That’s the cadence nowadays right?
“Those damn developers must be making a killing!”
“Developers must be loving this market!”
“These developers keep cramming in these homes tighter and tighter to make more money.”
“It probably cost them $300K to build it and they sell it for $1,000,000!”
These are the comments I hear on a pretty regular basis. Friends, family, potential clients, and regular Joe’s. I have to admit, even I thought they probably love this kind of market. That was, however, before I was educated on the intricacies of property development and really began to understand what these developers have to deal with.
Let’s start at square one.
To build a sub-division a developer first has to acquire the land. On the Eastside, the days of developers being able to buy hundreds of acres and building a master planned community like the Issaquah Highlands, Klahanie, or Trossachs, are gone. Those days are over. Today, they are looking for deals on typically well under 100 acre lots. Some micro-developments even go up on as little as 2 or 3 acres. It’s just the reality of the lack of land.
“But I see huge swaths of land all over the place.”
True, however, there are several factors that must be considered. Often this land is greenbelt, which is protected land and will not ever be developed. Sometimes it’s owned by somebody who just has no interest in selling, or wants a price above what the market allows. Other times, it may be the quality of the land. Wetlands are not the ideal building geography, not to mention the environmental hoops one would have to jump through just to make the land build-able.
The majority of the land that actually makes it to the MLS, is worthless to developers. It’s typically over-priced and when it does sell, it is to a private owner looking to either get into real estate development, or just looking to build their own home. But the dilemma with that, is when it does sell, it sets a price threshold that every land owner now thinks that they can expect.
“If the land is more expensive, they just increase the prices of the homes.”
Yes and no. While obviously land value is going to have a correlating impact on home value, a developer has to introduce a product that is in-line with market conditions. They simply cannot build a 4,000 sq ft home on the Plateau and ask $2 million for it because the land was expensive. That home HAS to fall between $900,000 and $1.4 million depending on the variables. Otherwise it is simply not marketable. Developers are extremely constrained by the cost of the land they purchase.
Time. When a developer makes a land purchase, there is an immense amount of front-end work that has to be done before a single foundation is poured. Environmental impacts, feasibility studies, architectural drafting, utility easements, etc., etc. With that, lies an inherent risk in the fact that any investment won’t be ready to market for 1-2 years or more in some cases. Most will act on what makes sense in today’s market, as none of us can predict the future. But there has to be some wiggle room built into the investment to accommodate for the breathing of the market.
Margins. While every project is different as there are so many variables to consider, most developers are not making insanely high margins. Depending on the location and size of the development, margins may be as low as 5% to as high as 30%. They are not selling these homes for twice as much as they have into it, it just isn’t happening.
The point of this article is to shed some light on the fact that most developers hate these market conditions just as much as most buyers do today. While they do have peace of mind knowing that their soon-to-be finished projects will sell, and often sell before completion, they are always looking forward and the outlook, quite frankly, is intimidating to even the most tenured local developers. They remain hopeful and optimistic, but the challenges of property development on the Eastside are serious and challenging. So next time you hear somebody blaming those “damn developers,” take a second to shed some light on the challenges that they face in providing homes for our families.
By: Dan Colson
The housing market in 2017 is going to receive a large influx of first-time home buyers. Millennials are finally reaching the time of their life when they are ready to settle down, buy a home, and move to the suburbs. Data by Realtor.com shows a projected 58% increase next year in first time home buyers from 2016. This will make an already super competitive market in the Seattle area, even more so. Which will likely, also, drive prices. And this will not change anytime soon, we will continue to see millennials entering the market for the next 10 odd years to come.
You may be asking yourself “what does this mean to me?” Well, if you are in the market for a house, it’s going to mean more of the same trends we have seen over the last few years: homes going for well over ask, multiple offer situations, no contingencies, etc. Luckily, right now, the price increases over 2015 have not affected payments significantly due to record low interest rates. However, there is a high likelihood that interest rates will rise in 2017. So if you were planning on buying a home in the next year or two, it may be prudent to start exploring what your options may be right now.
On the contrary, if you are a seller, the current market conditions are fantastic to sell! The Fall and Winter are typically slower seasons in real estate, especially here in the Pacific Northwest. This year, extremely constrained inventory has kept the market sizzling into the final months of the year. The Eastside continues to see price increases and an inventory level that is 83% lower than a balanced market. While coordinating a move during winter is not always the most fun endeavor, it could be a lucrative move as there is simply just not as many homes for sale as in the Spring and Summer months, in addition to the large pool of buyers currently looking in an attempt to avoid the fierce competition we saw this last year.
While residential construction has been ongoing in an attempt to meet the demand, the continued hiring by our region’s tech giants is making it difficult to catch up. For reference, Amazon currently has 8,800 job openings in Seattle. In addition to that, by the end of the decade Amazon will have constructed enough office space in the region to accommodate another 30,000 employees. Many of these hires will undoubtedly be the very millennials that are just now foraying into the housing market.
The good news is we have a strong, youthful, vibrant economy that is on pace to see continued growth for years to come. It seems that people and companies alike just can’t get enough of the beautiful Northwest!
By: Dan Colson
I often hear people’s worries that we are in another bubble. Prices have risen significantly in the last several years. There is an underlying fear that we are on the brink of another housing recession. While there are never any guarantee’s when it comes to the economy, I would like to share some of the differences between today’s market and that of the market pre-recession.
Supply and Demand
Anyone who has taken a basic course in economics (and many who haven’t) know that the basic drivers of price are supply and demand. In September 2007 there were 7.1 months of inventory on the Greater Eastside (for reference a balanced market is 6 months of inventory), with over 4600 active listings. Out of that, there were only 655 pending sales during that month. To break that into a percentage, about 14% of the active listings went pending.
Now when we compare that to September 2016, we really see the difference. We are currently only sitting on 1.1 months of inventory, we had 1,352 active listings and 1,214 pending sales. That is an astronomical 90% of listings that went pending.
From a supply and demand standpoint, the current increase in prices is warranted and will continue to be so. Until enough homes are built to begin to balance the market, current prices will remain steady or even continue to increase.
There are several factors at play from a financial perspective that are driving prices on the Eastside. First, in the years leading up to the recession, mortgages were extremely easy to come by. My mortgage partner likes to joke that back then “If you could breathe, you could get a mortgage.” Thankfully, we learned that the mortgage industry needed stricter regulation and in the subsequent years that is exactly what has happened. Today, there are more stringent requirements and much more due diligence done by the underwriters to ensure that the mortgages being written are sound.
There is also a significant amount of foreign investment happening in the region. Many of these buyer’s are bringing cash to the table and not relying on mortgages to finance their purchase. In a multiple offer situation (which has been prevalent with the lack of supply) a cash buyer reigns supreme. In order for a buyer depending on a mortgage to compete, they must offer an increased price or more favorable terms.
Seattle has a booming economy! Between Microsoft, Starbucks, Amazon, and Boeing, we have some of the nation’s most influential companies based here in the Pacific Northwest. Job growth has been steady in the region for some time now and wages are increasing to a level that competes with the likes of some of the nation’s largest cities. This is great for us, and great for sustained growth in the years to come. Downtown Seattle currently has more cranes constructing skyscrapers than any other city in the nation. That, in itself, is quite impressive.
When we truly examine the various factors that are contributing to today’s current rise in home prices in the region, we begin to really see the picture of what is causing it. It is not propped up by bad loans with adjustable rates that won’t be affordable when interest rates increase, like what happened in 2007-8. Instead, prices have risen due to a general lack of supply in the region, an increased interest in real estate investment, and a booming economy. And for that, we should be thankful.