You can't tear them ALL down

[photopress:tdf.jpg,thumb,alignright]When we were talking about Popcorn Ceilings, Redmondjp asked, “if new houses two blocks away are selling for $1M, at what point does my 28-year-old rambler 2 mi from MS become a teardown? Somebody could buy my property,build a McMansion and put it on the market for $1M….[photopress:td.jpg,thumb,alignleft]

at what point do you decide just to keep the roof from leaking and nothing else? This would be an excellent topic for a separate post, and I’d be really interested in your thoughts on this. There are hundreds if not thousands of older houses just on the Eastside where this same issue comes to bear…”

Excellent question Redmondjp.  The simple answer is: When the price a buyer will pay for the house to live in it, is less than the price a builder will pay for the lot to build something new on it, it reaches “tear down” value.

Take the Redmond house shown here. It went on market in November of 2002 for $467,000 and sold in June of 2003 for $380,000.  Today it is on market for $650,000, Zillow values it at $820,652 and the tax assessor puts it at $557,000.  When it sells, we will know the rate of appreciation for land cost in Redmond :-).  If the cost of $380,000 represented the value of the lot back in June of 2003, the land will have appreciated at a rate of 18% consistently since that time, to be worth $650,000 today.

The question isn’t, how does the value of the house decrease to the same degree that the value of the lot increases, until the two meet and we tear them all down.  The question is, if all of the splits and ramblers reached lot value and builders did put them all “on the market for $1M”, at what point do you saturate the market with too many houses that cost $1M or more?  Contrary to poplular belief, not everyone who works for Microsoft can easily afford to run out and buy houses close to work if they all, all of a sudden, became new houses priced at over a million dollars.

From the minute I hit this crazy town, besides wondering why everyone was giving full price per square foot value to finished below grade basements,  I started tracking the high end.  This market is not going to fall because of the $390,000 ramblers or the $475,000 median priced homes.  This market is going to fall from the top down.  It is my premise, that the market will topple based on an oversupply of $1M+ premises.

As of last night”

1) There were 28 homes for sale in King County priced at $6M or more, NONE in escrow and only 10 sold in the last 12 months.  That equals a 2.8 year supply on market IF no others come on market in the next 2.8 years.

2) There were 49 homes priced at $3.5 to $6M, 7 in escrow and 34 sold in the last 12 months, a little over a one year supply.

3) $3M to $3.5M – 40 for sale, 2 in escrow, 27 sold in the last 12 months, a 1.38 year supply.

4) In the $1M to $2M and the $2M to $3M, over a year’s supply on market.

Hundreds and hundreds of homes on the market priced at over $1M.  At what point do we have more houses priced there than we have people to buy them?  And when do the builders stop building them?

Some people say, “Who cares what is happening at the top?  Why is ARDELL always running stats in the million plus range?”  Because lots of these properties are new or vacant, which means they MUST sell at a lower price some day.  And when you can get a $2M house for $1.5 and a $1M house for $900, the $900 houses drop because who is going to pay $900,000 for the house now that they can get a house that used to be $1.1 for $900?  No one.  The pressure will come from the top down, so stop talking about the bottom up crowd.  When you have a glut of homes priced at $1M and up, and the builders keep building them…something’s got to give and the effects will trickle down. 

Until then, I’m not going to “get my head out of the clouds”.  It’s the nosebleed section way up there that will determine where this market is utimately headed.   Ms. $1.4 who should have priced and sold her house for $1.1 a long time ago, may just pull up her for sale sign and decide to stay.  But the builders can’t run away from their finished products.  The vacant houses can’t cash flow by renting them out.  The high end has to move OUT or DOWN, and if down is the answer, the rest of the market will get pushed down by them and with them.

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ARDELL is a Managing Broker with Better Properties METRO King County. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has 33+ years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. email: cell: 206-910-1000

12 thoughts on “You can't tear them ALL down

  1. That’s basically what happened in the last real estate slow down in the late 90s. I’ll guess the 500K and under market will have a relatively small drop and a comparatively minor sales slow down. In the last slow down the

  2. Ardell, I agree completely with your analysis. Prices will fall from the high end, as they ususally do. A combination of lax lending standards (allowing people to overleverage themselves), inexperienced speculators, and in-migration from more overpriced markets (ie, “CA equity locusts”) supported the high end and spurred deveopers to build spec houses priced for that segment. Now, however, buyers are spooked by what’s happinging all over the country, most speculators are exiting market as fast as they can, and in-migration is slowing or dead as the Seattle market becomes less of a bargain relative to other falling markets and people are finding it harder to sell their existing properties in those markets even if they want to move here.

    You didn’t address the condo/townhome market. There, I think the “falling from the top down” will happen at far lower prices. I’m seeing LOTS of new condo/townhome construction around the Eastside and Seattle for $600K to $1M (including apartment conversions) and I think that there will not be enough demand for all these very expensive units. As an expample, today I saw condos in Bellevue on the corner of Bellevue Way and NE 8th “priced from the $700’s”. This is the same lot where the construction had been halted on a previous project during the 2001 equity bust. These units are packed in like sardines on a very busy street. Too many units are being priced as though everyone is a millionare, and there just won’t be enough of them to go around to support these prices.

  3. Jerry,

    Condo market doesn’t fall from the top down, because of the condo fees. Downtown Bellevue isn’t a market indicator, so I don’t watch it.

    The high end condo market either lives or dies. What happens there doesn’t affect the guy trying to buy or sell a single family home at $650,000 or less, nor does it affect the mainstream condo market with monthly HOA dues of $200 give or take, priced at $350,000 or less.

    It’s a status market, and I tend not to deal in status real estate. It’s too much of a gamble. People don’t buy high end condos because they are good investments. They buy high end condos…uh…not sure why because I don’t deal in that market. My rule of thumb is, I only sell that which I can come back and sell. When a buyer buys, I look at being able to come back and sell it for the same price or better. That definition never fits the status market. I have to see the underlying and lasting value, and high priced, new, high condo fee market never seems to pass my smell test.

  4. Ardell,

    Tell us the ‘rest of the story’ with regards to the house pictured at the top. Was this house torn down and replaced with something else, or was it fixed up? Or is it still for sale in its current condition, waiting for a developer to put something on it? I’m not clear on that.

    So how do I find out how much a developer is willing to pay for my lot (you veered off into what’s happening at the upper end of the market)? KC assessment? Zillow? Call builders and ask them?

  5. The house shown is for sale and is over two acres, but that is not a “developer” plot. Zoning does not always permit subdividing, and the remarks section of this property do not indicate that you can put anything except one Single Family home on that lot.

    It was the only property in Redmond that I could find, past present or future, that would be the equivalent to a “Kirkland” style tear down. In Bellevue and Redmond, I see more 90% remodels than true teardowns. I skirted the subject because I do not think your premise that 50s and 60s built housing in Redmond (or Bellevue) is ripe for massive teardown. I think you would still get more for your property by an owner occupant than a builder.

    If you email me privately your address and name, I can give you a more precise reading on that. Are there homes on your street that were bought by builders and torn down? The next street over? If not, that’s a clue that builder’s are not interested.

    That is where flippers have made their biggest mistakes. If you walk down a street and see no investment on that street, that is a good sign that it is not a good place to invest. Every street is different and there is the “good side” and the “bad side” on some. Just because builders are buying everything they can get their hands on, on the odd numbered side, doesn’t mean they are remotely interested on the even side, for example.

    The main footprint is large enough on the house shown, that my guess is it will be a 90% remodel by a builder, not a “developer”.

    To answer your question, I don’t think the lot values of single older ramblers and ranchers in Redmond is, or is going to, reach the point where builders want them. I looked “behind” all of the new construct SFR residences in Kirkland, Bellevue and Redmond. On the ones in Kirkland, I found the former house that was torn down to build the new one. In Redmond and Bellevue? Not. The only three I know of are 1) view property in Lochmoor being done by an owner to live in and not a builder 2) the one above that had “water damage” 3) One over by Clyde Hill that has a view of downtown Bellevue.

    By and large, the neighborhoods of which you speak will sell to private owners, so letting it run down to the point where only a builder would want it, is not likely a very smart move.

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