Friday, February 29, 2008

If Every Day were a Leap Day

Thought I would take advantage of today, a day that only comes once every four years, to discuss the effect of scarcity. As any armchair economist knows, the more unique or special something is, the more it is valued. Conversely, the more common, abundant or replaceable something is, the less it tends to be valued.

Back in January, the WSJ had an article about how builders are reducing the choices available to new home buyers as a way to cut their costs. Apparently builders have finally figured out, the more you build to suit your buyer, the more your operating costs go up (or perhaps they just didn’t care during the boom times).

A perfect example of this trend can be seen at Lennar’s Blackstone El Dorado development. There, all the homes come with standard upgrades. The only customization allowed is in the flooring. This lack of choice was very surprising to us as buyers, since this is a rather high end development.

It also seems somewhat counterintuitive to me. As buyers have more to choose from these days, they are likely to be more discerning and want something suited to their tastes (as opposed to the time, when buyers were just grateful to get on the list to purchase a new home). I guess that’s why many builders are offering so many incentives, to differentiate themselves. However Lennar has built themselves into a corner regarding Blackstone (pun intended =). They already include all the trendy upgrades, so there isn’t much else they can do to tempt prospective buyers. I believe this commoditization of homes (no matter how nice) will lead to some depreciation for the new owners, because when the development is completed, the re-sales will have to compete almost purely on price and lot size/location.

Many of the major builders use the same floor plans from one development to the next, so commoditization is already a big problem in the rest of Sacramento. There are just too many similar homes on the market (Elk Grove, Natomas, Anatolia, Serrano etc.). The main way to make your home stand out, price it below your competition!

This scarcity argument has been used by many to explain why East Sac and other locations around town have not lost as much value compared to locations like Elk Grove. East Sac homes are both unique in character, supply (they come on the market less frequently), as well as location (close to the city) so there should definitely be a price premium that comes with these home. Just how much is a subject of great controversy =)


mbc said...

The cookie cutter syndrome is what really worried me when we sold our Rocklin house a few years back. In my old neighborhood every second or third house looked just like mine. And there were plenty of other similar homes in the adjacent developments. Buyers could literally look at 50 houses very similar to mine. Absolutely the only way I could make my house stand out was to aggressively lower the price, which I did until it sold.

sacramentia said...
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