Friday, October 23, 2009

September Real Estate Report

Has the market finally turned?

September was such a spectacular month for home sales in Madison Park that it caused one realtor to proclaim that “the logjam has finally broken” in the local real estate market. Perhaps so. Eleven houses and two condos were sold during the month, a huge increase from the dismal five sales recorded in July and the seven closings in August. September is normally not a big sales month here in the Park, making this year’s numbers particularly impressive:

The October closings, at least though the mid-point of the month, also seem to support the hope that the market here is finally on a sustainable upward trajectory. There were seven sales in the first two weeks of the month, and 12 homes were listed as “pending” sale by mid-October, according to the Northwest Multiple Listing Service (MLS).

Not everyone is ready to declare victory, however. One very experienced agent told me she was really not sure that the recent uptick was conclusive. She has a point. Looking at the home-sale numbers over the past couple of years shows that the market this year is still struggling to regain the level of sales experienced even as recently as 2008, when the market had already leveled off:

So the bottom line is this: the market is definitely on the move, but it may be a few more months before it becomes obvious that we are finally out of “the trough.”

Here’s where the market stands at the end of October. These numbers, based on listings reported by Redfin, cover all of Madison Park—Washington Park and Broadmoor included:

Single-Family Homes

Listings: 63
Median List Price: $1,995,000
Median Sq. Ft.: 4,040
Median Price per Sq. Ft.: $494
Average Days on Market: 136
Proportion with Price Reductions: 38%

Condos & Townhouses

Listings: 31
Median List Price: $635,000
Median Sq. Ft.: 1,131
Median Price per Sq. Ft.: $561
Average Days on Market: 176
Proportion with Price Reductions: 52%

The fact that inventory levels have declined to 94 listings is worth noting, since up until this month the Park has apparently not had less than 100 total listings all year. Interestingly, all of the houses sold in September closed for more than $1 million, according to the MLS. The most expensive was a $2,850,000, 6,200 sq. ft. Washington Park residence built in 2002. The least expensive was a $1,060,000 1959 ranch-style house located in the Canterbury section of the Park. The average time on the market for sold houses was 173 days, and the average discount at sale from the list price was 10% (the discount for condos was 13%). These percentages understate the true discount from the seller’s initial hopes, however, since six of the sold homes were originally listed at prices that were higher than their final list prices.

Again in September the pattern continued where the largest listed homes were the ones most likely to still be awaiting a buyer, though the homes that did close were still significantly bigger than the median Madison Park residence (as computed by

There are a few houses for sale in the Park for less than $1 million (11, to be precise), but they represent only 17% of the available inventory. One example is the house shown above, a two-bedroom 1940’s cottage listed at $649,950.
When the market was hot, this was precisely the kind of house that would have been purchased by a speculative builder with the intention of tearing it down and building the biggest house allowable. That’s probably not going to happen with this property this year, for reasons we’ll explore below.

September also saw the first case I am aware of in Madison Park of a short sale. There’s been a lot of discussion of this phenomenon in the press recently, but it is not something that has heretofore impacted the local market. What happens in a short sale is that the lender agrees to allow the property owner to sell the house for less than what is owed on the mortgage. The lender then “eats” the loss. Redfin reports this month that a Broadmoor house which is listed for more than $2 million is now in that short-sale category as a result of its latest price reduction.

Broadmoor, for whatever reason, seems to be pretty much stuck where it has been for many months: few sales and 25 to 30 houses on the market. Broadmoor represents 41% of the homes currently listed in Madison Park, while constituting less than 20% of the total homes in the neighborhood. There was one Broadmoor sale in September and no sales reported to date in October, according to the MLS. Broadmoor’s 26 listed houses are not more expensive than those for sale in Washington Park (median for-sale prices being $1,950,000 and $2,695,000 respectively), but Broadmoor’s are substantially older. The median year built for listed houses in Broadmoor is 1935, versus 1966 for Washington Park. The numbers for Washington Park are admittedly somewhat skewed by the fact that there are six speculative houses for sale there, all built within the last three years.

A tough market for spec builders

By my count, there are eight spec houses currently on the market in Madison Park, including two north of E. Madison Street. Houses built by speculative builders now constitute almost 20% of the houses for sale in the non-Broadmoor portion of Madison Park (Broadmoor does not allow spec building).

It’s a difficult time for the speculative builders who have normally worked the Park. Each has, at minimum, scaled back operations since the height of the market in 2007. Some have apparently ceased operations altogether, other than attempting to sell their existing inventory.

One of the most prolific re-developers of Madison Park properties over the past four years was Blueline Developers, which built ten houses in the neighborhood, ranging in price from $1.2 to $2.4 million. But they’re not building anything now and probably won’t be doing any redevelopments on their own account anytime soon, according to Lorenzo Smith, one of the firm’s principals.

“Right now,” he told me, “we’ve developed all of the properties we owned.” The game plan for the foreseeable future, he said, is to “hunker down and wait it out.” Smith noted two major restrictions on developers in the market: lack of bank financing for builders, and stringent requirements and higher rates for home buyers needing jumbo mortgages. “Developers are almost a dirty word with banks right now,” he commented. “We’ve talked to lots of different developers and the situation is the same for everyone.”

What this means for Blueline is that they have reduced staff to about 25% of what they had at the peak, and the company is currently only doing contract work for clients wanting remodels, build-outs, and new construction. Smith agreed that the market seems to be improving, “but we would want to see a little more movement before jumping back in.”

Chaffey Homes, which has also been a major player in redeveloping properties in Madison Park, has a similar wait-and-see attitude. Kevin Murray, the company’s Vice President, told me that he is “quite hopeful” that the market has turned. “It feels like we’re still in the trough, but we’re starting to see positive upward pressure,” he said. This is more the case for homes selling for well under $1 million, he noted, than for areas with pricier homes such as Madison Park. Nevertheless, Chaffey did chalk up a win here last month, selling the one house it had for sale in the Park. The house sold for about $1,650,000, which was only a slight discount from its asking price. Murray, who lives in the Park, said "it is great to see solid activity in our neighborhood over the last couple months".
Chaffey’s homes in the area have generally been in the $1.5-$2.2 million range. For this segment, Murray told me, there have been a lot of people who have been watching the market but not making the move to buy. He notes that some buyers want new, and once the available new houses start being absorbed, there may not be replacements in this market any time soon. Now that some houses are selling, this may accelerate buy decisions by those who have been waiting on the sidelines.
Murray commented that Chaffey has one other house almost ready to come onto the market (a Tudor-style house on 41st Avenue E.), but after that the company has no immediate plans to develop other properties in the area. He noted that Chaffey owns a Madison Park house that it intended to eventually tear down and redevelop. But “we’ve decided to sit tight for now,” he told me. This, in spite of the fact that there’s a building permit in place. Chaffey is treating the house as a rental property at this point. “If we see a couple more new homes sell, we might reevaluate the situation,” he added.

One area spec builder, however, seems to be taking a different view of the market and is moving forward with its redevelopment plans. M2K Developers, which is just completing a 4,000 sq. ft. spec house in the 1400 block of 38th Avenue E. (shown below), is also constructing two 5,000 sq. ft. houses on the 1500 block of 37th Avenue E., near McGilvra School.
I asked M2K partner Mike Culwell what prompts such a gutsy move at this time. His reply: “We’re fairly bullish on this market, though not as much as we were two years ago.” Culwell, who also lives in Madison Park, noted that “the area has great appeal as a destination neighborhood, has proximity to downtown and the eastside, and it’s a great place to live.” He said M2K would probably not be willing to do property redevelopments in any other Seattle neighborhood right now, but he is comfortable going ahead with the projects here that M2K had already planned. He noted, however, that his crews have been thinned out—and the company is slowing construction on its projects so as not to put all of its properties on the market at the same time. “There’s no reason to hurry these things through now,” he said, “but there’s also no reason to stop.”

Another developer called M2K’s decision “bold,” but noted that it’s possible M2K may end up having the only new-construction houses on the market at the point things really open up for the jumbo-mortgage segment.

The issue for most spec builders with houses already on the market is whether they can sit and wait for the market to turn. As one noted, “you can’t hold out forever.” Every month that a house remains unsold means another month of profit-eating carrying costs, which include taxes, insurance, maintenance expenses, and interest on financing.

The two houses shown below, located on the 1200 block of 42nd Avenue E., were built by separate spec builders in 2007 and 2008 respectively. After sitting with their houses unsold for at least a year, each of the builders independently made the tough choice to rent out the houses with a view to re-listing them when the market improved. That decision apparently paid off for Ryan McKinney, the builder of the 3,700 sq. ft. house on the left. His house is one of those on this month’s pending list.
[Thanks to Wendy Skerritt of Windermere Realty for her help in providing some of the market data utilized in this report. In addition to information reported by the MLS, homes sales data include sales recorded by the King County Assessor’s Office that were not reported in MLS totals.]

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