The Starbucks Effect

Often you see news stories that combine odd facts and statistics, and you wonder:  is the story reporting causation, or just correlation?

Consider the so-called “Starbucks Effect.”

If you’ve bought a house recently, you’ve probably used Zillow, a real estate website that provides lots of useful information about houses on the market with just a few keystrokes.    Zillow’s CEO and its chief economist, Spencer Rascoff and Stan Humphries, wrote a book called Zillow Talk: The New Rules of Real Estate that addresses the economics of home buying and home owning and attempts to answer questions that have long bedeviled home owners — like, should I remodel my kitchen, or my bathroom?

One chapter addresses the “Starbucks Effect.”  After crunching the numbers, they found that homes located near a Starbucks appreciated far more than homes located farther away.  From 1997 to 2014, houses in a Starbucks zone increased 96 percent, versus 65 percent for Starbucks-deprived residences.  And the closer to that green sign the better:  in five years, houses within a quarter-mile of a Starbucks went up 21 percent while houses a quarter-mile to a half-mile away increased only 17 percent.  (If you live in one of 20 large American cities, you can track the specific “Starbucks Effect” in your home town here.  Unfortunately, Columbus isn’t one of the 20.)

So, is this quirky statistic reflective of causation, or correlation?  Rascoff and Humphries conclude that a neighborhood Starbucks does drive up home prices, although they’re not sure exactly why.  Perhaps people equate a Starbucks with neighborhoods that are safe, monied, and thriving, or perhaps they really like the convenience of walking only a few blocks for their morning brew, or perhaps a nearby Starbucks makes them feel like urban hipsters.  Others wonder if the statistics are simply showing a correlation, because Starbucks must carefully analyze the economic conditions at potential locations for its stores.  In short, Starbucks isn’t going to try to peddle high-end lattes and frappucinos on Skid Row, and therefore it’s not surprising to see Starbucks ‘hoods outperform others.

It’s a chicken-and-egg type argument:  which came first, rising home prices or the Starbucks?  Some questions are unaswerable, and this is probably one of them.  I’m happy to report that we live very close to a Starbucks, although its presence had nothing to do with our decision to buy our house.  After reading about the “Starbucks Effect,” though, I’m hoping that it never closes.

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Bursting Bubbles

With the wild stock market swings in recent days I thought it might be helpful to recommend a book I just finished today, The Great Depression Ahead by Harry Dent.

It is an excellent book which is simple to understand that everyone who is an investor should read with an open mind of course. Mr Dent is a long term stock market bull who predicted the technology boom and it’s demise and turned bearish a few years ago. He is predicting Dow 3500 – 3800 between now and 2014.

The premise of the book is that simple trends drive long – term growth and that changes in demographic and technology cycles are critical in predicting business and economic trends. He mentions that government intervention (QE2, stimulus etc) can sometimes delay, but won’t be able to overcome the massive baby boom generation productivity, earning and spending power that have now peaked.

He uses data going back to the mid – 1800’s to come up with three different cycles – the 80 year lifetime cycle (last peaked in 1930), the 40 year generational cycle (when generational spending was at their peak in 1930 – 1970 and 2010) and the 30 year commodity cycle (that peaked in the years 1890 – 1920 – 1950 – 1980 and 2010) all converging bubbles that are popping at approximately the same time 2010 to cause an upcoming major stock market crash.

It’s his opinion that a diversified portfolio which we are all taught to have will not be able to withstand the coming stock market crash and that only cash and high yield bonds will fair well in the near future. Mr Dent believes there will be bear market rallies until 2020 -2023 at which time a new “boom period” will emerge.

My next read is going to be Aftershock by David Wiedemer, Robert Wiedemer and Cindy Spitzer, all economists who are predicting a more radical market meltdown then what Mr Dent is predicting.