in the non-SuperZips, particularly in the single-family detached segment. In theory, the family buyers in the SuperZips are affluent enough and creditworthy enough to want to buy a home. The next level down (perhaps in the top 20% but not in the top 5%) may still be nice neighborhoods attractive to renters, but not so nice that it motivates the affluent to purchase. And of course, the lower income neighborhoods should be where one would expect to find a lot of renters.
For those readers who aren’t economists, I’d love to get at least some anecdotes that either support the hypothesis or undermine it. If you’re a realtor who works a range of zip codes, and they cross between SuperZips and non-SuperZips, do you have any experience as to the kinds of buyers, and what zip codes they want to be in?