Raising Prices to Entice Buyers—wait, what?

Here’s an interesting story that popped up over the weekend and had people emailing me and discussing it in the comments and forums. A downtown luxury condo building named Escala is having trouble moving the last 70 units (of 270, so roughly 25%), so to try and juice up their sales, they’re raising prices. Yes, you read that right: raising prices.

Developer Lexas Cos. said this week that on June 5 it will raise the asking prices 3 to 7 percent for about 70 unsold units that have been on the market since last spring.

Another 22 units that will be released for sale May 1 also will have higher price tags.

Lexas principals John Midby and Eric Midby said prices are going up partly to send a message to prospective buyers: If they’re waiting to buy until prices drop, they’re reading the local market wrong.

And they have until June 5.

“We look at the underlying fundamentals and see a different picture than those that have been scared off by the national trends,” John Midby said. “It doesn’t match the psychology that’s pervasive in the market, even in Seattle.”

Seattle’s economy is strong, he said. Housing prices here have held up fairly well while those in much of the rest of the country have plummeted.

Stupid? Arrogant? Crazy like a fox? Or perhaps… genius?

Even our allegedly unbiased friend Glenn Crellin at the Washington Center for Real Estate Research doesn’t see the logic in this move:

“We are trying to create value for our current buyers and take [potential buyers] off the fence,” Midby said of the price increases.

But Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University, suspects those are not the only reasons.

“It is surprising that they are increasing prices to that degree unless there’s something else going on,” he said.

Lexas may feel an urgent need to move units, Crellin said: “A developer has to sell them because the carrying costs on a project that size are enormous.”

High-end downtown condo projects are particularly vulnerable to the real-estate market’s slowdown, he said, because many prospective buyers who are looking to move downtown from big, expensive suburban homes are having more trouble selling those houses quickly.

Matt Goyer over at Urbnlivn has some additional analysis:

Here are the number of $500,000 to $5 mil condos sold over the past few years in downtown:

2005: 134
2006: 129
2007: 207
2008: 45 so far

Currently there are 189 units in that price range active on the MLS. There are certainly more than this because not all new construction inventory is in the MLS.

So it looks like downtown Seattle is track to sell about as many luxury condos as it did in ’05 or ’06, which would mean about 90 more this year. Apparently Escala thinks that pretty much all of those will be from them. Good luck with that.

On the other hand, an article in the Puget Sound Business Journal this weekend claims that the condo supply downtown is “expected to dry up.”

With 40 condominium projects in the pipeline for downtown Seattle one might expect a glut of new units on the market. But tight-fisted lenders and hesitant buyers, both reacting to the nationwide credit crunch, have severely hobbled the once high-stepping market.

The pace of development has slowed so sharply that local experts predict a shortage in 2010 that could drive prices up. One consultant forecasts delivery of just 189 new units that year — down from an average of 1,100 anticipated in each of the prior three years.

Behind the prediction: No new condo project has broken ground downtown since the last two buildings — 275-unit Escala and 204-unit Equinox — got under way last summer, said the consultant, Dean Jones, president of Realogics Inc., a Seattle-based condo research and marketing firm.

Since it can take as long as two years to build a high-rise condominium tower, the dearth of new construction is pushing delivery into 2011 — assuming those projects, which represent more than half of the 40 in the pipeline, can find financing.

So it looks like that nifty rendering of Seattle’s 2010 skyline might be a bit off. So are the developers at Escala on to something, or off their rockers? I suppose by the end of the year we’ll know.

(Eric Pryne, Seattle Times, 04.26.2008)
(Matt Goyer, Urbnlivn, 04.27.2008)
(Jeanne Lang Jones & Kirsten Grind, Puget Sound Business Journal, 04.25.2008)

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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. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

48 comments:

  1. 1
    jimmythev says:

    I saw that in the Seattle Times… I was shocked! I will be waiting for these units to go on firesale for $300k next year.

  2. 2
    old timer says:

    Sounds like it could an attempt to prop the valuations on units already sold.
    Those may not yet have permanent financing in place, and with lenders becoming skittish, this may buy some time and bring some permanent financing with the valuations ‘assured’ by the higher prices on the unsold units.

  3. 3
    Affluent Bitter Renter says:

    “The pace of development has slowed so sharply that local experts predict a shortage in 2010 that could drive prices up. One consultant forecasts delivery of just 189 new units that year — down from an average of 1,100 anticipated in each of the prior three years.”

    Remember the rule – lots of condo projects being built reflects builders’ confidence in strong condo price appreciation, proving that It’s A Great Time To Buy. No condo projects being built means that there will be a future shortage of condos, also proving that It’s A Great Time To Buy. No matter what the market condition is, It’s Always A Great Time To Buy!

  4. 4
    Alan says:

    This is a classic sales technique call “the takeaway.”

    http://www.startupnation.com/forums/5765/14/1

  5. 5
    Tsuru says:

    Coffee is for closers.

  6. 6

    […] Affluent Bitter Renter says on Seattle Bubble: Remember the rule – lots of condo projects being built reflects builders’ confidence in strong […]

  7. 7
    Olaf says:

    I’ve noticed the same thing with a couple of single family houses that are sitting on Redfin. It’s truly bizarre to see: while other unsold houses in those neighborhoods cut their asking price, there’s one or two that respond to the lack of buyers by HIKING their price.

    it’s sort of like a toddler throwing a tantrum.

  8. 8
    s.data says:

    There may be a lull in the number of condos breaking ground, but I’m waiting for all the option arm and interest only loans to reset in the near future to drive many units onto the market. I don’t need new projects to be optimistic, I have faith in the poor choices made by banks and borrowers over the past couple of years.

    Also, why no mention the two tower project at 5th and battery that should be breaking ground by the end of this year?

  9. 9
    johnnybigspenda says:

    its a cheap tactic to knock a couple of prospective buyers off the fence… right now there is no pressure to make a decision (maybe the prospect of increasing interest rates eventually… but we haven’t seen that yet). Sometimes people need the pressure … it makes it easier for the buyer to rationalize why *now* is the time to buy as opposed to wait and see mode.

    Plus, as everyone knows, buying a house is not a straight up ‘calculation’… and the logic that is applied is balanced somewhere between fear and greed, not to mention a wife who wants to make babies or yet another annoying rent increase or whatever… lots of factors that are weighted according to the buyers preferences.

    It thinks its just a cheap tactic to give a nudge to a few who were in wait and see mode. In the big picture, they will also be in a position to offer ‘deeper discounts’ after the price increase (so that buyers feel that they got a good deal behind the scenes even while the sticker prices have been going up). A call to action if you will… not the worst strategy.

    Not sure its all that effective if there are equivalent alternatives available (who are not going to be raising prices)… this would be only for the Penthouses or equally rare properties.

  10. 10
    Slumlord says:

    Perhaps the developer is really trying to improve the assets on their balance sheet. This could have nothing to do with selling units faster at all.

  11. 11
    vboring says:

    it is also odd that in an article discussing condos there was no mention of the recent changes to condo loan availability from the GSEs.

  12. 12
    yeslerhill says:

    I tend to agree with Slumlord. They’re just trying to keep values of already bought units up, and probably to help them somehow maintain their financing?

    As a life long renter (well, for the 30 years I’ve an “adult”). I look forward to the next year, 18 months when all these condos and townhouses end up as rentals! Whee!

  13. 13
    EconE says:

    I came across a post on housing fear that was pretty interesting.

    http://housingfear.blogspot.com/2008/02/my-condo-development-has-been.html

  14. 14
    EconE says:

    Now all the people that bought presale…(perhaps in order to flip?)…can look on the MLS at the new Escala listings and brag to all their friends how much more their unit is “worth” than they paid for it and dream of the toys that they will buy with all of the sweet sweet profit from their flips.

    They’ll feel soooo smart that they would never never ever consider not closing on their contract and walking away from their deposit.

    And then they’ll end up losing a bunch of money like many of the other downtown condo flippers.

  15. 15
    AndySeattle says:

    An emotional tactic that will appeal to the emotional buyer. I swear more often that not that the people I hear that are buying right now are all doing it for emotional reasons. The pragmatic buyer is extinct.

  16. 16
    Slumlord says:

    Extinct or waiting. There will be a good time to buy again, but maybe not for another 2-3 years.

    In my opinion, some locations offer a lot of long-term upside potential. These would be within walking distance of the light rail stations or in areas with excellent bus service. Gas will continue to get more expensive and the suburbs may die, but people will still need a way to get around.

  17. 17
    AndySeattle says:

    Extinct or waiting. There will be a good time to buy again, but maybe not for another 2-3 years.

    Good distinction. Waiting is probably more appropriate.

  18. 18
    vboring says:

    Slumlord,

    I agree. Close in communities with good mass transit are worth keeping an eye on. Beacon Hill and the Central District will have their days in the sun, eventually. If I’m still here in 2-3 years, that is where I’ll be looking to buy.

  19. 19
    david losh says:

    Some people think there is no other place to live than in the city center. Some others want to be walking distance to work and amenities. Our down town core is a horrible place, but it is what it is.

    The development of South Lake Union is bringing jobs. Bio tech and e-commerce jobs are a wave of the future, as I understand it. In my tirade against our city government my opinion is that the supply of housing units and commercial space in Seattle is artificially low. Demand is what has pushed up our pricing more than anything else.

    Town houses have been selling for way over inflated prices for years now. Ballard and Fremont should have been developed into mid rise condo and commercial. We still have a lot of catching up to do for in city living.

  20. 20
    alex says:

    [The Tim] – “So it looks like downtown Seattle is track to sell about as many luxury condos as it did in ‘05 or ‘06, which would mean about 90 more this year. Apparently Escala thinks that pretty much all of those will be from them. Good luck with that.”

    I wish we could post the comment above at that company’s office.

    Btw: have you all done your part in bringing affordable housing about by discouraging a tempted friend from buying??

  21. 21
    deepcgi says:

    This trick works pretty well on my 3 year old and but not very well on my 7 year old. The difference here is that I actually know it’s purely psychology, whereas these folks believe they can force this Titanic to make a u-turn merely with their force of will.

    Well, good luck with that.

  22. 22
    deejayoh says:

    Now all the people that bought presale…(perhaps in order to flip?)…can look on the MLS at the new Escala listings and brag to all their friends how much more their unit is “worth” than they paid for it and dream of the toys that they will buy with all of the sweet sweet profit from their flips.

    They’ll feel soooo smart that they would never never ever consider not closing on their contract and walking away from their deposit.

    I think you may be on to something there EconE. This may be more about keeping the sales they have than it is about making any new sales. Well, actually – they probably have to find at least one new sucker.

    Like that Jack-in-the-Box ad from a long time ago – the one with the “food taster, $25k” kid at the trade show. Jack asks him: “Any sales?” Kid replies: “only need one”

  23. 23
    Chris says:

    New Home Trends reports they “sold” 51 units in May 2007, which must have been the earliest deposit month, and 23 in the intervening months since, through 3/24/08. that said, data on that source is culled from the builders/developers, so who knows how accurate it is.

    I’d guess this tactis is more about retaining existing deposits than finding new buyers. they can hope credit gets looser again and pray for a better conditions in a few months.

  24. 24
    Slumlord says:

    David,

    I agree that there is room for improvement on the civic side of things, but I have a more favorable view on how things currently are. Downtown Seattle, and Bellevue too, have made major improvements in recent years. In my opinion, they compare well with many cities. Even Renton is becoming a real city (albeit on a smaller scale).

    Two places that appear to be laggards are Everett and Tacoma. I qualify my statement by saying that they “appear to be laggards” because both have made improvements in recent years, reversing their long-term declines.

    One major tool that local cities seem to be overlooking is schools. Having strong schools in cities attracts families and keeps them close to the jobs and out of the dying suburbs. Each downtown area should include elementary schools in walking distance to their towers of condos.

    On the subject of affordability, I see the problem as a historic legacy. If we had been building condo towers rather than suburbs between the 1950s and 1990, then there would be well-designed but older buildings on the market today. These would offer the location amenities of newer buildings but at a lower price. Some of today’s aspirational condos will be affordable to people with normal jobs in 20-30 years.

  25. 25
    david losh says:

    If the city governement would have allowed down town development twenty years ago Ballard and Fremont could have been kept for mid income buyers.

  26. 26
    Slumlord says:

    True. I worry that they risk repeating that mistake by keeping the building heights too low around the light rail stations.

  27. 27
    Ray Pepper says:

    Hey raising those prices has a Positive side as well. Every 1000.00 more you pay 22.50 comes back to you from 500 Realty……

    Theres always a bright side. Crank up those Prices!!!!!!!!!!!!!!!!

    Ray Pepper
    http://www.500Realty.net

  28. 28
    softwarengineer says:

    NO ONE’S IMMUNE

    We all wish we’d pick nursing careers [or biotech jobs…lol] or teaching jobs, then the growth causes hyper-inflation and general wage deterioration, but by gosh, I’m immune from the recession, my job depends on numbers of population in Seattle.

    I don’t want to pop your bubble, but 50% of our medical cost reimbursements is totally dependent on Medicaid and other government support that the other 90-95% of us working that aren’t teachers or nurses pay taxes to support. Defense props up 50% of Seattle’s aerospace income and if that gravy train is butcher axed soon….

    No, none of us are immune from the “Seattle Stagflation”, even if you’re lucky enough to have a job. Been to an empty restaurant land movie theater lately on a prime weekend night? Its grim out there right now, very grim.

  29. 29
    david losh says:

    I also think there was a lot of missed opportunity along the Light Rail line.

    The thing about Seattle’s economy is that it is stagnent and has been for many years. The article about the Clise Family is a good example. It’s a thirty person corporation controlling 13 acres of prime Real Estate in down town. Did you know they exsisted?

    The empty commercial places are in my opinion a part of Seattle’s charm. We gauge Seattle’s vitality by small town values; Jobs. We look at Safco, Boeing, now Microsoft, or Starbucks as local boy makes good.

    The money here is Seattle Washington goes back to the timber industry. Big builders didn’t come to our town they were already here. We keep a pretty tight reign on anything that goes on in or around our town.

    So yea people don’t go out to eat, they stay in, stay close to family, and go to church in bad times.

  30. 30
    Ben says:

    Ray – that is the most blatant, annoying attempt to disguise advertising as a comment that you have ever done, and that is saying something. You already have your name out there, but now whenever you comment like that it makes you look worse.

    And I have no problem with your business model or any of that crap. I recall that once you thought that you were fighting against the man or something whenever you commented. You can do whatever you want with your business, and I might be able to bare you having a way bigger sig than everybody else, but please actually make a meaningful comment.

    Tim – apologies for making it sound like I own the place, but Ray really is ruining the feel of the blog IMO.

  31. 31
    Ben says:

    On the topic of the article, I have seen this behavior in several properties on the Eastside as well. Prices will be dropped and then raised back and then dropped for a while.

    One theory I have is that this is done so that they can advertise price drops constantly without actually dropping the price over time. But this only works for people who don’t use Redfin.

  32. 32
    Jackson Wallace says:

    Everett is smack on the receiving end of the convergence zone, so they get the crappiest weather around, and they are full of white trash and all other trash smoking meth, growing weed in closets. The police up there are the kind Seattle use to have, buttinski puritan party-killers. If you want to live with Beavis and Butthead, go to Everett and grow a mullet. If you want to go to the only part of WA that resembles S Central LA, then move to Tacoma. In the 90s, you used to hear about nearly as many drive-bys there. Tacoma went through quite a rennaissance, but with a big territory of featureless grid, Tacoma just can’t come all the way back, and there are a ton of foreclosures hitting down there. Tacoma is slipping back into poverty. And no matter how great downtown looks in the day, at night it is deader than a doornail. You gotta drive miles to get to the waterfront amenities, which are some. I looked hard at Tacoma – its done. Same with White Center – going back down. The boomers will get scared watching their retirements evaporate, but what we really need to depress prices is a good earthquake.

  33. 33
    novice says:

    Maybe the condo developer has been reading rosy outlooks for the Seattle real estate market from the Wall Street Journal. See the following link: http://s.wsj.net/public/resources/documents/retro-HAGERTY.html

    NB: look at the source of data

  34. 34
    Buceri says:

    Who is screwing with the inventory???

  35. 35
    Ray Pepper says:

    Hey Ben!!! Loosen up! It was meant to be funny. If you cannot detect sarcasm then you are beyond anyones help on this blog! I will add to the education of this blog when I see fit. Until then……..You keep pumping RedFin. A great company as well as MLS 4 Owners. Oh yes, Iggy’s House as well.

    Ray Pepper
    Broker
    http://www.500Realty.net

  36. 36
    david losh says:

    Everett and Tacoma are great examples of where things went wrong. When home pricing in those two areas began reaching in city of Seattle prices there was a problem.

    An investor I know sold his properties here in Seattle to buy commercial store fronts on Hill Top. He almost had me convinced to buy there. One night it was like a horror film where the walking dead enter the streets from all directions. Crack addicts were everywhere that night. The police sweep, then in a few weeks it’s the same.

    We also like Everett, my wife and I. There are some beautiful homes there. The prices seem reasonable for the views, but even with the new convention center, Aqua Sox and redevelopment of the city core, it’s still Everett.

    The point is that Seattle pricing should have been a focal point in the region. In fact surrounding areas and cities saw huge, and dramatic price increase, that in my opinion were never warranted. Bremerton for example and the passenger ferry disaster.

    By comparison down town Seattle is a bargain to Everett, Tacoma, Bremerton, and even Bellevue. Look at what’s coming on line in Bellevue’s down town core. Prices in Seattle may be high because we here in Seattle, by comparison, have only built out mid density in high density areas.

  37. 37
    LUC says:

    David,

    You wrote, “Bio tech and e-commerce jobs are a wave of the future, as I understand it.”

    Having worked in Biotech for approximately 15 years in Boston, Philly and Seattle. Seattle will have to play catch-up with other Biotech hubs. The areas that generate that most Biotech jobs, and have the venture capital to support future growth are Boston, The Bay area and San Diego. Notice all three are bubble areas. Any Biotech start-up in Seattle (SLU) would have to be able to finance 800 million to 1 billion dollars to bring a drug to the market. That process takes at least 10 years and there is no guarantee that drugs under development will make it to the approval stage. These start-up biotechs generally generate very few jobs in first few years of existence (10 – 20), with further job growth dependent on the drug candidate success at the research, preclinical and clinical stages.

  38. 38
    Ubersalad says:

    pay no attention to david losh, he read about it on a wall somewhere to sound smart.

  39. 39
    Ray Pepper says:

    David Losh I think you are grossly mistaken about Tacoma prices . I used to live in West Seattle, Greenlake, and Bitterlake. I started buying in North Tacoma 8 years ago. In the last 2 years I purchased 3 commercial buildings. I just submitted an offer this morning on the 4th. The prices were 64k, 200k, 268k, and now one at 300k. The one for 64k rents for 1100, 200k 2000, 268k (we will be inhabiting, and the one for 300k I have tenants lines up at 3500.00 a month.

    I never bought in Hill Top but that area has had the most major renovation I have ever seen. Condos, New Houses, commercial bldgs and hopefully less crack heads. I just never liked that area and still don’t. But, there are so many other parts of Tacoma that are GEMS.

    Seattle prices have no comparison to Tacoma prices. I’m not sure what you have been looking at but commercially speaking I find tremendous value in Tacoma. North Tacoma is where I reside and I will never live again in Seattle. I strongly urge you to look at Fircrest, University Place, Titlow, and North Tacoma. You will find what I already know.

    You can find one of my purchases on the MLS. Thats the espresso shop I bought at 64k. I put about 30k in it. Its now a cash cow as a rental and when it sells in the 280k ranges its a virtual tripler. Show me an espresso shop, in a trendy commercial district, in Seattle for 280k . Not White Center, or Burien. BTW I really like what they have done to Burien. I’m a BIG FAN of Seahurst and Normandy Park.

    Always do your DD. Find that GEM! They are popping up every week.

    Ray Pepper
    http://www.500Realty.net

  40. 40
    Ben says:

    Ray – don’t pretend that you were trying to be funny. Why are all of your jokes promoting your company?

    And I am not ‘pumping’ Redfin. You make it sound like the bloke that runs it sends me 15 peanuts every time I mention them. It happens to be the only MLS database web site with listing history that I know of.

    You need to call up Ira and get lessons on how to use blogging to get customers. Sometimes pushing your marketing too hard is counterproductive.

  41. 41
    EconE says:

    Ugh.

    Tim…I sure hope this Ray Pepper clown is paying you well.

    He makes your site……..

    lesser.

  42. 42
    Ray Pepper says:

    Ben and EconE just be happy I’m here and bring something to the table. You don’t want just Red Fin do you. Wouldn’t you like to see some alternatives? Anyone who complains about my blogging just skip over it. You can name call all you want but don’t you realize it just reflects on you. I contend our model for Real Estate is the Best in the industry.

    I have already called Ira. I wanted to hire him. I have already contacted Tim but we are locked in with Comcast for advertising. Someday you will use us. Do you know why? Because I’m here. If you do NOT then I assume you will use Red Fin, Iggy’s, or MLS 4 Owners. There is plenty of room for us all.

    You guys sound like my 3 kids. Just yesterday my daughter called my son a clown. Tim I’m sorry for making your site “lesser:”

    Ray Pepper
    http://www.500Realty.net

  43. 43
    RickB says:

    Jackson Wallace wrote, “Same with White Center – going back down.”

    What in particular leads you to this conclusion? WC doesn’t look too bad to me…

    -Rick

  44. 44
    david losh says:

    we already have bio tech and have for many years. immunex as an example, and a couple of others i don’t really know. what i hear is about commercial space, offices at South Lake Union being built to concentrate the industry. just rumors i know. AIDS research seems to have been a big focus here in Seattle, Harborview, along with the new HPV drugs that did research here.

    Tacoma!!! Wouldn’t want to live there. Double Wides in Nevada, and not a slum lord.

  45. 45
    Ben says:

    Ray – you are still confused about what people are telling you. I have no problem with your business. I am still not sure what it is, because you spend more time telling people that it exists than explaining what it does. I assume that you are a real estate agency of some kind. I tried to read about 500 Realty on the website but the annoying music and unsolicited video turned me away.

    The problem I have is that your marketing is like spam on this blog. Your post describing the purchases you made in Tacoma is great – this useful stuff. You actually added to the discussion.

    Don’t make the mistake of seeing some conspiracy where everybody who hates your marketing is a shill for some competitor of yours. Your potential clients are telling you that your marketing is annoying. Listen to them and you might actually turn them into clients.

  46. 46

    […] those that don’t remember, Escala is the development that employed the ingenious strategy of raising prices to entice buyers back in April of last […]

  47. 47

    […] Shocking Price Strategy TimelineBy The Tim on February 3, 2010 | 3 ResponsesApril 2008: Raising Prices to Entice Buyers—wait, what? (Awesome plan, Escala!)Developer Lexas Cos. said this week that on June 5 it will raise the asking […]

  48. 48

    […] the fabulous ‘1′ Hotel and Residences is currently a $6/hr parking lot.Escala: Famously raised prices in early 2008, as the marketers insisted that potential buyers waiting for price drops were “reading the […]

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