One South Realty

Paying More Feels Weird

What would you do if your local automobile dealer told you that the price of the car had gone up between the time you test drove it and when the paperwork was prepared?

What if the new Adidas jogging shoes went from $59.95 on the rack to $79.95 by the time you walked to the register? You’d request them to honor their advertised price, right?

So when happens when your buyer’s agent tells you the cute brick cod cod with a slate roof and white picket fence, priced at $339,950 will probably get multiple offers and sell for closer to $370,000?

Get prepared, because that’s the kind of market we’re in.

The Market Has Changed

Whether it is an automobile or a sweater, or a pair of shoes, we have been conditioned to seek discounts. We check the discount racks, clip coupons, and keep our eyes out for sales. Paying retail means paying too much.

And when it comes to real estate, we have been conditioned to negotiate hard and that a good deal means getting the seller to take a discount.

Well, market conditions have changed that narrative quite a bit.

Supply and Demand Set Pricing

When the crash occurred in 2008, the market was substantially overbuilt. The 12,000 houses for sale in July of 2008 has dropped to less than 4,000 in 2018. And the number of contracts has spiked from 1,500 in July 2008 to over 3,000 currently.

Stated differently, the market is approximately 600% tighter today than it was in 2008.

That is a really big change.

We Could See it Coming

Flash back to 2012: We could see inventory plummeting and could literally feel the market firming up. The bidding wars hadn’t arrived yet, but the first wave of buyers who were cautiously entering the market were shocked that there weren’t more houses to choose from. It was akin to going to a factory closeout sale on the last day and wondering where the good deals were.

What was happening, and happening quickly, was a total supply crash. And when it was coupled with an increase in demand, especially at more affordable price points and closer to the urban core, we quickly moved from recovery to problem to crisis.

And so here we are.

Some things to think about

In the days leading up to the crash, it was all about the demand. Lax lending practices were creating an endless supply of buyers.

Today, it is about the supply (or lack thereof). In some neighborhoods, buying a home is like buying milk and bread the night before the blizzard hits.

We don’t want to scare you. Rather, we want our clients to enter into the process with the correct state of mind. Each of Richmond’s submarkets behaves differently.

  • If you are trying to purchase a home in Church Hill or the Museum District for $300,000, you are going to end up in a bidding war – it is inevitable.
  • If you are trying to purchase for $500,000 in Bon Air, you aren’t as likely to end up in a bidding war, but you might be one of two offers and likely end up at or near full price.
  • If you’re looking at a million dollar home in Moseley, you can probably get a discount.

The key is working with an agent who can help you read the market.

Don’t Take Your Cues From the Past

We can no longer operate under the long held belief that refusing to pay what the market will bear for a great home is a winning strategy. The conditions that made our market what it is today are unlikely to change and owning good real estate in a stable and inventory constrained area is smart, even if you’ve got to pay top dollar to get it.

Happy hunting!

The Change –– 2018 into 2019

Each year at One South, we sit down as a group and talk about the prior year and what we expect in the coming year (or more.)

For the last several years, we have basically been looking at each year as if it will be more of the same. But as we look out over the horizon of what is to come, we can feel the market shifting. The questions are:

  • When?
  • Wher?
  • By how much?

Below is a copy of the presentation.

The Consistent Misuse of ‘Dollar Per Square Foot’

We are all guilty of it. Realtors. Developers. Builders. Lenders. Appraisers. And of course, the buying and selling public.

What are we guilty of? Misusing the ‘dollar per foot’ metric in our analysis of housing values.

What is Dollar Per Foot?

If you are unfamiliar with the ‘dollar per foot’ measurement then you haven’t been looking at housing recently. Dollar per foot (or sometimes referred to as ‘price per foot’ or $/SF) is equal to the price of a home divided by its number of finished square feet.

Everyone tends to use the metric rather blindly in an attempt to compare one house’s value over another. Unfortunately, the comparison is used without really understanding its best application.

When $/SF Works

We will begin where the $/SF analysis works well: When comparisons are made between houses that are HIGHLY similar.

What does highly similar mean?

  • condos with similar views
  • housing built in the same neighborhood with similar designs, materials, age and especially, lots
  • retirement communities
  • townhouse communities

If you are comparing a townhouse in Community A to another townhouse in Community A on a different street, then yes, $/SF is helpful. Knowing that one townhouse is priced $5 per square foot less might make a difference in your decision.

But if you try to compare the townhouse $/SF to the condos built down the street, you aren’t going gain any real insight. It isn’t dissimilar from comparing the price of a hamburger from McDonalds with a steak from Ruth’s Chris. Yes, they both are food, and (allegedly) beef, but the similarities end there.

When $/SF Doesn’t Work

So here are the common mistakes we see:

3rd Floors and Basements: A finished 3rd floor or basement is not worth the same — on a $/SF basis — as the first and second floor are. Often sellers assume that a $150/SF average in the neighborhood means that the 500 SF finished on the third floor or finished basement adds $75,000 to the overall value of the home. It doesn’t. Most appraisers will discount the additional space at roughly half of the neighborhood average, but even that adjustment varies wildly.

Condos vs Single Family: First of all, condos are measured differently (they tend to take interior measurements versus exterior ones making them technically smaller, even if the floor space is the same). And second, the maintenance burden for much of the exterior and landscaping is carried by the association. When the roof goes on a single family home, the owner pays for a new one. In a condo, the new roof is budgeted for with each owner only responsible for a fraction of the cost. Don’t use $/SF when comparing different asset types.

Lot Differences: All lots are not created equally. A lot on a main road that backs to the community pool is not nearly as private as the one in the rear of the community that backs to a creek, and thus far less valuable. So if you were going to use $/SF to compare the two, you would need to account for the value difference in the land to gain any real insight.

Poor Design: Lastly, people tend to really miss out on the impact of design. Two 3,000 SF homes, even in the same neighborhood and built by the same builder, can vary wildly in price due to poor design (kitchens separate from living spaces / oversized formal dining rooms) or dated decor. It’s hard to look at pictures online and gain any real sense of the difference, but if you are going to use $/SF, you should try.

Summary

I like to tell clients that using $/SF IN your analysis is fine. Just don’t use it as your analysis.

If your decision will lean heavily on $/SF, make sure that you are really comparing highly similar properties, with nearly identical lots and quality levels. If you are in an urban area where property values shift quickly, tall condo buildings where views can be radically different, or in areas where lots vary greatly (especially along water), then you can kind of just toss $/SF out the window.

If you know how to use $/SF properly, then it can be a helpful tool in decision making. But if you just use $/SF and don’t ask questions, your analysis won’t be very valuable.

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