That Starbucks around the corner from your house may be draining your wallet, latte by latte. But if you’re a homeowner, it may be paying off for you in other ways, in the value of your home, for example.
That’s one of the eye-catching findings that two executives of the Seattle-based real estate data firm Zillow reveal in their recent book, "Zillow Talk: The New Rules of Real Estate."
Myth-Busting
Zillow chief executive Spencer Rascoff and chief economist Stan Humphries set out to examine long-held assumptions in the real estate world and see if they were borne out by the numbers.
For example, they looked at whether it’s really true that you should buy the worst house in the best neighborhood, that “adjustable-rate mortgages were the instrument of the devil,” and that you should always do a kitchen remodel.
It turns out none of those are true, Humphries said in an interview with KPLU. Buying the worst house in the best neighborhood does not mean it will eventually catch up to the value of the better homes. Adjustable-rate mortgages make financial sense depending on how long you plan to own your home because you wind up paying less interest in the early years.
And what about remodeling your kitchen? Humphries crunched the data to see which kinds of investments yielded the biggest boost in home value.
“Really the best improvement you can do is what’s called a mid-range bathroom upgrade, which really means that you’re taking something that’s barely a functional toilet and making it into a real bathroom,” Humphries said.
“The thinking there is that everyone can use more bathrooms in the house, whereas oftentimes these upscale kitchen upgrades that get done, the taste of that kitchen upgrade is in the eye of the beholder and the [person] that’s going to buy your house may not like the tile versus granite that you chose," he said.
The Starbucks Effect
As for the Starbucks effect, Humphries said he and Rascoff got the idea after analyzing home price appreciation in predominantly gay and lesbian neighborhoods, areas such as the Castro in San Francisco or Greenwich Village in New York that have shown dramatic increases in home values.
“So we were asking ourselves: Who’s the next group you might want to use as a marker for home price appreciation? And pretty early in that exploration, coffee shops popped out as something that was really highly correlated with home values, so we dug in there,” Humphries said.
They examined home price growth from 1997 to 2012 for houses within a quarter-mile of a Starbucks, a quarter-mile of a Dunkin’ Donuts, and houses a bit farther away (between a quarter- and a half-mile) from one of those two coffee shops.
They found that homes in the outer ring rose 65 percent during that time. Homes within a quarter-mile of a Dunkin’ Donuts appreciated 80 percent, and homes within a quarter-mile of a Starbucks surged 96 percent.
“True, properties near Starbucks locations tend to start out more expensive,” Humphries and Rascoff wrote in their book. “But … these properties appreciate at a faster rate than U.S. housing on the whole. Interestingly, they’re also recovering much more quickly from the housing bust.”
Misguided Policies?
One particularly surprising assertion in the book, given that it’s written by two executives who run a company that facilitates home buying and selling, is that the government has made too big of a push for boosting homeownership in recent decades.
President Bill Clinton and President George W. Bush introduced policies to make it easier for more people to buy homes, and that resulted in raising the homeownership rate from a historical level of about 63 percent or 64 percent to almost 70 percent in 2005. Then the housing market crashed, and now the homeownership rate is back down to its historical level.
“We think that often times when there’s this hysteria and this one-sided picture that everyone should own homes, that’s, I think, damaging in the long term. Because for a variety of circumstances, renting makes a lot of sense for a lot of people,” Humphries said.
“We’re also concerned that often times this worship at the altar of homeownership does create some perverse side effects, like the fact that we have a real crisis in affordable rental housing in this country right now,” he added.
Humphries said because of that emphasis on homeownership, the government hasn’t paid enough attention to increasing the stock of affordable rental housing.
“The consequence of that is that a third of us don’t own our homes but yet we’re in rental stock which is getting more and more expensive, and that has real equity issues,” he said.
