The New Value Paradigm

In light of the dismal national real estate numbers, a lot of readers of this blog may be  shocked the Sullivan County numbers this month (which I'll post on my Current Market Conditions report in early Sept.) Unless there's a tsunami of closings in the next week, the sales volume numbers are going to be sluggish. But both the median and average sales prices are poised to take a huge upturn. The 3 month average could be up by 15% to 20% over July.

So what's happening? Has the real estate market here suddenly gotten 'hot', with buyers clamoring for houses and pushing prices up? Not at all. What I'm noticing in looking at the 'solds' is that some buyers are grabbing really great deals on "better" properties at higher prices.

Consider some recent examples. A 4 bedroom lakefront house at Emerald Green, on one of the best parts of the lake, sold for $360,000. A dramatic 4BR contemporary on 1.7 acres perched on the edge of Fillipini Pond sold for $350,000. An old boarding house on almost 80 stunning acres closed for $285,000. A very quirky property — a 25,000 sq. ft. "home" on 33 acres, originally on the market for $1.59M sold for $500,000.

These sales, along with others that are similar, sold well above the median sales price, and collectively will pull the average up. This may make it appear that prices are firming, but they're really not. In fact, the prices for these properties are sharply down from where they would have been at the peak, and likely below where they may have sold 12 to 18 months ago.

I expect we're going to see more bargain buying in the "better dress department", as buyers stay on the lookout for great deals. Pricing property, which is already challenging, will likely become more difficult, especially for more unique or special properties. (Note: I'm not talking 'quirky' here, but about those that are truly special.) For example, the Emerald Green and Fillipini lakefront sales would indicate that the market price for a 4BR lakefront home might be $350,000 to $400,000.

But what about a similar sized house on Wolf Lake, with a more desired rustic mountain lake setting? (4BR houses on Wolf Lake can be very tough to find.) Or hilltop contemporaries with wide panoramic views. They're also in very short supply. Demand is such in both cases, that the houses don't have to be "distress priced" to move. I'm sure that the sellers of these houses have taken much less than they wanted, but they didn't go at fire sale prices. They didn't need to.

But the number of those truly special and unique properties, and the buyers for them, are quite small. Most properties, particularly at the upper price points, will need to keep coming down until some of those value shoppers start chirping, "Wow, what a deal! It's amazing that we can get (that much acreage) (that kind of lakefront) (that large a house) for that price." There's a new value paradigm afoot, and sellers are going to have to adjust to it.

Comments

[Steve Sullivan]

Take a look at the new home sales data just released.

276k. Way down.

Analysts had predicted in the mid 3's - which was poor.

276 is terrible.

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10:03 AM

Jul. New Home Sales: -12.4% to 276K vs. 333K expected, 315K (revised from 330K) prior.

Months' supply 9.1 vs. 7.6 prior.

[Steve Sullivan]

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aMPHz7m3ZYq0

[David Knudsen]

Steve, I'm not surprised by the new construction numbers. Another indication that demand is very low. And supply keeps increasing. It's Economics 101 — low demand + high supply = lower prices. I expect that sellers all over the country are in freak-out mode. They just can't sell their houses. Only a small number really have the flexibility to keep cutting prices until they find a buyer — someone with a small mortgage, or owns their house free and clear or an estate situation without a large mortgage payoff where the heirs just want to move the house. The banks have become tougher on short sales where the sellers have other assets.

It's easy to look at this in the abstract, with "sellers" as a faceless mass. But there are people with lives behind these sales. These days, those lives may have spun into a financial tailspin. Working in real estate used to be 'happy happy'. But it isn't now. Almost every other sale I'm involved with involves a sad story. Sometimes I almost feel like the grim reaper. As a buyer agent, my interaction with sellers is relatively minimal. Listing agents face it much more directly every day, working with sellers who desperately need to get out of their houses.

[Reg]

Hi Dave. I take issue with the term 'better,' as applied to real estate. The properties you're describing are more expensive, undoubtedly, but there isn't really a 'better' to 'worse' spectrum. I think that's a troubling message to send.

[bluelite]

Dave,

Isn't Fillipini Pond over run with vegetation? Does that take away from value?

[David Knudsen]

True. Fillipini isn't the deepest, clearest lake in the county. And that certainly does affect its value. Bue even taking that into consideration, that was a pretty remarkable price for that house.

[mnc]

David, has anyone addressed this problem in the last year or two? It's a rather formidable foe.

http://www.sc-democrat.com/news/09September/07/chestnuts.htm

[ar]

"New Value Paradigm" should be nominated for Best Euphemism Of 2010. Sounds so much nicer than "if you bought during the boom, you paid 100 grand or more too much."

[David Knudsen]

Thank you for the nomination. I'm honored and humbled. Will it go into the Hall of Fame of Euphemisms, along with 'Death Tax'?

[JB]

Hows about mildly "elevated taxation" for "RE tax rip-off"

[nick]

I dunno... I'm thinking it will face competition for the AR branded "I Got Creamed, Wait Did I Mention That Already? Oh, sorry..." euphemism, just on a sheer quantity level.

[The House I Fell in Love With]

A Detailed Analysis At Projected Home Prices: A Look At Underlying Supply And Demand Forces by Tyler Durden at ZeroHedge, a hedge fund trader from the pits.

http://www.zerohedge.com/article/detailed-analysis-projected-home-prices-look-underlying-supply-and-demand-forces

[ar]

Oh, hey, there's Nick The Economist chiming in with a gratuitous dig. I'm pretty sure, Nick, that I didn't get hosed anywhere near as bad as you did on that castle out back of the Mobil station, which may explain why I'm way less sensitive than you are about the whole thing. So I'm not going to take offense. In fact, I'm going to be neighborly and give you a tip on credibility preservation: bad idea to call yourself (on your LinkedIn page) a "Columnist" for a specific publication that actually happens to list, at the bottom of its home page, the names of each of its designated "Columnists" -- a list that doesn't include you. As in here: http://www.huffingtonpost.com/

Better to come up with some less easily verifiable, and less objectively false, whopper to pump up the old ego when you start feeling blue about all that moola blown on your very first real estate purchase.

[Felix Sanders]

Now... now boys.

Be nice and play together or Dave will yank your hides off the network.

Felix Sanders

[rod]

of course, ar, it could be said that hiding behind two small letters while disparaging anything real estate just because you got creamed is no more enviable.

Although your public healing has been fascinating to watch.

[nick]

Ooh look I have a stalker. Hi there.

*yawn*

Come visit, people can be so aggressive in fake internet life, nothing wrong with aggressive discussion/argument, but umm... do try to distinguish between discussion of the topic at hand (ie real estate, sullivan county, etc) and insane creepy wierdo on a message board. Next time you're lurking in my trees just come say hi. I'll give you a beer.

[ar]

Of course, rod, you're right --having that third small letter really makes all the difference.