- The American Dream: As Real as Ever
- The Motivating Force of a Demand-Led Expansion
- Buy and Hold, but for How Long?
- Transaction Costs (Greatly) Influence Holding Periods
- Riding Out the Dips: A California Story
- The Returns: Capital Gains
- The Returns: Imputed Income
- Calculating Your Total Return
- Onward and Upward to the Stock Market
The Motivating Force of a Demand-Led Expansion
Jennifer and Carlos are a lot alike. After finishing college the same year, they each landed good jobs in the same U.S. city. They worked hard, saving and planning, and as luck would have it, they purchased homes in the same suburban development during the same month three years later. The units they liked went for $200,000 a piece, and they each figured they could live happily with one bedroom and one small bath until they decided to settle down and have families. After a few years of bumping into each other nearly all the time, the two began to date, and it wasn't all that long before Carlos proposed to Jennifer. At the five-year mark of homeownership and only six months before their wedding day, they put their units up for sale—but they had gauged the market accurately and knew that selling wouldn't be too difficult in a short period of time. And they were right. Their sales went quickly and profitably, and with cash in hand, they began their lives together deeper in the suburbs, where the homes come with in-ground pools, big lawns, and two-car garages.
A nice story with a happy ending? Sure. But the forces of economics and fundamental investing behavior are swirling behind the scenes.
When Jennifer and Carlos shopped for their original homes, they each noticed two things: First, a lot of properties were available. Second, prices overall seemed pretty steep. But this latter fact didn't turn them off, if only because they believed that prices would continue to increase the longer they put off making a purchase. So they entered the house-hunting market with enthusiasm—in effect, joining the very powerful group that today drives America's demand-led housing expansion: Simply stated, steady economic growth in America over time has led to a steady increase in the demand for homes. As the population has become larger and more affluent, it has increasingly looked to own residential real estate, raising the demand for this particular good.
In economic terms, any such demand-led expansion can be satisfied through either price increases, increases in supply, or both. In the U.S. example, an upward shift in the demand for homes has produced a movement along the "supply curve" that has resulted in higher prices and higher output (or more homes).
Jennifer and Carlos might not have been able to state this like an economist, but they understood it well enough: Homeowners profit very simply because they buy and hold properties. Buying and holding allows people to take advantage of the secular uptrends in home prices, while riding out any short-term downward fluctuations in prices. This is an insurance policy on success. Buy something at $1, hold it while its value increases despite any bumps along the way, and sell it at $2—or more. That's the one-two punch for homeownership, just as it's the winning combination for investing in the stock market.