Case-Shiller Tiers: High Tier Home Prices Surpass 2007 Peak

Let’s check out the three price tiers for the Seattle area, as measured by Case-Shiller. Remember, Case-Shiller’s “Seattle” data is based on single-family home repeat sales in King, Pierce, and Snohomish counties.

Note that the tiers are determined by sale volume. In other words, 1/3 of all sales fall into each tier. For more details on the tier methodologies, hit the full methodology pdf. Here are the current tier breakpoints:

  • Low Tier: < $305,656 (down <0.1%)
  • Mid Tier: $305,656 – $484,832
  • Hi Tier: > $484,832 (up 2.1%)

First up is the straight graph of the index from January 2000 through November 2015.

Case-Shiller Tiered Index - Seattle

Here’s a zoom-in, showing just the last year:

Case-Shiller Tiered Index - Seattle

All three tiers were up month-over-month yet again in November. The high tier saw the smallest month-over-month gain, but was also the first tier to surpass its peak level with this month’s data.

Between October and November, the low tier increased 0.6 percent, the middle tier rose 0.6 percent, and the high tier gained 0.3 percent.

Here’s a chart of the year-over-year change in the index from January 2003 through November 2015.

Case-Shiller HPI - YOY Change in Seattle Tiers

Year-over-year price growth was up in all three compared to October. Here’s where the tiers sit YOY as of November – Low: +9.9 percent, Med: +9.7 percent, Hi: +9.8 percent.

Lastly, here’s a decline-from-peak graph like the one posted earlier this week for the various Case-Shiller markets, but looking only at the Seattle tiers.

Case-Shiller: Decline from Peak - Seattle Tiers

Current standing is 12.0 percent off peak for the low tier, 5.5 percent off peak for the middle tier, and 0.1 percent above the previous peak for the high tier.

(Home Price Indices, Standard & Poor’s, 2016-01-26)

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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.

63 comments:

  1. 1
    Macro Investor says:

    A few days ago, I mentioned on the Seattle Housing Market 2016 thread that tech and aerospace were vulnerable to a rate hike environment. Today we have boeing stock down nearly 10%, apple and netflix down 6.5%.

    The fed warned they were ready to hike rates, and it has started. Many here said that would NEVER HAPPEN. To understand what is going on, you have to understand — the fed is concerned with much more than government budgets and borrowing. That is secondary, as is the fate of stock market gamblers.

    Their main concern is the primacy of the US dollar and banking itself.

  2. 2
    GoHawks says:

    Macro, do you think they will raise any more times this year? My vote is one more time, tops.

  3. 3
    Macro Investor says:

    The futures are betting on just once, but a few weeks ago 4x. So, that is not reliable, any more than vegas odds on a football game.

    My GUESS would be 2-3x. Too slow and it appears un-confident. Too fast and it suggests there must be something to panic about.

  4. 4

    Rate Hikes Were Put Off By Yellen

    Causing a stock market plunge because the great economy is too weak to allow it to happen? This reminds me of Orwell’s 1984 “Doublespeak”.

    LOL….the interest rates will never go up….it will bankrupt Federal Entitlements, i.e., paying off the $20T debt payments.

  5. 5

    By softwarengineer @ 4:

    Causing a stock market plunge because the great economy is too weak to allow it to happen? This reminds me of Orwell’s 1984 “Doublespeak”.

    I’m not following. Anything indicating a weak national or international economy should cause a decline in the stock market.

  6. 6
    stevejobs says:

    Facebook killed it today on earnings…rallys 15%..Amazon too…
    West Coast Tech/Housing bubble to continue for a while..

  7. 7
    stevejobs says:

    Fed Hikes interest rate….Mortgage Rates drop during last two weeks of Market selloff…silver linings everywhere.. bad news is good..good news is good…Tech/housing bubble to continue

  8. 8
    Blurtman says:

    RE: Kary L. Krismer @ 5 – In Yellen Bizarro World, down economic indicators causes a rise in the stock market as folks interpret that to mean no interest rate raise, and continued low interest rates.

  9. 9
    Blurtman says:

    RE: GoHawks @ 2 – Only sound institutions are able to access the Fed funds rate. Sound apparently means recently insolvent with a documented record of continual fraud. The whole system is a fraud erected to benefit a small club.

  10. 10
    oddman says:

    It is quite the hot market. Anything priced within any reason is quickly snapped up or bid up. The only houses sitting are those that have no meat for the flippers and builders and are too troublesome for the average consumer.

    As it stands I don’t see stock improving unless our civic leaders bite the bullet and speed up permitting along with some large scale rezoning and infrastructure . But that is very unlikely to happen as it would require our leaders to take some risk, and spend a lot of money doing the ground work.

  11. 11
    Blake says:

    By stevejobs @ 6:

    Facebook killed it today on earnings…rallys 15%..Amazon too…
    West Coast Tech/Housing bubble to continue for a while..

    Facebook, Google etc all rely upon ad revenue, which dries up very quickly once the economy slows. Read this about their valuations and how it distorts the indices:
    http://davidstockmanscontracorner.com/amazon-and-the-fantastic-fangs-a-bubblicious-breakfast-of-unicorns-and-slippery-accounting/

    -snip- “Self-evidently this was a flashing red warning signal that the end of the third great central bank fueled financial bubble of his century was near. AMZN and its three other FANG amigos (Facebook, Netflix, and Google) had accounted for a $530 billion gain in market cap while the other 496 stocks in the S&P 500 had declined by an even larger amount. That is, the apparently flat S&P 500 index of 2015 was hiding an incipient bear—–owing to a market narrowing action like none before.”
    (end quote)

    Historically, price to earnings ratios above 20 are very high… Google’s P/E is 30, Facebook’s 110, Netflix’s 337 and Amazon…. 900!
    (AMZ continues to lose money in almost all it’s business ventures, it’s only making any money from their cloud/web services, which is highly dependent (50%) upon many startup companies that may vanish in the next few years…)

  12. 12
    redmondjp says:

    RE: Blake @ 11 – You’re dancing awfully close to the fire there, Blake! Maybe somebody should start a new blog called techfroth.com or something like that.

  13. 13
    Blake says:

    RE: redmondjp @ 12
    Sorry…. this just in! ;-)
    (Reuters) – Amazon.com Inc’s holiday quarter profit missed Wall Street’s estimates by a wide margin as the world’s No. 1 online retailer faced rising operating costs and growth slowed in its cloud services business. Its shares plunged 12 percent after hours on Thursday, after its quarterly report, following a 9 percent increase in regular trading.

  14. 14
    GoHawks says:

    RE: Blake @ 13 – and MSFT crushed their report. Some good, some bad, but hardly the end of the world.

  15. 15
    boater says:

    RE: Blake @ 13
    If i had Amazon stock I wouldn’t be feeling to bad. The 52 week range is something like $300-$670. Currently its somewhere around 600+. So they’ve doubled investors money in a year but a 10% pullback should cause people to run for the hills?

  16. 16

    If I’m reading the reports right, Microsoft’s Cloud services have almost 3x the revenue of Amazon’s Cloud services. That surprises me. They must be doing something right to market, or maybe Azure is just that good. But I would have guessed the opposite in relationship of revenue.

    I haven’t been an Amazon Cloud customer for a couple of years, but two days ago I was a car license plate that began with the letters AWS and I immediately thought Amazon Web Services.

  17. 17

    RE: Kary L. Krismer @ 16 – Two days ago I “saw” a car license plate. I don’t have the ability to transition into inanimate objects that can think! :-D

  18. 18
    ShinyPants says:

    By Kary L. Krismer @ 16:

    If I’m reading the reports right, Microsoft’s Cloud services have almost 3x the revenue of Amazon’s Cloud services. That surprises me. They must be doing something right to market, or maybe Azure is just that good. But I would have guessed the opposite in relationship of revenue.

    I haven’t been an Amazon Cloud customer for a couple of years, but two days ago I was a car license plate that began with the letters AWS and I immediately thought Amazon Web Services.

    Don’t know what reports you are reading, but Microsoft doesn’t break out their cloud services revenue separately. So I don’t know how you are arriving at the 3x revenue figure.

  19. 19

    Geekwire had reports on both companies yesterday–separate articles. Here’s the one on Microsoft.

    http://www.geekwire.com/2016/microsoft-earnings/

    The company’s cloud business continued to drive its results, with revenue in its Intelligent Cloud division, including its Azure cloud computing platform, growing 5 percent to $6.3 billion.

  20. 20
    Shoeguy says:

    Tulip Mania 3.0!

  21. 21
    ronp says:

    I am still shocked at the prices of the new homes in NE Seattle. A little (2bdr 1 bath? $500K?) house near me was torn down this month and I went to look at the permit online. The replacement is this giant guy — http://www.bdrholdings.com/windermere.htm . Crazy.

  22. 22
    Sarah says:

    As long as interest rates remain super low, inflation will run rampant … good for homeowners, not so great for buyers…

  23. 23
    Shinypants says:

    By Kary L. Krismer @ 19:

    Geekwire had reports on both companies yesterday–separate articles. Here’s the one on Microsoft.

    http://www.geekwire.com/2016/microsoft-earnings/

    ‘Intelligent Cloud’ division is not just the Azure Services as the quote stated. (emphasis is mine)

    revenue in its Intelligent Cloud division including its Azure cloud computing platform,

    From the 10k: (again includes emphasis by me)

    Intelligent Cloud
    Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business. This segment primarily comprises:

    Server products and cloud services, including Windows Server, Microsoft SQL Server, Visual Studio, System Center, and related CALs, as well as Microsoft Azure.

    Enterprise Services, including Premier Support Services and Microsoft Consulting Services.

    Azure is Microsoft’s Cloud services not those other pieces mentioned in the 10k. So you are not comparing apples to apples when you make that statement.

  24. 24

    RE: ronp @ 21

    The price of a new home that was a tear down is supposed to come out at 3X what they paid. So if they paid $500,000 for the lot then the new house should be $1.5 Million. Some adjustments for time difference between date purchased and day the new house is ready for market. If it’s more than that be shocked. If it is that then that is what would be expected.

  25. 25
    Jasper says:

    RE: Ardell DellaLoggia @ 22 – A rule of thumb of 3.5x would be more accurate than 3x. (My rule of thumb is that when the potential value of the economical highest-and-best use reaches 4x the value of the current use, things are likely to get redeveloped.)

    In Maple Leaf, I am seeing a ratio of 3.5x. For example, a $ 400,000 tear-down was replaced by a $ 1,395,000 new house. (The Maple Leaf builder is not the same as the builder of the following three houses.)

    I guess that the new Windermere house will go on the market for about $ 1,750,000 – $ 1,895,000. The builder purchased the property for $ 550,000 during the spring of 2015.

    During the summer of 2015, the same builder sold two similar houses in Laurelhurst for about $ 1,700,000 each. The builder purchased the two lots for a total of $ 1,000,000 (or $ 500,000 each). This is a ratio of slightly over 3.4x.

  26. 26
    Erik says:

    RE: Jasper @ 23
    If you use decimal point precision on a rule of thumb, that makes it an equation and not a rule of thumb any longer.

  27. 27
    Blurtman says:

    By Ardell DellaLoggia @ 22:

    RE: ronp @ 21

    The price of a new home that was a tear down is supposed to come out at 3X what they paid. So if they paid $500,000 for the lot then the new house should be $1.5 Million. Some adjustments for time difference between date purchased and day the new house is ready for market. If it’s more than that be shocked. If it is that then that is what would be expected.

    Excluding the land, what is the cost of a new home?

  28. 28
    Jasper says:

    RE: Blurtman @ 25 – In Seattle, for this quality spec home, figure:

    * Lot price x 120%. The 20% markup includes “hard-money” financing costs, real estate commissions, and transfer taxes.
    * $ 120 – $ 150 per square foot for living area (including basements finished to the same level as the rest of the house, but not including garages). This includes the contractor’s management efforts, contractor mark-up, B&O taxes, sales taxes, engineering fees, design fees, permits, inspections, demolition of the old house (or re-routing utilities around an old house), excavation, dirt hauling, legally required landscaping, foundation work, porches, et cetera.
    * $ 50 per square foot of garage. This includes the various costs mentioned in the previous paragraph.
    * 15% markup on the per square foot costs, to cover the “hard-money” financing costs, real estate commissions, and transfer taxes.
    * Economic profit.

    True custom homes might have another $ 0 – $ 30 per square foot of extra customizations. Also, true custom homes might have another $ 0 – $ 20 per square foot of professional design services (such as architect fees.) On the other hand, a true custom home can use a “build-on-your-lot” builder, and save 10 percentage points of markup for financing and real estate transaction costs.

    For example, take a hypothetical 3,500 square foot house, with a 500 square foot garage. The house has a traditional or Craftsman style, and fits into a Seattle neighborhood with many homes built between 1904 and 1928. The hypothetical house replaced a $ 320,000 tear-down. The project takes one year from when the lot purchase closes to when the new home sale closes. The entire project is built as “above-ground” space, because that is what appraisers like to see, and it is slightly cheaper that way. (The house would actually be more useful to its occupants if the basement were sunk by half a floor. But today, the only new homes with that feature are true custom homes.)

    * $ 320,000 tear-down.
    * $ 500,000 for the house.
    * $ 75,000 for the garage.
    * $ 24,000 for 2 ½ points on all borrowed money
    * $ 25,000 interest on money borrowed for full year, at 8 percent.
    * $ 25,000 interest on money borrowed over course of year, at 8 percent per year times an average of half a year.
    * $ 66,000 real estate commissions and sales and marketing costs, at 6 percent of sale price.
    * $ 20,000 transfer taxes, at 1.775 percent of sale price.
    * $ 45,000 hoped-for economic profit.
    ——————————
    $ 1,100,000 hoped-for sale price

  29. 29

    RE: Jasper @ 23

    That reality varies from the expectation (rule of thumb) does not change the rule of thumb. As example from comment 13 “Amazon.com Inc’s holiday quarter profit missed Wall Street’s estimates by a wide margin,,,” The expectation for that period does not change to reality. But when you are dealing with the real estate market vs the stock market there is an adjustment for the time it took to build the property.

    You need to set a consistent expectation to know how the market is doing relative to the expectation. Up, Down, Up, Down is not an efficient way to look at markets. Up today! Down today! is an amateur vantage point. Markets are evaluated by “exceeds expectation” or “underperformed expectation”.

    If a house comes in at 2X cost of lot, then it underperformed. If it comes in at 3.5 X lot then it overperformed. Of course this is sold price and not asking price. Also if the tear down was bought for $400,000 and the home comes on market a year later and the market there went up 10% in that time, then you can up the present value of the teardown to $440,000 and do 3X that. But the one year to build is really already built into the rule of thumb unless the period is much longer. For instance some builders bought the tear downs in the downturn but then waited for a few years until the market started back up again to start building. Those would be more than 3X lot because they did a buy and hold on the lots.

    I’m not surprised to see 3.5 X lot, but I am surprised to see that in Maple Leaf. Is that an asking price or a sold price? How long was it from tear down purchase to new home sold? If it’s an asking vs sold price, and it is not quickly pending…then the “Jury’s Still Out” on that.

    Are we in a bubble? The bubble is that portion more than 3 X lot. At peak bubble we were seeing 4-5 X lot in some areas, as example. Expectation is 3 X lot. That does not change. Several builders who bought at peak ended up selling at 2X lot. That is underperforming and a loss even though you could say it was a break-even to slight gain. It is 1/3rd under expectation without regard to monies made or monies not lost, the same as the Amazon stock reportings being “bad” even though they made money.

  30. 30
    Jasper says:

    RE: Ardell DellaLoggia @ 27 – The Maple Leaf home is pending. I do not know how close the sale price was to the asking price. The tear down was purchased 11 months ago.

    A year ago, other tear downs in the same neighborhood were selling for about $ 300,000 – 320,000. This one had an especially large lot on a quiet street, with more street frontage than normal.

  31. 31

    RE: Jasper @ 28

    That’s what I call a “yeah, but”. :) The street frontage didn’t expand from what it was, so that it is an oversized lot should have been reflected in the teardown price.

    Market Value = $1,200,000 or 3 x lot.

    Things can sell for more than market value or less than market value.

    The difference of $200,000 is something else. It is the premium for limited inventory plus the premium for even more limited NEW construction inventory plus the premium for a 3 car vs 2 car garage which is hard to come by. Yes the extra frontage is what allowed for the 3 vs 2 car garage, and possibly the tear down price did not adequately reflect that. Possible.

    It is important to separate the premiums from the market value because if the price later falls to $1,200,000 then it did not “fall”. If it gets under $1,200,000 then the market is going down…vs just that house going down.

    So let’s say 3x lot is what a buyer should pay. What they will pay is the market tracking point and the premium for limited inventory is then the $200,000 or so.

    By isolating the premium for current market conditions, one can track the “bubble” vs the “market”.

    In a different neighborhood where that lot might be $600,000, then the house would be $1,800,000. Might a buyer not notice this and pay $1,800,000 when the tear down was $400,000? Of course. Should they know the rule of thumb of 3 x lot? Yes. Then they pay more than 3 x lot with “informed consent”. That’s OK.

    Can a builder mess up and get less than 3x lot (meaning he overpaid for the lot)? Yes. Can a builder get lucky and end up with 5 x lot? Sadly, yes. But that does not change 3 x lot as being the start point from which to measure success or failure or windfall profit.

  32. 32
    Jasper says:

    I disagree with this method of modelling home prices:

    By Ardell DellaLoggia @ 29:

    RE: Jasper @ 28 – So let’s say 3x lot is what a buyer should pay.

    I find it more useful to model home prices using a model like this:

    * Lot value, plus
    * Price per garage parking space * number of garage parking spaces, plus
    * Adjusted value per square foot * number of square feet, minus
    * 2x the cost of adding features that should be expected, but are missing.

    The adjusted value per square foot varies significantly from one home to another, depending on the condition of the home, what the builder (or remodeller) cut costs on, and how well finished the basement (if any) is.

    In my opinion, the value of basement square footage ranges from 25% to 75% of above-ground fully finished square footage. 25% is for an unfinished basement; 50% is for a typical “finished” basement that is not the same quality as the rest of the house; 75% is for a well-finished basement whose floors have give, whose rooms have lots of natural light (comparable to the rest of the house), and whose finishes match the quality of the rest of the house. Part of the reason for the 75% being discounted from 100% is that basement area calculations include very thick foundation walls, and the views are rather limited.

    In my experience, Seattle-area appraisers do a terrible job of estimating the value of garage spaces, incremental lot area, and basements. They tend to use minimal values for garage spaces and incremental lot area, and assume that all basements are worth half the square-foot value of the rest of the house.

    “Features that should be expected, but are missing” include things like:

    * Walls and ceilings that don’t have water damage.
    * Enough earthquake strapping to keep the house from falling off the foundation during a major earthquake.
    * Smoke-free walls.
    * Roofs that have some life left in them.
    * Pipes that provide rust-free water.

    Of course, these are the sorts of “deferred maintenance” issues that cause some “modest houses” to become “tear-downs”.

  33. 33
    ARDELL says:

    RE: Jasper @ 30

    3x lot is only about new construction.

    Flip is price paid plus 2x cost of what was added.

    Resale and basements have nothing to do with above.
    Heading to a 3 year old’s birthday party, so cutting this short. There is not one method for all houses.

  34. 34
    ronp says:

    Wow, thanks Jasper and Ardell for the great comments. I guess I better find the $41K to remodel our basement. Could be worth it!

  35. 35
    Jasper says:

    Oops. In my example, I messed up the garage cost. Here is the corrected example:

    By Jasper @ 26:

    RE: Blurtman @ 25 – For example, take a hypothetical 3,500 square foot house, with a 500 square foot garage. The house has a traditional or Craftsman style, and fits into a Seattle neighborhood with many homes built between 1904 and 1928. The hypothetical house replaced a $ 320,000 tear-down. The project takes one year from when the lot purchase closes to when the new home sale closes. The entire project is built as “above-ground” space, because that is what appraisers like to see, and it is slightly cheaper that way.

    * $ 320,000 tear-down.
    * $ 500,000 for the house.
    * $ 25,000 for the garage.
    * $ 23,000 for 2 ½ points on all borrowed money
    * $ 26,000 interest on money borrowed for full year, at 8 percent.
    * $ 24,000 interest on money borrowed over course of year, at 8 percent per year times an average of half a year.
    * $ 66,000 real estate commissions and sales and marketing costs, at 6 percent of sale price.
    * $ 20,000 transfer taxes, at 1.775 percent of sale price.
    * $ 96,000 hoped-for economic profit.
    ——————————
    $ 1,100,000 hoped-for sale price

  36. 36
    Jasper says:

    RE: Jasper @ 33 – In this hypothetical example, the “economic profit” disappears if the sale price is $ 996,000.

    Ardell is noticing that a builder will make a reasonable profit at the latter price (which is very close to 3x the tear-down cost). The builder’s reasonable profit is baked into these square-foot costs; the hard-money lender’s reasonable profit is baked into the financing costs.

    I am noticing that I don’t see houses being torn down (and replaced by much more expensive buildings) unless developers expect to make a profit (over and above the builder’s reasonable profit). In particular, in the markets I follow, this redevelopment tends to happen when the final sale price divided by the tear-down price is about 3.5.

  37. 37

    RE: Jasper @ 34

    I don’t think I explained that correctly as we are looking at it from two different angles.

    “Ardell is noticing that a builder will make a reasonable profit at the latter price (which is very close to 3x the tear-down cost). ”

    As agents we don’t calculate a builder’s profit. The builder does that. As agents we value the price of the tear down. The seller decides whether to sell it to a builder or as a starter home to an owner occupant. 3 x lot is how we back into the price of the tear down before it is listed for sale. If the most recent sales of new homes jumps to 3.5 x lot, as you said, then the next tear down is valued at 3 x lot. So the 3 x formula doesn’t change. The owner of the teardown gets 1/3rd of the appreciation on new construction. When it sold for $400,000 the best guess of final sold price of the new home was $1.2M. Once it is proven that the next new home in the area sold for $1.4M vs $1.2M then the next tear down jumps to $466,000 vs $400,000 or 1/3 of what a new house might be expected to sell for that is built on it.

    Mistakes are made. Perhaps the $400,000 price did not take into consideration the advantage of the extra frontage vs merely the extra sf, which if there were “more yard” vs more frontage would not have valued out the same. Perhaps someone will read that new information of $1,400,000 new house incorrectly and pay $450,000 to $465,000 for the next tear down, but that tear down has the same sf of land but only 40 to 50 street frontage.

    3 x lot is where you start when setting the price of the tear down. A tear down is not about the deferred maintenance of the house. You can have a pristine and well kept bungalow of 790 sf, and it would still be a tear down if the price an owner occupant will pay for it does not exceed what a builder will pay for it to tear it down to build a new house on the lot. It could be size alone that causes it to be a tear down. If an owner occupant won’t pay at least $50,000 more for the house than the builders will pay, then it is a tear down. It could have a brand new roof, new siding, new windows and need nothing. But if a buyer won’t pay more to live in it than a builder will pay to throw it away, then it is a tear down.

  38. 38

    RE: ronp @ 32

    Go to the King County Parcel viewer and make sure you are not putting $41,000 into a teardown using the rationale shown in comment 35. Break out the main floor footprint first. If you have more than 1,000 sf on the main, then usually finishing the basement is a good idea in Seattle. 1,200 on the main all the better. 550 on the main, 350 up and 550 basement, then no.

    In this market people are paying to much for “1,450” sf broken up as 550 main, 350 up and 550 basement. But that is a limited inventory “bubble” house where the value will drop more in the downturn than a 1,450 (same total) with 1,100 on the main and 350 up or down.

    As to Jasper saying the appraisers are undervaluing the basement, it really is a matter of the market over valuing the basement. There are cellars, basements and lower levels, and they value out differently. In Seattle older homes you sometimes see a cellar and sometimes a basement and rarely a “lower level” which are more common on The Eastside.

    This more to Jasper, an appraiser values the basement for what it is and could be vs how it is “finished”. The purpose of the appraisal is for the 30 year loan and the bank doesn’t want an appraiser to value a carpet in a basement or a spiffy wet bar as part of that value. In fact carpet or trim work or dropped ceiling or not is not part of an appraisal regardless of which level those are on. Appraised Value, Assessed Value and Market Value are three different things to three different purposes. They are not supposed to agree with one another. So that you don’t agree with the appraiser does not make the appraiser wrong or you wrong. You are determining market value and he is determining the collateral value for the loan. Two different things.

  39. 39
    Jasper says:

    By Ardell DellaLoggia @ 35:

    RE: Jasper @ 34

    I don’t think I explained that correctly as we are looking at it from two different angles.

    “Ardell is noticing that a builder will make a reasonable profit at the latter price (which is very close to 3x the tear-down cost). ”

    As agents we don’t calculate a builder’s profit. The builder does that. As agents we value the price of the tear down. The seller decides whether to sell it to a builder or as a starter home to an owner occupant. 3 x lot is how we back into the price of the tear down before it is listed for sale.

    RE: Ardell DellaLoggia @ 35 – Quite right. I think we are saying the same thing “from two different angles”:

    You are saying “po-tay-to” (“This is the highest price we can charge at which a builder might be interested in buying it as a tear-down.”)

    I am saying “po-tah-to” (“I don’t expect a developer to be interested in a deal where the expected economic profit is negative, and here is the price where the economic profit goes away.”)

  40. 40
    Jasper says:

    RE: Jasper @ 37 – This suggests an interesting dynamic:

    * If the 3x ratio is present, and prices are rising, developers will be interested in redevelopment.
    * If developers are making an economic profit (because the ratio is above 3x), then sellers will raise prices.
    * So well-represented sellers (of potential tear-downs) “put the brakes on” redevelopment of neighborhoods by raising the tear-down prices.

    This suggests that:
    * Redevelopment activity should drop dramatically during falling markets.
    * Rising markets can encourage redevelopment activity.
    * Redevelopment activity is a signal that can cause rising markets (for certain kinds of property).

    (I know that these things have been pointed out before, but usually it is in the context of “gentrification” or government-promoted redevelopment, rather than just the ~3x ratio, the time it takes to redevelop a property, and the appreciation rate.)

  41. 41
    Jasper says:

    By Ardell DellaLoggia @ 35:

    RE: Jasper @ 34 – The owner of the teardown gets 1/3rd of the appreciation on new construction. When it sold for $400,000 the best guess of final sold price of the new home was $1.2M. Once it is proven that the next new home in the area sold for $1.4M vs $1.2M then the next tear down jumps to $466,000 vs $400,000 or 1/3 of what a new house might be expected to sell for that is built on it.

    I can imagine the scenario you describe happening in a neighborhood where most houses in good condition are priced above $ 500,000. Basically, there is no “resistance” (from competing non-tear-down houses) for price moves between $ 400,000 – $ 466,000.

    But what do you see happening in a neighborhood where many houses are available between $ 400,000 – $ 550,000, and only a few people are looking to move into the neighborhood to buy new $ 1 M+ homes? Naïvely, I would expect the price move (of tear-down houses) to peter out when the price reaches the price level of “typical” houses, if the developers are only interested in buying “a few” tear-downs.

    Would you expect to see a different result, like “tear-down prices jump from $ 400,000 to $ 466,000, and the prices of the remaining houses rise to prices above the tear-downs”?

    Looking at the Maple Leaf market, I can see evidence for both possibilities. As evidence for the first possibility, several non-tear-down homes were available last year close to the price that the tear-down in question sold for, so the price for that tear-down seems to have been reasonable. As evidence for the second possibility (and of interest to ronp @32), the price range of non-tear-down homes has gone up quite a bit, and neighbors who did modest (but nice) basement remodels more than recouped their investments.

  42. 42
    oddman says:

    RE: Ardell DellaLoggia @ 35

    Once again Ardell hits the nail squarely on the head.

  43. 43

    RE: Jasper @ 38

    There are a few different layers, which is why I posted the “flip” math of “price paid plus 2x cost of improvements” along with 3 x lot back in my comment #31.

    “So well-represented sellers (of potential tear-downs) “put the brakes on” redevelopment of neighborhoods by raising the tear-down prices.”

    You don’t want all of the old houses to be tear downs, as not everyone can afford a brand new house. You will force too many people out based on affordability. You need a good mix.

    A flipper will pay more than a builder.

    An owner occupant or an investor who will hold it as a rental will pay more than a flipper or a builder.

    Raising the “tear down price” happens more when the main floor footprint makes the home more desirable for a flipper or an owner occupant. Also happens when the location does not warrant the max investment of tear down to new construction. Busy road as example.

    I just did one of these with a flipper not too long ago. Very busy road. You rarely start at 3 x lot or a tear down price on a very busy road, because you already know you can’t get to 3 x lot in that location and you don’t want to bring the price of the house down to 1/3rd of where that would make sense. Purchase price $240k. Maybe a builder could get 3 x $240k or $720,000, but not likely on that busy road. So even though it fit the description of a tear down in size of house in relation to the size of the very large lot, the location would cause the house to sell too low if you considered your buyer profile as builder.

    Shift to flipper math. While a builder wouldn’t pay $240k and hope for $720k or more on a busy road, a flipper can pay $240k and put in $40,000 plus the other costs and end up at between $350,000 and $400,000. Dropping to 3 x lot would not be in the best interests of the seller in that case. Best result is not a $720,000 end product but a less than $400,000 nice house. You want some nice inventory at lower than max price to be available in the neighborhood.

    I had a similar one before that and we had offers from builders and flippers, but the highest price came from an investor who put little to nothing into it and rented it out. This because the main floor footprint was large. If the building is large enough it usually doesn’t end up as a tear down except under extreme negative conditions.

    You need all of these working at the same time so you don’t end up with only new houses priced at over a million dollars. None should sell for less than lot-tear down value. But there needs to be a mix of builder price, flipper price, investor price and owner occupant price to keep enough variance of price in each neighborhood. Sometimes it all moves to highest price, but usually only with extensive views. You don’t want everything to rise to the point where every price is maxed out at 3 x lot. An owner occupant paying $50,000 more than the builders is better for the owner of the tear down and sometimes for keeping home prices down as well.

    Usually you price it at the extra for owner occupant buyer, unless that is out of the question. Then you sort the offers and usually the lowest come in from the builders who will tear it down and the higher ones from flippers and owner occupant buyers. But that only works with “no legal outs” as the flipper tends to beat everyone out in the bidding war, but include a home inspection. Then they back up the price at inspection negotiation by trying to deduct the cost of what they will be doing as improvements to the property.

    I am having a bit of a problem right now in Seattle looking for a residential multi-family for a client. Duplex, tri-plex, 4-plex. Most are pricing based on cap rate and rental income. But if the lot size and street frontage don’t meet the needs of builders in the future, you lose the “land play”. I don’t think they are building any new duplexes or tri-plexes or 4-plexes, so paying 5 x lot because of the rents alone doesn’t make much sense to me. The land proposition has to make sense before you consider the rental income and market value.

  44. 44

    RE: oddman @ 40

    Thank you. :)

    RE: Jasper @ 39

    I didn’t see your 39 when I was typing my 41, but some of that does answer your question.

    It isn’t just “neighborhood”. There are some streets in some best neighborhoods where there are no new homes. This is not happenstance and going back to 2002 to present if NO house was torn down and a new house built on that street or that side of the street, regardless of neighborhood, anyone buying the property should first figure out why there is no “investment” on that block.

    You said: “But what do you see happening in a neighborhood where many houses are available between $400,000 – $550,000, and only a few people are looking to move into the neighborhood to buy new $ 1 M+ homes?”

    If there are good houses of good size to be had for $400,000 to $550,000 in that neighborhood, then the lot value is lower in that neighborhood as well, and why your #33 math doesn’t work. See below.

    Going all the way back to your #30 where you didn’t give enough attention to the value of the lot and then jumping to your #33 where you started with a $320 lot and ended up at a $1.1M price for the new house.

    This really answers your own question as to why your math of #33 is not correct. Every neighborhood has a cap price regardless of the builder’s actual costs. A $320k lot should end up with a $960k house. If the neighborhood could support a $1.1M house, then the lot price should have been higher. In that price not as easy to see, but I did just see a house sell for $1.3 million on a $250k lot. Sure the house was awesome…but a buyer should not pay $1.3 million in a neighborhood where the lot prices are $250,000. You see it happen, but that doesn’t mean it isn’t a mistake.

    This is important in 2015 forward as you are seeing more mistakes which puts “the bubble” we are in not necessarily as an overall “bubble market” like 2006 and 2007, but entirely focused on some houses but not all houses. Appreciation and a bubble are not the same thing. Yes, appreciation can turn and go the other way. That’s what makes real estate a “market”. But a bubble is filled with air and a bubble pops. A $1.3M house on a $250k lot is $750k value and $550,000 of “air”. Makes no difference that the builder didn’t have a $550,000 profit. The air is due to the value of the lot and not the amount of money put into the house.

    You see big examples of this where a first time general contractor type tries a new construction or 90% remodel project. That he hired the wrong foundation guy and wasted $200,000 at the start, and then proceeded with the right foundation guy and did it correctly to the end of the project, does not make the end price “worth it”. (Obviously I have seen more than one of these. )

    If the builder pays 3 x lot and can sell it for 3.5 x lot and still do the house well, good for him. The market could have gone up more by the time the house was built. BUT you can’t just add up what the builder spent. Different builders have different profit margins. Not all use “hard money” as in your example. Your $96,000 end profit on a $1.1M house is not nearly enough BTW. Seriously in your #33 if the agents made $66,000 and the builder only made $96,000…something is seriously wrong with that. :)

  45. 45
    ARDELL says:

    RE: Jasper @ 39

    Some neighborhoods have little to no new houses at all because no one will pay 3x lot to live there. The lot value is basically nil if the builders don’t want it. Same thing happens in best neighborhoods in a down market when builders aren’t buying.

  46. 46
    Jasper says:

    RE: @41: Great post!

    I have one quibble:

    By Ardell DellaLoggia @ 41:

    RE: Jasper @ 38 – Raising the “tear down price” happens more when the main floor footprint makes the home more desirable for a flipper or an owner occupant. Also happens when the location does not warrant the max investment of tear down to new construction. Busy road as example.

    I think you mean “Raising the price above the tear down price.” (I like your explanation of how the tear down price for some properties is lower than for other properties.)

    I was referring to “raising the tear down price” itself.

  47. 47
    Jasper says:

    By Ardell DellaLoggia @ 42:

    If the builder pays 3 x lot and can sell it for 3.5 x lot and still do the house well, good for him. The market could have gone up more by the time the house was built. BUT you can’t just add up what the builder spent. Different builders have different profit margins. Not all use “hard money” as in your example. Your $96,000 end profit on a $1.1M house is not nearly enough BTW. Seriously in your #33 if the agents made $66,000 and the builder only made $96,000…something is seriously wrong with that. :)

    I considered pointing out these issues myself:

    In the example in #33, the builder/developer makes a lot more than $ 96,000. I deliberately included the builder’s normal profit margins while wearing their builder hat in the square footage costs.

    The $ 96,000 represents “economic profit” — the extra value that the deal represents over-and-above the developer’s “Best Alternative to a Negotiated Agreement”. In other words, it is the developer’s profit while wearing their developer hat.

    In all four examples discussed in this thread, the developers did use “hard money” lenders. I used the lowest published points and rates by one of the “hard money” lenders in the example. Many developers put up large portions of their own capital, and/or use commercial bank lenders. This saves large amounts of interest, points, and/or fees. But they reasonably expect to make a profit on this capital, so I did not subtract out this savings from the example. You can think of any such savings as the developer’s profit while wearing their hard money lender hat (and lending to themselves).

    I am quite aware that builders negotiate their real estate commissions, or become real estate agents themselves, or have spouses that are real estate agents. But the builder does need to spend time and money marketing their property. To keep the example simple, I approximated the builder’s marketing costs (including the value of their time wearing their marketing hat) as being equal to their commission savings.

    There are other ways that a builder can save money. For example, finding ways to cut waste, or finding more effective subcontractors (as you note in comment @42), or choosing cheaper flooring. A big possible savings would be to shorten the project from 12 months to 6 months; this would reduce the financing costs by about 40%. The tract house developers have done this. But all four examples discussed in this thread had project timelines of about 12 months (from lot closing to home closing), and you have noted that this is typical for infill development.

  48. 48
    Jasper says:

    Ardell, you contradict yourself here:

    By Ardell DellaLoggia @ 42:

    RE: Jasper @ 39
    If there are good houses of good size to be had for $400,000 to $550,000 in that neighborhood, then the lot value is lower in that neighborhood as well, and why your #33 math doesn’t work. See below.

    Going all the way back to your #30 where you didn’t give enough attention to the value of the lot and then jumping to your #33 where you started with a $320 lot and ended up at a $1.1M price for the new house.

    This really answers your own question as to why your math of #33 is not correct. Every neighborhood has a cap price regardless of the builder’s actual costs. A $320k lot should end up with a $960k house. If the neighborhood could support a $1.1M house, then the lot price should have been higher.

    It’s the same neighborhood. Last year, it had quite a few modest sized older houses, in tolerable to very good condition, priced between $ 400,000 – $ 550,000. A few tear down houses were listed on the MLS, and sold from $ 290,000 – $ 320,000. A few brand new houses sold for $ 1 M – $ 1.3 M. Large newer houses that during the previous bubble peak had sold for $ 900 k – $ 1 M, exceeded their previous peak prices.

  49. 49

    RE: oddman @ 10
    If I Was a GREEDY Builder Looking for Quick Profits

    I’d sit around a bit and wait for $30/bbl oil to like strip 30-50% off the manufacturing cost of lumber, construction wages should fall in unison. Gasoline RECENTLY plummeted to $1.67/gal at a downtown Kent cash only station. New home building will PLUMMET too…..then gouge the Seattle dummy buyers for HUGE PROFITS…..LOL

    New cars, food, our wages, etc, etc….all tied to oil.

    Ohhhhh wait…..the buyers wages should plummet too to make up for it…..LOL

  50. 50

    With all the movement in the market 2016 is shaping up to be an interesting year. The tell tale sign will be middle income housing, if those numbers can be improved upon we’ll see a recovering economy. Now if those numbers go the opposite direction we may be in trouble. Great post as usual!! We’ll be watching!!

    Ashley

  51. 51

    RE: Jasper @ 46

    Once you say “In the example in #33, the builder/developer makes a lot more than $ 96,000. I deliberately included the builder’s normal profit margins while wearing their builder hat in the square footage costs.” I think we are no longer having an open-minded and honest conversation.

    Why did you deliberately state a partial number for the profit and “hide” the balance of the profit? It was a bit obvious, but intentionally misleading to the person with whom you were speaking at the time, who was not me.

    To answer your question, less than 1% of all single family home sales being a million or more is not the same as other neighborhoods that are in the 45% to 50% range selling for a million or more. Less than 1% is still within the margin for error. We’ll see. 10 sales in a decade, 4 of those ten being very recent, is a “jury’s still out” scenario. It’s still a gamble for the builder and a slight downturn or scare could shut down the show in that neighborhood first and without impacting other more stable areas.

    I’ll go back to a buyer shouldn’t pay more than 3 x lot for brand new…or at least know the reason why they are. If they want to add that overage to the “new house premium” that is lost as soon as they move into it like a new car driving off a lot, that is their privilege. To slightly change an old quote, a sucker is really NOT born EVERY minute. :) Or at least I hope not. Not with all of the technology and information we have at our fingertips these days.

  52. 52

    RE: Blurtman @ 25
    With $30/bbl Oil Now

    30-50% less than it was a year ago, but will the seller pass the lower costs on? Those greedy guys, c’mon man, they’re like vulture grocery stores.

  53. 53

    RE: Ardell DellaLoggia @ 48
    If a Builder Today Gets Discounted Oil Building Material and Labor

    That $100K profit is really $200-300K approximately. Let’s be HONEST.

  54. 54
    Jasper says:

    By Ardell DellaLoggia @ 51:

    RE: Jasper @ 46 – Once you say “In the example in #33, the builder/developer makes a lot more than $ 96,000. I deliberately included the builder’s normal profit margins while wearing their builder hat in the square footage costs.” I think we are no longer having an open-minded and honest conversation.

    Why did you deliberately state a partial number for the profit and “hide” the balance of the profit? It was a bit obvious, but intentionally misleading to the person with whom you were speaking at the time, who was not me.

    Ardell — I resent your impugning my integrity. Please apologize.

    Blurtman asked “Excluding the land, what is the cost of a new home?”
    I answered with the costs that Blurtman, or I, or a non-builder developer would pay, if they chose to use “hard money” financing. (And if they could qualify for such financing.)

    I carefully explained at the time that the square footage costs included “the contractor’s management efforts, contractor mark-up, B&O taxes, sales taxes” and the various soft costs and related construction expenses. I repeatedly mentioned that the square footage costs included the “builder’s reasonable profit”.

    I had two reasons for breaking out the cost this way:

    * Most readers of this blog are not general contractors. In particular, I have no reason to believe that you, Blurtman, or I are general contractors. If we were to try to take advantage of such a redevelopment opportunity, we would need to either become general contractors, or hire a general contractor. If we were to become general contractors, we would need time and practice to become good at it — and might miss (or mess up) opportunities in the meantime. If we hired a general contractor, we would be looking at paying an “on your lot” builder approximately the prices I listed.

    * I was performing an economic analysis of the redevelopment decision. If you want to know, “Does this deal make sense going into it?” then you need to subtract out the expected opportunity costs of doing the deal. “Economic profit” is defined as the profit left over as the result of that subtraction.

    The existence of “on your lot” builders provides a convenient market price for the opportunities available to a builder wearing their builder hat, as opposed to their developer hat. (This thread has four real-world examples. The builders of these houses sometimes build spec houses, and sometimes work as “on your lot” builders.)

    Published pricing for “hard money” lenders provides an estimate of the expected opportunity costs for the capital used. (I accidentally omitted the inspection and appraisal fees that lenders charge.) (As I noted earlier, the builders of the four real-world examples in this thread used “hard money” lenders, including the lender who published their current pricing.)

    In the hypothetical example (now @35), I carefully explained where these opportunity costs are included in the calculation, and carefully labelled the profit (net of these opportunity costs) as an “economic profit”.

  55. 55
    Jasper says:

    RE: softwarengineer @ 52 – Crude oil prices have dropped 60% – 70% from two years ago, or 40% – 50% from a year ago:
    http://www.nasdaq.com/markets/crude-oil.aspx?timeframe=10y

    Commodity lumber prices have dropped 25% – 35% from 1 – 2 years ago:
    http://www.nasdaq.com/markets/lumber.aspx?timeframe=10y

    As long as the builders (that survived the bust) are building as many homes as they can, labor prices are not likely to drop. I talked with an “on your lot” builder on Friday. They have a nearly one-year backlog. They are adding staff to help customers make design choices.

  56. 56
    ronp says:

    ardell @38 thanks for the advice, nice to see a numerical per sq. ft. analysis. We did a 90%(?) tear down and added two bedrooms to our worn out NE Seattle house a couple of years ago, spending way less than the nearby builders are doing with their “resale” tear downs. So we have a small “new” house compared to the example I linked to above, but we need to clear out the accumulated junk in our basement, add egress for a bedroom and maybe do a small bathroom ($41K does not include a bathroom). College tuition is coming up so maybe we never do it…

  57. 57
    kmac says:

    As someone who builds homes (not in Seattle), I would never pay so much for a lot that the finished home was only 3x the lot price.
    If it sells at that, so be it, but 3x doesn’t leave enough meat on the bone to take the initial risk if you ask me.
    Real Estate agents are the last ones who should be dictating what other “should” make.

    3.5 to 4x lot is what I’m comfortable with, going in.
    Especially with all of these scam fees they charge now that are connected to the building permit.

    My last permit had more fees for storm water than the bldg. permit cost.
    I love all these clowns that impose the fees (administratively or voting) but then scream that the greedy evil builders aren’t making “affordable homes” anymore.

  58. 58
    Blurtman says:

    RE: Jasper @ 28 – Thanks for the info and the discussion that followed.

  59. 59
    redmondjp says:

    RE: kmac @ 57 – Thanks for posting, kmac – this issue cannot be emphasized enough.

    On the four lot short-plat behind my house, the underground stormwater detention vault (which is nearly as large as my house BTW) cost the developer $240K and took about 6 months to construct. It’s an engineering marvel – there is now a massive grating (something like 4′ x 8′) right where the tiny lawn should be in front of one of the new $1M+ homes now built, through which you can look down into this underground swimming pool (no idea why this large of a grating is even necessary, as it doesn’t even serve as a drain at a low point and there is already manhole access to it elsewhere – it will be great for kids to forever lose their Hot Wheels into, however).

    So that one government-mandated item, just that one item alone, added $60K of cost per new house/lot and added several months to the project duration. Saving the salmon ain’t cheap!

    On the other hand, my own house, built in 1976-77, uses the crawl space as the stormwater detention vault. No joke – the builders at that time ran the downspout drainpipes right into the crawlspace, and then had to drill a hole in the foundation and add a sump pump on the outside to pump all of the water out (turning my crawl space into an Olympic-sized swimming pool during heavy rains if I lose power for a few hours). It turns out that a different builder did the exact same thing on a neighbor’s house built a couple of years earlier. The wafting, skunky smoke smell was strong on jobsites in the 1970s, that’s for sure . . . and building inspectors of the day still signed off on this stuff.

  60. 60

    By redmondjp @ 59:

    The wafting, skunky smoke smell was strong on jobsites in the 1970s, that’s for sure . . . and building inspectors of the day still signed off on this stuff.

    Home inspectors don’t sign off on anything. They point things out. It’s up to the buyer to decide whether what they find is acceptable, in consultation with the inspector, the agent and others.

    As to pumps, there are a number of situations where extended power outages and pumps are not a good combination. Sometimes those are external to the house such as pumps on driveway areas. The ones that would worry me the most are the pumps on septic systems. I tend to favor owning a generator in areas where septic is common (basically anywhere outside Seattle City Light’s coverage area), but having a non-gravity septic system would be additional motivation to buy a generator.

  61. 61
    kmac says:

    There is a difference between building inspectors (gov employees) and home inspectors (private entity).

    But yes, according to what I understand of past court decisions, even though you give boat loads of $$ out for a permit, the .gov employee owes no duty to any individual, only to the public as a whole.

    I’ve been working residential construction in greater Seattle area since early eighties and I rarely remember getting whiff of skunk smell on jobsites.
    I do remember a much more laissez-faire attitude of local residents around here, which may explain some of the badly designed situations found on some of the early properties.

  62. 62

    By kmac @ 61:

    There is a difference between building inspectors (gov employees) and home inspectors (private entity).

    But yes, according to what I understand of past court decisions, even though you give boat loads of $$ out for a permit, the .gov employee owes no duty to any individual, only to the public as a whole.

    I mis-read what redmondjp wrote, thinking he was referring to inspectors today, not then.

    But I believe that is correct–there is no liability for a city/county building inspector missing something. The best example of that would be the relatively new building torn down in Seattle because certain sealant wasn’t used, or some such thing. They are only checking that things are built to code and even if they miss something in that area there wouldn’t be any liability that I am aware of.

  63. 63
    kmac says:

    I think a .gov inspector can be liable to the individual only if you, as the aggrieved individual, can prove that you relied upon that inspector’s specific advice or recommendation and it proved to be faulty information.
    Still an uphill battle to prove.
    Most inspectors will not offer advice for that very reason. They just tell you to refer to the applicable code. At most, they will give you their interpretation of the code in question, but never how to achieve the goal.

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