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Faculty Insights

What WSB Research Says About Buying a Home and Where You Live

By Clare Becker

September 8, 2021

illustration of two houses for sale

For most of us, buying a home is the biggest single purchase we will ever make. It’s a decision that goes beyond just the hefty price tag: Where we live affects every aspect of our lives, from where our kids go to school, our sense of happiness and well-being, to our perceived ability to exit by selling when we are ready to move on.

Here are some excerpts from Wisconsin School of Business faculty research on home buying and the real estate market:

Don’t stop saving after the big purchase. You worked so hard to make your homeownership dream a reality. Now you can relax and loosen the spending reins. But a study on household mortgage debt by Abdullah Yavas, the Robert E. Wangard Real Estate Chair and a professor of real estate and urban land economics, found that households with a mortgage had higher spending rates than those without a mortgage, despite the fact that the first group had built-in “forced savings” in order to make that monthly mortgage payment. What might explain this? It’s because buying a home “puts an effective end to uncertainty,” says Yavas. “Drawing from the economics literature, we know that uncertainty is one of the primary drivers of savings. When you’re first thinking about buying a house, you’re cutting your consumption. You need to start putting some money aside, but there’s uncertainty because you don’t know the purchase price of the house you’ll ultimately buy, plus other fluctuations and circumstances may emerge before you actually have enough saved to buy.”

Reconsider the lure of bright lights, big city. Major cities can be exciting, vibrant places to live and call home, especially if you’re just starting out with a good salary and a promising career before you. After all, if you don’t live in a metropolitan area when you are young and relatively unencumbered, when will you? But you may want to take a clearheaded look at some of the mitigating factors first, such as housing and cost of living, commuting time to work, and whether you’ll really take advantage of the city’s job opportunities and amenities beyond showing around visiting family and friends. Yongheng Deng, a professor of real estate and urban land economics who actively works with the World Economic Forum and the UN Sustainable Development Solutions Network (SDSN), has studied housing affordability and the rise of the “superstar city”—cities like San Francisco, Manhattan, Singapore, and Shanghai—that are high in amenities but extremely low in affordability. While such metro areas may attract young professionals, they can’t necessarily keep them. “Cities need young people and young talent, but long commutes and sky-high prices are crowding out high-skill young talent,” Deng says of these “overheated” markets. “However, growing evidence around the world’s major cities shows that improved measurement of housing affordability and effective policy arrangements can help alleviate the unaffordability problem in superstar cities.”

Post-pandemic, America’s smaller cities may thrive. If your heart is set on urban living, smaller U.S. metro areas may be a solid choice. While COVID-19 has deeply impacted real estate, smaller cities may bounce back more quickly from the pandemic. Tim Riddiough, professor and chair of WSB’s Department of Real Estate and Urban Land Economics, says less densely populated cities like Dallas and Las Vegas may make a faster economic recovery than older cities with higher tax bases. Even with the pandemic ups and downs that Las Vegas’ casino economy has weathered, for example, the city may remain relatively healthy and continue to experience growth from new residents to the state, Riddiough says. “In ten years, it’s going to have a very different economy and a more diversified base than it has now.”

Great, but I need to sell my current home first. Maybe you’re ready for a change, but want to make sure you get the best possible sale price for your home. According to Alina Arefeva, assistant professor of real estate and urban land economics, creating a bidding war is the way to go. “In an auction format, a homeowner can facilitate a bidding war among prospective buyers, where competition among buyers increases the home’s selling price,” Arefeva says. “In a one-on-one bargaining format, the seller chooses a buyer randomly from among other interested buyers. Rents, incomes, and other fundamentals of the housing market obviously all matter, but my hypothesis was that these factors alone do not account for price fluctuation and volatility; increased competition via bidding might.” How does she know it really works? She sold her own home this way.

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