We want to believe we are in control, that we can manage the future, that we can make reasonable predictions about what lies ahead. So, we look for order amid chaos; all in the name of comforting ourselves. We are not wired to rightly understand abstractions, random gathering of clouds and stars, or natural or human trends that offer no evident purpose.
We tend to create patterns where patterns don’t exist. We look at events, either calamitous or celebratory, and focus on what happened while ignoring what might have happened given a different set of contingencies. We don’t act with any statistical orderliness. We change our mind on a whim. We do stupid things. We copy each other. We panic.
Impact of Change & the Unforeseen
An oft repeated mistake that real estate buyers make is they severely underestimate the impact of change, the unforeseen.
Impact of change: Land buyers during the lower U.S. souths 1820’s land boom looked rational given then-current skyrocketing cotton prices and trends. Land values soon plummeted as cotton prices cratered with increased U.S. and supply from India, Egypt, and Brazil. Similarly, the New York City skyscraper builders of the 1920s seem to have overlooked the impact that vast increases in office and apartment space would have on long-term rents. Home buyers in Las Vegas and Phoenix in 2005 seem to have miscalculated the almost perfectly elastic supply (i.e., When the percentage change in the quantity of real estate supplied exceeds the percentage change in price. In most cases, the market can respond quickly to a price change) of homes in America’s deserts.
The unforeseen: Early 19th century America ushered the opening of the Erie Canal and the beginning of railroad transportation. From their introduction into society, it was very unclear how much transportation costs could fall and how fast Americans would initiate the westward expansion. One hundred years later, those questions and trends were still very murky. Similarly, the future allure of densely populated downtowns, like Chicago and New York, was not well-charted in the early 1800’s and still remained a vague mystery in 1900.
“Oh, how you can get stuck-oh!”
Real estate markets are peculiar in that, by their very nature, they don’t discriminate on whether it’s a commercial, residential, or secondary home transaction. The market acts as a switchboard of sorts connecting every sort of dream, aspiration, emotion, and tidily transferring them into endless offers to buy and sell.
Many secondary home purchases, with the benefit of hindsight, rest somewhere between limited perception and ordinary error. They are not necessarily irrational but rather cognitively limited, working with simple empirical evidence mixed with emotion, instead of a comprehensive general balanced framework. I know. I speak from first-hand experience.
The days leading up to the purchase of my vacation home was an exciting time! It provided me with a chance to plan weekends away while picturing the communality of holiday meals and laughter enveloping my home away from home.
However, the realities of secondary homeownership soon settled in. It was actually harder to find the time to get away. Kids grew up and now have demanding schedules, the drive gradually became longer, while my work grew increasingly inflexible. It also cost a lot more than anticipated including unforeseen maintenance and rising property taxes. I decided to rent it out to complete strangers consuming time and creating constant headaches while forfeiting my pride in ownership. I finally sold the home. It was both a painful and expensive experience.
Driving Towards Predictability
With regards to the secondary home ownership, the sharing economy model is less clumsy and far better suited to change. For some, the sharing economy can be a bit unusual. For others, it’s a mindset and one that will continue to grow to far reaches of the economy and society.
Think about it. By the time today’s 10-year-old reaches the age where they purchase their first car, they have had Ubers their entire life. The question of why one would then want to acquire for sole ownership becomes more complicated. When that was customary, it was apparent, and consumers were willing to take out big loans. But now there are options and freedom from accumulating more debt, requiring a garage, and fretting over where to park. The market continues to applaud and gravitate towards these types of options.
It’s no secret that the advent and instant expansion of the sharing economy has swiftly and forever reshaped the accommodations industry as well. Presently, this seemingly overnight innovation and adoption has rapidly evolved where some are taking it to the natural next level: Challenging the status-quo home ownership model. Producing both a diverse and sustainable model where everyone’s best interests are aligned. It’s a transformational lifestyle adjustment where you can – as an example – hold title to a home without mortgage payments, maintenance, and all the while maintain the flexibility to live elsewhere. A model that pursues to reduce the various dislocations and inequities in secondary home ownership. One that seeks to align all interests.