In the morning I wake up, clean up, dress up (down), drink the espresso that my wife kindly makes me, take my kids to school, and go to my office. I do this five days a week. On the other two days, I skip the part where I drop the kids off at school. When I get to the office, I turn on the lights, sit down at this desk, and check the MLS. I check the new listings and the sold listings, the reduced listings, too. I think about what to write about. I think about the weather and the scenery, the lake and the sky. I think about the trees and the tinge of whatever color might be deepening or fading. I think about the lakefront market, the lake access market, the vacation home segments in their pieces and as a whole. And then, when I sit back and consider everything I just say, “man, people are paying lots of money for really basic subdivision houses.”
Most days, I ignore those primary market thoughts, and write instead about lakefronts and the sort of real estate that interests me and my clients. But today, the primary market interests me, because this trend is established and it’s serious and I can no longer ignore it. The primary market is hot, all segments, all prices, so long as we’re talking about less than $400k. Some of the primary neighborhoods are selling for more than $400k, but not with particular regularity. Those primary home subdivisions that I wrote about with fervor a few years ago have come to life, and buyers appear to be content to purchase their own version of vinyl perfection.
When I wrote about the state of the primary market, the subdivisions were mostly idle. Some construction, but not much. In the three years that have followed, the construction market has boomed. New homes are being built with frightening speed, slapped up in a matter of a couple months. Efficiency, claims the builder. Haste and synthetic materials, counters this Realtor. But still, the market is hot and I’m curious to see what, if anything, today’s buyers have learned from the past market cycle. That cycle, in case you forgot, was especially hard on neighborhoods for the simple reason that platted neighborhoods tend to function as their own specific market. If there are four comps on the road you happen to live on and all of the homes were built to a similar standard at a similar time, you can bet your value will be seriously impacted by the sales of those nearby homes.
To check on the market, let’s look at a few random, recent new home sales in the new home subdivisions on the west end of the village of Williams Bay. I won’t identify the owners or the addresses, but let’s look at sale price ranges and mortgages pulled to gauge the strength of this homebuyer. That strength is important simply because the market isn’t going to appreciate forever (too bad, OpenDoor), and once the market stalls, those with the smallest percentage of equity are the most likely to face difficulty. The first sale was well over $400k- a price threshold very rarely surpassed in the primary market. A check of the mortgage reveals the buyer only financed around 80% of the purchase. Good for them, and good for this subdivision.
Down the road, another sale. This one also over $400k, this one to a buyer who appear to have financed around 85% of the purchase. Another winning data point for this subdivision, as another strong buyer has entered the fold. The next sale was a bit under $400k, and that buyer looks to have put less than 4% down. Another sale in a different subdivision, this one in the lower $300k range, this one to a buyer who put around 5% down. Another sale, this one just over $300k, the new owner putting around 4% down. There are other examples, some with 20% down, others with less, but the concept here is simple. If you’re buying into a hot subdivision, paying hot subdivision 2018 prices, and your neighbors are, perhaps 40-50% of the time buying their homes with less than 5% down, is this is a solid model for sustainable values if we head into a down cycle within the next 4-6 years?
Personally, I don’t think it is. That’s why I wish primary home buyers would exercise caution as they rush to these newly drywalled homes. I understand the desire to be in a new home, but I’d rather be in an older home in an existing neighborhood than be surrounded by a constant cloud of low-money-down-construction-dust. An interesting side-note from my market studies of 2015 and 2016 is the desirability of subdivisions that are close to schools. If kids can walk/bike, or otherwise easily get to a school, the subdivision tends to be fairly hot. If the subdivision is outside of town, without a nearby city center or grade school, the subdivision is still somewhat stagnant. If you’re a primary buyer considering a new home priced $450k and under, please be cautious. I say that fully knowing caution doesn’t play a role in a hot market, no matter how badly I wish it would.