Random Real Estate Thoughts

Why do prices vary sooooo much in older LEXington neighborhoods?

by John Rice

So, I’ve had the pleasure of working with a buyer wanting to get a house in some of Lexington’s finest older neighborhoods….Chevy Chase and Ashland Park.  Don’t remember which house it was, but the buyer says to me “How come I’ve seen nicer houses sell for less and lesser houses sell for more?”

Good question.  Got me thinking about a way to explain it to him without sounding like a beauty pagent contestant struggling to answer a complex question.

From the get go, any house in any neighorhood has the usual factors like size, location & condition that impact value.  Usually, in an area less than, say, 40 years old, it just comes down to those variables.  For houses that age or less, most are similar in their floor plan since builders were buying their plans out of a book and building multiple versions of the same house.   Also, you don’t see many houses that have had major additions, so it typically just comes down to if a house has been updated or not.  Let’s take Beaumont as an example.  The whole neighborhood is pretty much houses from $350k to over a million, but most are $450-600k and are about the same age and about the same in function and about the same size.  Finding equal comps is fairly easy.  Once you know the hiarchy of streets, you can just cut and paste for the differences in square footage and quality of finishes.  Pretty simple.  Pretty logical.

Once you step into most older neighborhoods, I mean ones build before 1940 or so, you start to rely more on emotion rather than just logic when determining value.  Sure, you’ve got the same variables of location, size and condition, but you also have function (since not all the original floor plans really work today), expandability (since older houses in these Lexington neighborhoods are smallish), the quality/condition of any additions or modifications to the floor plan, and vibe.

In my opinion, vibe is the most important one in determining value in older houses.  People want an old house to feel a certain way.  When I ask buyers of newer homes what they liked about a certain house, they usually list features, like granite, lot size, closet size, etc.  When I ask the same for old house buyers, they usually don’t start with the list of features, they say the house has charm, or character.  Then their list of features usally starts with something like the look of the house, the trees, or what they could walk to.  It’s a whole different approach to value.  That is why you sometimes see two houses the same size with the same features sell for two far apart prices.  One had the right vibe and the other one didn’t.

Since I fumbled around and said “Um” about 100 times when asked the above question, this post is dedicated to Steve.  Thanks for asking it and causing me to write this post so the next time I get asked that question, I’ll be better prepared to answer.

Why are there so many houses for sale on this street?

by John Rice

It’s a question I get asked a lot.  To a buyer, it means there must be some reason why so many people want to get out of the area.  It makes them nervous about buying.

The truth is that rarely is there some circumstance that is causing everybody to sell all at once.  The last time I saw a situation like that was when there was a shooting at an apartment complex in NE Lexington.  The next week, a whole lot of the houses on the street across from it were for sale.

Another situation where I see many people selling all at once is in neighborhoods that were built about 2004-2006.  Many homeowners bought not only before the market collapsed, but they also did the crazy loans that were available back then.  They owe more on the house than it is worth and price it based on what they need to get rather than market value.  There was one builder in town that had their own mortgage company.  I think their credit application only had one question on it:  DO YOU HAVE A PULSE?  If you did, you got a loan for any house they built.  Most of the houses in their neighborhoods have been foreclosed by now though.  In this case, it isn’t that people were wanting to leave, it was that they couldn’t afford to stay.

Most of the time, when you see a street with many houses for sale, it has more to do with how fast they are being sold than any problem with the street.   If you have a street in a neighborhood with slow sales or over-priced listings, they just don’t go away…..they just stay on the market.  Meanwhile, another neighbor puts their house on the market too….and it doesn’t sell fast.  Well, before long, you end up with every house on the street for sale.  In a neighborhood that moves faster, you still might have the same number of people moving in the same amount of time, but since their houses sell faster, you don’t see all the signs in the yard all at once.

In most of these situations, I usually advise my clients not to buy.  I always tell people that backing to apartments, multi-housing or commercial usually bites you in the rear at some point, as the people across from that apartment complex discovered.  When all the houses were getting foreclosed in the builder/mortgage company’s neighborhood, I told people that there was a good chance that investors would buy them as rentals, so let’s skip it.  I think the only real risk a buyer takes on a street with a lot of sellers is that they might have a tough time selling when it is their turn to do so.  Often, the reason for the slow sales is that it is a second or third choice neighborhood in a time when most buyers can still get into their first choice location.  If the buyer is okay with that and can get it for a price that takes that into consideration, I give it a thumb’s up.

Why my wife would fire me as her Realtor

by John Rice

“Sometimes I don’t like being married to a realtor.”  Oh no she didn’t?  Yep, she went there alright.  See, after casually looking for a new house for what seems like forever, we are finally going to pull the trigger on something this summer.  Problem is I keep shooting down every house my wife falls in love with.  She also told me that she wished she could just find a house she likes, get excited about it, and buy it.  I told her that the reasons I shoot down some of the houses we’ve seen are for things she will thank me for years from now.

One of her favorite houses (and mine) backed to a big field full of tall trees……for now.  I hit the PVA to see who owns that property and if it is inside the urban service area.  The owner is a developer who has never had a truly successful project, so I shoot that one down.  It would only be a matter of time before the bull dozers regrade that field and we’d have all the runoff potentially flooding the basement.  It was zoned for single family housing, but zoning can be changed.  Sure, the neighborhood’s HOA would have fought putting apartments back there, but you never know.  Then there is resale value.  If you pay a bit extra to have nothing behind you, you’ve lost that money once there are houses back there.  NEXT!

Then, we find one we both really like.  My issue there?  There is a similar neighborhood right next to this one.  No big deal, right?  There is when there is a $50-75k price difference for a similar house.  I wonder if in 10-15 years buyers will perceive a difference between the two neighborhoods, or at least enough to justify the price difference…..NEXT!

There is one she totally loves.  Has a pool, kitchen in the basement, everything.   Price isn’t bad for all that…..but, it is in an area surrounded by much cheaper houses.  There are only about 10% of the houses in that area that are in our price range.  The rest are about half the value.  Never a good thing to have an island of more expensive houses surrounded by less expensive ones.  Over time, the less expensive area is more likely to impact the values of the more expensive ones than the other way around, especially when there are more of the less expensive ones.  Plus, right around the corner, there are a few streets with the same houses as the one we liked that are only about 5-6 years older and sell for much cheaper.  I kind of think that once the newness wears off of this area, the prices will be more in line with the streets full of the slightly cheaper houses that are 5-6 years older.  NEXT!!

So, now we are considering one that we both like due to the neighborhood.  It is a good value.  The area is old enough that the dust has settled and we shouldn’t have any surprises about its future.  Problem with this one is that it is on the main road through the neighborhood and sits diagonal on its corner lot.  I’m having a hard time thinking about being on the main drag of the neighborhood since I am always telling people that you’ll lose some buyers when you go to sell.  Plus, the backyard is really small where the house sits diagonally on the lot.  That doesn’t bother me personally, but you’re losing some buyers with several kids since it is not the backyard they will want.  I’m only going to buy this one if I can get it at the low end of the comps since I will always have to sell it at the low end of the comps due to the lot and road.  We’ll see.

I think my wife would sometimes like one of those realtors whose advertising says something like “Let me find the home of your dreams!”  For some buyers and realtors, that is all they think a realtor needs to do.  Take people out in a shiny car and open doors for them until the dream home is found.   I often get listings from sellers who used an agent like that when they bought.  All they knew was that they liked their house.  The agent didn’t tell them that their lot sucked, their floor plan was odd, or anything that would have an effect on their ability to sell their house later……SEE HONEY, I’M JUST TAKING CARE OF YOU LIKE I DO ALL MY BUYERS!!

All joking aside, my wife knows I’m watching out for us.  I shot down a great house when we last bought because there was a vacant field across the road.  I looked at the zoning.  It was so broad that practically anything could have been built there.  Ground has just been broken for a large apartment complex in that field.  The same house is for sale again for much less, and still hasn’t sold.  Meanwhile, our current house has turned out to be a good investment because it is in a popular neighborhood with a good school district, and I bought it right.

Now really is the best time to buy (and why it won’t last long)

by John Rice

Yeah, it sure is.  I remember throughout my career seeing other Realtors try to create urgency by saying “Now is the time to buy!”  It was usually tied to a drop in the interest rates.  I always thought my clients were smart enough to realize the interest rates dropping by an eighth of a point wasn’t that big of a deal, so I never jumped on that wagon.

Today is different though.  I am saying now is a great time to buy.  Probably the best time in the past 15 years based on all that has happened.  I’m not going to quote a lot of statistics here since they don’t always tell the whole story.  Like sure, having 1126 sales year to date verses 1000 sales for the same period in 2011 feels good, but 2011 was a bust after the tax credit expired in 2010.  Somebody could point out that 1126 sales YTD this year is nothing compared to the 1722 we had in 2005, but we don’t know how many of those sales were houses that were flipped, meaning one house can count for two sales.  Another could point out that we have had a milder winter that has brought buyers out early………and we all could debate on why the glove didn’t fit O.J. Simpson too.

I’m mainly looking at stability.  As somebody who owns a few houses, I’m concerned most about value.  It’s only the realtor in me that cares about the number of sales.  If supply and demand are pretty in balance, I don’t care.  If my house were the only one for sale and there was only one buyer out there, I’d be fine with it.

This is the first year in a long time where prices aren’t dropping around here and the market is standing on its own two feet.  The tax credits tried hard to stabilize the market, but that turned out to be just a shot in the arm.  Today, we don’t have any crutches for our market.  It’s just about good prices, really low interest rates, and the appearance (whether real or perceived) of an improving national economy.  I’m not seeing the fear of the future like we did as recently as last year, and I sure am not sensing the hesitation from buyers to pull the trigger on a house.

How long will this last?  Who knows?  While we aren’t going to wake up later this year to find an early 2000’s frenzy, I think we’ll see seller’s gaining confidence again.  Right now, they still feel pretty lucky to sell their house.   I think they’ll become less willing to bend over backwards for buyers, which means a higher sales price and/or less negotiation over inspection repairs.  Also, rates will eventually go up.  While rates dropping don’t motivate buyers as much as you might think, rising rates do.  That’s always been funny to me how people seem to care more about a payment going up by $35 a month than they do about a payment dropping by $35 a month.   Let me ask you this, do you see rates going much lower?  If your answer was no, that means the only thing rates can do is stay the same or go up.

So, now really is a great time to buy.  It’s also a great time to sell.

The Under $100k Buyer. Going…Going…Almost Gone

by John Rice

HELLO UNDER $100,000 BUYER…….ARE YOU OUT THERE????

I don’t think you are, and I don’t blame you.  With prices and interest rates so low, why settle for a $90k three bedroom, one bath house without a garage when for only $143 more a month you can get not only a newer house, but one with an extra bathroom and a garage?

Between the listings I have and from watching the under $100k market every week, I think it is safe to say that few people are looking under $100k right now that aren’t investors.  I have one of the best $90k houses I have ever seen listed right now.  I didn’t expect it to take 45 days to sell.  We finally got an offer though, and a good one at that.  Every week I scroll through all the new listings, pending sales, and sold listings from $0 all the way up to $550k.  Most of the under $100k ones are foreclosures that get bought by investors.  The $100-150k is super strong at the moment.

Let me flash back to 2005-2006.  Back then, realtors dreaded a buyer who said their peak price point was $100k.  There just wasn’t much out there back then for that kind of coin.  Today, $100-125k seems to be where most of those buyers land.  Whip out your mortgage calculator and you’ll find that the payment is the same at today’s 4% rate for a $125k house as it was for a $100k house at 6% back then.

We all know that the higher end houses have suffered the most with values over the past several years, but I am now worried about the lower end.  Who would have ever thought that record breaking affordability would mean that nobody wants the most affordable houses there are??