A Ceiling for Seattle-Area Long-Term Appreciation Rates

Chihuly chandelier in the Mercer Mansion
photo source: Public Records
(Look familiar?)

The Puget Sound Business Journal and the Seattle Times both spent some print this weekend on the tale of a mega-mansion on Mercer Island (1631 Roanoke Way, 98040) that sold last month for $12 million.

Of course, the angle of most of the local press I saw on the sale was the big “discount,” of the home, which was originally listed way back in 2004 for a cool $40 million. I thought I’d take a slightly different look at the story.

So what we have here is a prime piece of lakefront real estate—1.5 acres—on Mercer Island with stunning views of the lake and the Olympics. Definitely qualifies as the kind of land they’re “not making any more” of. On this land, we’ve got a 23,000 square foot mansion. The kind of home that people buy when money is really no object.

During the time it was up for sale, although it was not (as far as I can tell) listed on the MLS, it did receive a nearly endless stream of free press, with story after story after story after story after story after story after story gushing about the home. Oh, and did I mention that after purchasing the home for $2.5 million in 1989, the previous owners did a multi-million-dollar remodel in 2001 (the 2006 Wall Street Journal article refers to “their recent eight-figure investment”), nearly tripling the home’s original size?

So what kind of long-term appreciation rate does the combination of super-exclusivity, gobs of free advertising, and the mother of all home improvement projects get you? 7.78%, apparently.

Mercer Mansion Appreciation

Personally, given the above factors, I would consider 7.78% to be something of an absolute ceiling on what one would expect for long-term appreciation on a more average home in the Seattle area. In fact, given the massive size of the remodel, I’d say it’s probably safe to assume that half or more of this home’s appreciation is due to the increased size of the home.

Just something to keep in mind as you’re house shopping. Many Seattle-area homes may be cheap today compared to 2007, but they’re often still a bit overpriced compared to a reasonable long-term appreciation rate of 3-4%.

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

38 comments:

  1. 1
    bob says:

    SO … for the average family home or condo, should folks consider the default home appreciation to be +/- 1% the inflation rate? It seems reasonable to me – but a lot of folks (including someone this weekend) believe it can be double the inflation rate. Is that because they are ‘market-timing’?

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  2. 2
    GoneFromSeattle says:

    2.5M purchase price ( in 1989 $s) + 10M upgrades (in 2001 $s) —> $12M ( in 2010 $s) and you conclude that this appreciated at a pace of > 7% a year?

    7% appreciation would be spectacular (your 401K didn’t get that rate) but it didn’t happen. These people lost nominal money on their investment, and a lot more in real money.

    I think the ceiling you’re deriving from this example way overshoots the story.

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  3. 3
    David Losh says:

    This home is actually a business plan. You’ll notice the seller, and buyer are prominent business people in the Seattle area.

    It’s like having a Highlands address, or Beverly Hills, Park Avenue. This is a measure of success, it’s an advertising cost.

    There is no “free” press about it. This property has been handled by a publicist.

    One point that I would like to make is that this property probably wasn’t on the NWMLS with pictures on redfin. The buyer pool is extremely small. In those circles this is a coveted property.

    This property is an illustration of your home purchase. You are in a very small buyer pool. Your home purchase is a business plan. You should be networking in the circles that will get you to your financial goals, because that’s what a Real Estate is all about.

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  4. 4

    I wouldn’t really look at appreciation on an asset like this to be much of a gauge of anything.

    If you do just look at appreciation though, I wonder how much better they would have done putting $2.5M into median Seattle houses in 1989, and then the same millions more for the remodel into more median houses, and then selling them all in 2004 when they put this place on the market?

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  5. 5
    The Tim says:

    RE: GoneFromSeattle @ 2 – Yes, that’s why I said right in the post:

    I’d say it’s probably safe to assume that half or more of this home’s appreciation is due to the increased size of the home.

    Also, to my knowledge it is a pretty well-known fact that most home improvement projects are money losers when it comes time to sell the house. I don’t see why a $10M remodel would be any different.

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  6. 6

    RE: The Tim @ 5 – It might be worse because anyone buying in that range might want to do something completely different, and thus the improvements might end up just being really expensive staging. ;-)

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  7. 7
    RoflCatDown says:

    RE: The Tim @ 5 – I can’t speak for other folk, but unless I were buying something truly historic I don’t think I’d really want to live in a $12 million dollar home with decorating tastes that say more about the previous owner than myself.

    AKA Would it be cheaper for me to buy a couple of properties, tear the existing structures down, and build new for my own look at the same price as this buying this behemoth and remodeling it?

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  8. 8
    David Losh says:

    Well, I can say that there have been times we have gone into perfectly beautiful homes to rip out the presence of a previous owner’s taste.

    One of the tricks is to be trendy, but the watch word is forward thinking. Some design is timeless, this house, though, lacks elegance, from the pictures I can see. To each their own.

    Like I said, we are talking about it. Lot’s of people are aware of the house. It’s a prestige property that needs work, but in time it may have true value.

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  9. 9
    Dave0 says:

    During the time it was up for sale, although it was not (as far as I can tell) listed on the MLS…

    It was listed on the MLS, I remember looking at it multiple times, but the address was never disclosed. It always just said “north-end Mercer Island.”

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  10. 10
    TheHulk says:

    Choosing this house as the “ceiling” of appreciation rates is a little misleading. First of all, only a very small number of people (I suspect less than 10) at any given time are actually interested in buying such a house. With the market so limited, the sellers depending on how desperate they are will have to adjust to current expectations. I strongly suspect the previous owners were desperate to get rid of this white elephant and hence did this at a steep discount. The 2.5 M purchase price + the multi million remodel implies they barely broke even (most likely lost money when you take into account transaction costs).

    Besides all that, I do get the meta point you are making here. Prices *seem* to be at a steep discount when you compare to 2007. When I look at a house price (at least houses in areas I am interested in) I like going back 10-15 years in time and then adding in a 3% or so annual non compounded appreciation. The disconnect seems to be somewhere between 10% (the house last sold in early 90s) – 25% (the house last sold in this decade) off current list prices.

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  11. 11
    David Losh says:

    RE: Dave0 @ 9

    I think you’re right, I’ve seen a lot of pictures of the place over the years, so it must have been listed.

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  12. 12
    Sniglet says:

    This post raises a very interesting additional question: What would be a normal real-estate appreciation rate be in a deflationary environment of falling incomes, stock prices, and commodities?

    To put this question another way, what would happen to real estate prices with a Dow at 8000, 6000 or 4000? Would real-estate prices appreciate significantly with a Dow 20,000?

    Is there any type of correlation to real-estate and the broader economic trends, or are the two mutually exlusive?

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  13. 13

    RE: Sniglet @ 12 – Clearly the upper end of the market is affected pretty heavily by the stock market. Those people making offers on $1M+ houses probably don’t have all their money in the bank, and when the market goes down not only might they no longer have the funds, but they clearly would not feel as wealthy.

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  14. 14
    Drshort says:

    RE: Sniglet @ 12

    I think you need to consider population trends when considering long term appreciation rates. A growing population in an area will create upward pressure. A declining population will do the opposite (think detroit). This, obviously, is in addition to the other factors like income, etc..

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  15. 15

    RE: Sniglet @ 12

    Exactly

    I was thinking the same thing Sniglet. It’s like saying, geeeeee….we sold 10% more autos than last year, but the year before that, sales plummetted 50% for cars. I’d add the 10% short-lived sales YOY was a lion’s share put off rental/lease car inventory too [probably because the auto stock sat relatively unused in their lots the last couple years].

    The jet-set elites that can afford this house probably saw at least 3-4% wage increases over the decades to date too…..while the mainstream bottom 95% of household incomes were flat or downward the last decade. That’s why lower interest rates don’t help housing anymore….even at 4% interest, who qualifies?

    Article in part:

    “…No one can remember mortgage rates as low as they are now. The thirty-year rate is at 4.85%.

    Mortgage rates could go to zero and it would probably not help the housing market. One obvious problem is that lower rates do not improve people’s credit ratings or access to cash for down payments, but the trouble is more complex than that.

    While some data shows that housing may be finding a bottom, it is likely that very few people are willing to gamble their own money that the perception is true. If unemployment rises, housing prices could continue to fall. If foreclosures rise, the value of homes could tumble anther 10% or more. Of course, people thinking about buying a house have to be concerned with their own jobs. Low mortgage rates don’t matter to the unemployed….”

    http://247wallst.com/2009/03/27/pushing-mortgage-rates-to-zero-wont-help-housing/

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  16. 16
    Sniglet says:

    RE: Drshort @ 14

    I think you need to consider population trends when considering long term appreciation rates. A growing population in an area will create upward pressure.

    This is a falacy. There is no direct correlation to population and housing prices. The fastest growing areas in the country have experienced some of the largest price declines in the last few years. We are seeing real-estate prices, and rents, drop in many regions even though the population hasn’t decreased one bit.

    The reality is that demand for accomodation is a highly flexible variable and is predicated far more on incomes, and an individual sense of economic prosperity, than it is on population.

    When people become unemployed they will downsize from a 4 bedroom home to a 2 bedroom rental, or even move in with relatives. When people are worried about their job security they will be very reluctant to take on large debts for bigger homes. Heck, there are people now renting out rooms in their homes to make ends meet.

    Taken to an extreme, you could have an explosion of population into tent cities without having any appreciable impact on real-estate prices through increased demand.

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  17. 17

    By Sniglet @ 16:

    RE: Drshort @ 14

    I think you need to consider population trends when considering long term appreciation rates. A growing population in an area will create upward pressure.

    This is a falacy. There is no direct correlation to population and housing prices. The fastest growing areas in the country have experienced some of the largest price declines in the last few years. We are seeing real-estate prices, and rents, drop in many regions even though the population hasn’t decreased one bit.d.

    It’s not a falacy, it’s just incomplete. That’s because population is only half the supply/demand equation. Areas with the fastest growing populations probably also had the fastest rates of new construction, and that new construction probably over-shot the actual need by higher amounts.

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  18. 18

    RE: Sniglet @ 16

    Sounds Like You Do Adhere to Population Density Clearly Impacting Lowering Housing Prices

    From Five Short Blasts, Pete Murphy, page 110 in part [The Theory]:

    “….As population grows ever more dense, the unemployment gets worse. Poverty is becoming a serious problem now. The number of people with no health insurance is growing as employers end their health benefits. The government is beginning to run a huge deficit, as social programs become larger and more expensive. But economists have a solution. We need more growth!….”

    LOL

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  19. 19
    Sniglet says:

    RE: Kary L. Krismer @ 17

    population is only half the supply/demand equation. Areas with the fastest growing populations probably also had the fastest rates of new construction

    It would be more accurate to say that areas with the fastest population growth are generally the ones with the greatest economic expansion. Populations will gravitate to where the jobs are. Thus, housing prices will rise in these “growth” regions as people become increasingly confident with their personal economic prospects.

    Over-construction is only a small contributing factor to eventual price declines. For example, you could have price declines even if there had been little or no construction for a long while if there were a sudden rise in unemployment. At the extreme, you could see vacancies rise even in places with low per-capita housing ratios if many families started living in tent cities as they lose their jobs.

    It is income levels, and their direction, which are FAR more important for determining the direction of housing prices than anything else.

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  20. 20

    RE: Sniglet @ 19 – I would disagree. If there had been no houses/condos built in King/Snohomish/Pierce counties since 2005, we’d probably have medians over $600,000 even today (and that would probably be a number more than 25% off the peak).

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  21. 21
    Sniglet says:

    RE: Kary L. Krismer @ 20

    If there had been no houses/condos built in King/Snohomish/Pierce counties since 2005, we’d probably have medians over $600,000 even today (and that would probably be a number more than 25% off the peak).

    True. If demand is increasing and supply remains constant prices will rise. However, that “demand” is generated by economic growth, not population. The economy had been expanding in King/Snohomish in recent years, which created more demand (and an increase in population).

    Just look at it another way, if the major employers of the Puget Sound layed off 20% of their employees in the next year it would have a negative impact on housing prices, even if the population remained the same (or even grew).

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  22. 22

    RE: Sniglet @ 21 – I wouldn’t disagree with that, I’m just saying that once someone puts millions of dollars into some raw land, a lot more into utilities, roads, etc., and then even more into actually building a house, that if things turn south they will sell if for a lot less than they were planning when they started, and even less than what they have into it. And that behavior, if widespread, can really drive down prices.

    It’s sort of like the “dumping” of electronics, where designing and building the chip plant (and related stuff to actually make product) can cost a lot of money, but when everyone else gets their chip plants up too they’ll sell the electronic component for a price where building the chip plant in the first place wouldn’t make any sense.

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  23. 23
    per_se says:

    I don’t think it’s population size but household size that is the factor.

    Economics becomes a factor into the household size since, as Sniglet pointed out, if conditions worsen people end up staying at home longer, getting roomates, etc. When times are good people are more inclined to look for “their own place”

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  24. 24
    deejayoh says:

    I don’t think I agree with the premise.

    This property is so specialized and different than most properties on the market that I would not use it as any barometor or indication of market health. There are only a handful of potential buyers who could afford it so saying that the gain on this house reflects the market is kind of like saying that Maybach sales are indicative of what is happening in the broader auto market. There really is no relationship. It’s not even the same product.

    Remember, the rich are like us. Only different…

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  25. 25

    RE: deejayoh @ 24 – And it’s not even the best (or at least most valuable) house in the area, which presumably is owned by Bill Gates.

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  26. 26
    someone says:

    Hmm. Reminds me of another Mercer Island mansion that sold last year…

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  27. 27
    Netspirit says:

    Bellevue #4 in CNN’s most beautiful places to live: http://money.cnn.com/video/pf/2010/07/09/best_places_bellevue_wa.moneymag/index.html

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  28. 28
    Sniglet says:

    Another interesting question this post raises is whether there is a floor to Seattle real-estate price depreciation? What is the maximum level of price decines that could happen? I am going to stick with my oft stated view that it is possible (and in my view probable) that average Seattle real-estate prices could fall over 80% from the peak (which is something like 75% lower from where prices are now).

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  29. 29
    mark says:

    RE: Kary L. Krismer @ 25
    Doesn’t Bill Gates live in Medina? Paul Allen lives on Mercer Island! Or does Medina count as area?

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  30. 30
    mark says:

    RE: deejayoh @ 24

    Got to say, the first time I’ve ever heard of a Maybach. Has anyone around here ever seen one in real life?

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  31. 31
    David Losh says:

    RE: per_se @ 23RE: Kary L. Krismer @ 17RE: Sniglet @ 16RE: Drshort @ 14

    Real Estate development is it’s own job center. Like Henderson Nevada, or West Port Washington, a development trend can create it’s own hysteria. People move into a growing community only to find that the majority of employees work in the construction industry.

    Miami had the promise of an aging population coupled with immigration that would raise the demand for water front condos. The problem was that both demographics are on limited incomes.

    That’s why you see people paying $212K for houses in South Everett. We all know it’s just not worth that kind of money, and $120K is probably too much, even though it cost $160K to build. It’s South Everett, with a questionable lower wage base that has thousands, if not a million, of these new construction disasters waiting to happen. Even if you rationalize the proximity to Seattle then you have to figure that Puyallup has the same set of messes.

    It’s important to concentrate on value when owning a property rather than price.

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  32. 32
    David Losh says:

    RE: Sniglet @ 28

    Seattle has a floor to Real Estate pricing. 1998 looks like the floor. If we hit that set of pricing for housing units we will have a more robust economy.

    Let’s remember that economy is money spent in a broad swath.

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  33. 33
    2kt says:

    RE: Sniglet @ 28

    And this number, 80% decline, comes out of what? Your great prop statistical model, or the usual place, which you seat on?

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  34. 34
    Snigliastic says:

    By mark @ 30:

    RE: deejayoh @ 24

    Got to say, the first time I’ve ever heard of a Maybach. Has anyone around here ever seen one in real life?

    No, but here’s a great story about a guy driving a Maybach through a Burger King.
    http://www.golf.com/golf/tours_news/article/0,28136,1578503-0,00.html

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  35. 35
    Ron Nelson says:

    Sniglet-

    The Price of the House is Still the Payment every Month..

    If Interest rates are 4% Versus 10% thats a Whole 600. Dollars a Month Difference on Borrowing a 100,000. Dollars.

    I was pricing Today houses in Boise Idaho…. Amazing that Currently you can easily get houses there that would cost you easily 4-500,000. here for 150,000. in Boise Idaho — apparently or at least people are asking 1100.-1400. rent for those same houses in Boise you can pick up for a House Payment of $800. dollars a Month. Sure wish that would happen here sooner than Later!

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  36. 36
    Ross says:

    It doesn’t really make sense to express a appreciation ceiling in nominal change; it should be inflation adjusted. Another way to say this — if the economy gets to say 10%/yr inflation rate, then it will be very easy to see approx 10%/yr appreciation on home prices. Probably we’ve seen inflation around 3% over the last decade, so the real return is closer to 4%/yr.

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  37. 37

    By mark @ 29:

    RE:
    Doesn’t Bill Gates live in Medina? Paul Allen lives on Mercer Island! Or does Medina count as area?

    I would say that all of King County counts as “the area.” But if you want it more restrictive, Lake Washington waterfront.

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  38. 38

    […] Seattle Bubble did a nice analysis using this sale to set a ceiling on Seattle-area real estate prices. […]

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