New Year Memories - Great Buys

Of course I have many great New Year memories, but the one that popped into my head today was New Year’s Day 1972. At the time I was a senior at WSU and a number of us had returned to campus right after Christmas to finish papers due the end of the semester. Back then, the semester ended a couple of weeks after the Christmas break.

As a kid growing up, New Year’s Day had always been special and included a special dinner with friends and neighbors. Back then my folks used to bring out a bottle of port wine to signify that the meal was indeed a special event. Although I’ve never been quite sure of what exactly constitutes a port wine, sometimes they would let me take a sip. Anyway, in keeping with that tradition, I felt obligated to fix something special. Since a fraternity brother had left a couple of quail or ducks with me after a hunting trip, I thought they would make the perfect meal. But, as I began the preparations, I realized the birds still had feathers.

I reasoned that my mom knew everything, so I called her and asked how to get rid of the feathers. She told me to melt paraffin wax in a pan and dip the birds and when I removed the wax from the birds, the feathers would disappear. Surely, that sounded easy enough except, after I had dunked and removed each of the birds from the dripping wax, I found out that it wasn’t so easy to remove the wax and feathers. Actually, by the time I had finished, I literally believe I had broken every remaining bone in each birds little body. At the time it was very nerve racking but now it seems quite humorous. As I recall, my friends and I enjoyed a delectable feast and no one cared how the feathers were removed.

As to my real reason for being back on campus before the Christmas break had concluded; I finished my paper and had it turned in the first day back in class. Actually, it was a great paper and I received one of the two highest grades in the class. The class was a graduate economics class on discrimination and my paper was entitled “The Circular Tendency of Discrimination.” My wife says I still have a copy of it around somewhere. She believes I never throw away anything. I hope she’s right. It was a great paper and a great accomplishment. Something I still treasure.

As this relates to real estate, it reminds me of the eternal question of “What is value; what constitutes value; how do you measure value and who determines what that value is or should be?” Of course the paper I finished that Christmas break had great value to me. I gave my blood, sweat and tears finishing it and it earned me an exceptional grade in a graduate level class. Did I mention that the grade on the paper determined ones entire grade for the class? Well it did. The sole grade determinant was one single paper and I was triumphant and exuberant that I had done so well. That paper had real value and the grade I received was the measure of that success or value.

However, in residential real estate, value is primarily determined by buyers and supposedly quantified and substantiated by real estate appraisers using data from already closed transaction where buyers and sellers had come together in a meeting of the mind. A meeting of the mind is another way of referring to a sale price.

Just to stir the pot a bit, an economic adage states that value doesn’t always equal cost. With residential real estate, that’s another way of saying that some components of a home cost more than what a willing purchaser is willing for pay. Hot tubs are a quick example. Another one would be master bedroom soaking tubs. In those cases, the cost of the hot tub or soaking/Jacuzzi tub usually exceeds what most buyers would be willing to pay if the items were sold separate from the residential real estate. As an appraiser, those instances would be referred to as, “the contributory value, less depreciation, of the hot tub or soaking/Jacuzzi tub is less than the actual cost of those items when purchased new. Contributory value indicates that they are part of something greater; that they contribute to something which has many parts. The value of a whole house could also be less than the cost of building it. It’s what a willing buyer is prepared to pay.

But, getting back to value, let’s say that a builder buys a lot and builds a home. Let’s also say that the builder proposes to build a new residential home projected to cost $300,000 on a lot already purchased for $100,000. The builder goes the banker and fills out an application and hopes to get an appraisal of at least $400,000; $300,000 for the proposed improvements and $100,000 for the lot to build it on. If an appraiser, after an inspection of the property and review the building plans (specifications), is able to concur with the builder and conclude that the value of the residential real estate, once completed, is at least $400,000, then the builder will typically get a loan from the bank and begin construction.

However, if after the home is completed and if it still remains unsold, does it still have a value of $400,000? Not necessarily. Furthermore, it doesn’t have a higher value either. It isn’t until someone steps up to the plate and completes a purchase of the property at a price agreeable to both the buyer and the builder, who is also the seller, that value is confirmed. As with the earlier example, the cost of building the home isn’t necessarily the value of that home when exposed on the open market.

This is very important. I’m constantly being told, “Well my home was appraised last year for $400,000 and therefore, that’s what it is worth today.” Sorry, it’s only worth that today if the market will support that price and a willing and able buyer is willing to pay that amount. Here again, it is important to recognize that the value conclusion of a real estate appraiser, completed by a licensed or certified appraiser, is as of a specific day and time. It isn’t intended to represent a value that will exist to any other date or expand into the future. This is especially true today. In today’s market, value is a moving target. It isn’t constant and it’s constantly changing.

Another economic principle is that change is expected to occur; that markets will change and react differently to altering conditions and influences. That is why it is called the “principle of change.”

Looking at our current Pierce County market, one indicator I pay a lot of attention to is the medium price of the unsold residential housing inventory. These include all unsold homes which are currently listed for sale on the Northwest MLS. The medium price is the price of the home most near to the middle of all of the homes available at any given time. As an example, on January 1st, 2008, the medium price of all unsold residential homes in Pierce County was $310,500; $351,500 in Bonney Lake; $535,000 in Gig Harbor; $287,825 in Lakewood; $265,448 in Spanaway; $259,000 in Tacoma; and $400,000 in University Place.

In statistics I ran this morning, the medium price of the unsold residential inventory in Pierce County was $285,845; $315,000 in Bonney Lake; $499,925 in Gig Harbor; $267,000 in Lakewood; $225,000 in Spanaway; $234,950 in Tacoma; and $369,900 in University Place. Yes, there have been changes and this data indicates that the list prices of the unsold residential inventory are being reduced. This is a reflection of perceived market changes and an attempt to become more competitive.

What all of this suggests is that, if not already, residential real estate will soon become a hot commodity. In other words, it’s a great time to be buying real estate. The list price (asking price) of residential real estate and the interest rates to purchase those properties are at the lowest levels in years.

For those of you still on the fence, let’s look at statistics of the medium price of the unsold inventory from September of 2004. In Pierce County the medium price of the unsold inventory was $225,000; in Bonney Lake it was $257,400; in Gig Harbor it was $349,000; in Lakewood it was $209,950; in Spanaway it was $192,450; in Tacoma it was $188,990; and in University Place it was $290,000. You do the math. Real estate is still a great buy.

Ken Thiemann is a Real Estate Consultant with Windermere RE / Paragon Company located at 7525 28th Street West in University Place, Washington. In addition to holding an associate broker’s license, he is also a Washington State certified appraiser. Due to stringent appraisal reporting requirements, Thiemann points out that the majority of the valuation consulting he does is completed under his broker’s license. When possible he completes manual statistics of various market areas throughout Pierce County. Since 2004, he is particular interested in homes listed and sold over $800,000. For instance, in December of 2004 there were 95 homes throughout Pierce County listed over $800,000. In statistics ran this morning, there were 395 homes listed over $800,000. Thiemann attempts to use statistics to help his sellers better understand the market in order to facilitate a quicker sale. Thiemann was originally licensed in 1972 and earned his broker’s license in 1976.