I’ve always thought that the “Plankton Theory” on housing made a lot of sense. It says that for values to increase, there must be demand at the entry level costs, since move-up buyers need somebody to sell to before they can buy a bigger house. Just like big fish in the ocean wouldn’t be able to eat small fish if the small fish couldn’t eat the plankton. I believe the analogy was first introduced by PIMCO’s Bill Gross in 1980. Logically, it makes perfect sense, and when pondering the question of when/where will housing recover, my eyes have accordingly been on the first time buyer activity.
About a year and a half ago, we looked at some data supporting this concept – the ripple up from first-time buyer values showed gradually weakening support.
And in recent weeks, there’s been a flurry of news from the other end of the spectrum – the high end property. There are several theories about why the wealthy are buying, and why they are buying with cash. But the bottom line is that February 2011 sales data showed that homes selling above 1MM were up 3.9%, outperforming all other price ranges.
There have been several stories about this trend. And some prominent folks in real estate and finance – Barbara Corcoran, Donald Trump, John Paulson – are turning up the volume on their excitement over housing at these levels. –
As opposed to a push up from demand among first time buyer, are we going to see recovery from the top down? Where wealthy buyers gobble up high end homes, and essentially pull from the top, demand rippling all the way down to the bottom? Maybe a little of both? The number of wealthy buyers who can afford to buy another property without selling one at the same time would seem to be small relative to the overall market. But this activity represents a force at play. It’s an interesting dynamic to keep an eye on. What do you think?