Infrastructure Improvements and Real Estate Investing

    

This essay is intended to highlight only one key aspect of financially-savvy real estate investing: a targeted area’s improvement of its infrastructure. Significantly improved infrastructure is one key marker for the real estate investor to distinguish between sustainable higher home prices and a group of factors that indicate an un-sustainable real estate bubble. The decision whether to invest and when will most likely be affected by the question of whether large gains in real estate prices are sustainable or not. Below is a short list of some of the factors that contribute to long term, sustainable gains in home values. Additionally, there is also a list of the factors that tend to make for unsustainable rise in home prices. Where the second list of factors plays an overwhelmingly dominant role, you can predict with near-scientific certainty that a bubble has arisen . . . and must burst.¹

Factors contributing to sustainable rise in values:

• Improved infrastructure such as improved roads; improved access to expressways, interchanges, and commuter rail stations; construction that provides greater convenience for commuting, as well as access to shopping, restaurants, and other forms of entertainment
 
• Capital improvements inside the property such as new/improved bathrooms, kitchens, and other rooms (e.g., upgraded flooring, countertops, cabinets, fixtures, tile, appliances, lighting, etc.)
 
• Inflation of prices generally (prices of all goods and services)
 
• Incomes rising more than inflation rate (higher real income makes for higher home prices because people have stronger purchasing power)

Factors contributing to unsustainable rise in values:

• Exotic mortgage finance (interest-only loans, no money down, short-term, adjustable rate mortgages (ARMs), etc.)
 
• Mortgage rates at multi-decade lows (cheap money makes everyone a buyer)
 
• Major relaxation of credit standards
 
• Real- income climbing slowly while home prices rocketing upward (Limited resources dictate that magical thinking eventually gives way to economic reality)

For purposes of this essay, we will only expound on the first factor contributing to sustainable gains in home values: improved infrastructure. The reason that the topic of sustainable housing prices is so limited is because of the method of illustration. We will use a geographic information systems (GIS) based approach to provide Geospatial Property Intelligence ^TM to the reader. That is, rather than merely discussing infrastructure improvements, readers can see Google Earth-based graphics that depict and actually illustrate an area’s major upgrade of its infrastructure.

**Caution: The northern outskirts of Austin, Texas are used for illustration only.  In the spirit of full disclosure, the author owns investment real estate in Leander, Texas (part of the north Austin suburbs).  The graphics included are meant to highlight the advent of Geospatial Property Intelligence ^TM (a term being coined here), as a facilitator for better real estate investment decisions throughout the entire United States, not as an advocacy for any investment in the Austin, Texas, area.

Leading the way in the sustainable category for higher prices is improved infrastructure. The development of infrastructure is what turns previously undesirable areas into desirable ones. No leap of logic is necessary to conclude that the most desirable living areas create the greatest demand for housing. If two-lane dilapidating roads are replaced with extra-wide boulevards and formerly congested commuter roads are replaced with smart-card-based freeways, the desirability of an area goes up considerably. As part of a major effort to relieve traffic congestion in the Austin, Texas area, the idea of a series of smart-tag only (no cash) four-lane divided freeways was proposed several years ago. Today, multiple, fast-moving tollways are in operation in the Austin area; among them are US 183A, which proceeds northwest form Austin and passes through Leander. There is also Texas Highway 45, which connects 183A with Texas 130 (with an interchange at Interstate 35); and Texas Highway 130, which allows interstate traffic to bypass downtown via Austin-Bergstrom International Airport.

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Additionally, if public transportation (a new commuter subway/railway system) that is reliable, comfortable, and convenient is brought into an area, then desirability for the area also increases. Austin has built a new commuter rail-line that whisks workers from downtown to the far northwest outskirts of the city in less than half the time that it formerly took commuters to drive (prior to the introduction of tollways in 2007). The red outline in the graphic below shows the commuter rail network. The new tollways are also depicted in order to show their relationship to the new commuter rail network.

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Typically, once the conveniences of super highways and commuter rail-lines are in development, other amenities like new shopping centers will complement an area. For example, in Leander, Texas multiple new shopping centers have opened since 2006. Suddenly, convenience, space, and a feeling of newness will draw people to an area that was previously ignored. The difference between being previously ignored and undeveloped (or dilapidated) and an area being converted into a major draw for housing, shopping, and recreation is what contributes to an area’s sustainable gains in home prices. The graphic below depicts Leander, Texas, which is in the northwest outskirts of Austin. Leander is expanding formerly two-lane roads into four-lane boulevards, has recently seen the addition of U.S. 183A (a smart-tag only expressway) and a commuter rail-line that takes residents to downtown Austin. The improved infrastructure has also led to the construction of new shopping centers in Leander. Among the new shopping opportunities is the new HEB Plus, a supermarket complex that offers utility bill payments, a medical clinic, an in-store bank, and a gas station on the complex’s premises. The new shopping center is across the street from the new commuter rail-line’s passenger terminal.

(Click Image to Enlarge)

Improved infrastructure helps home values rise and remain high. Unlike cheap money (very low interest rates) or astonishingly lax credit standards, improved infrastructure cannot evaporate overnight as a driver of home prices. Improved infrastructure provides a tangible and verifiable reason for real estate values to rise and remain high over a long period of time. No matter where you are looking for real estate investments, people desire convenience; and significantly improved infrastructure provides a long-term solution for people’s need for convenience.

 

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Notes:

1. For a thoroughly detailed explanation that addresses the question of overinflated prices and real estate bubbles, see Yale Economist Robert Shiller’s book, Irrational Exuberance.

 

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