Decade of New Construction

Better to Buy or Build?

This question comes about in almost every new client conversation I have. There are those diehards that refuse to live in a new house, and there are those who want a maintenance free home from the start. (no such thing by the way – but new homes are certainly less). Personal tastes aside, there is always a financial question regarding which is better. It is the goal of every seller, whether builder or homeowner, to maximize their price at the sale of a home. There may be some other factors on the table regarding timing, but it all comes down to the final net price to seller. Always.

So, prices tend to go up and down in tandem for resale and new construction. Sometimes, one lags the other, but in general, when prices are rising, they are going up for both types of sellers. For that reason, the percentage of sales that are new construction tend to be pretty flat in good times and bad. I’m not saying that new homes keep selling, I’m saying that as a percentage of total sales, they remain fairly constant.

When we look at the last decade, this is certainly what we see. From 2003 to 2011, the percentage of total sales that were new construction (Albemarle and Charlottesville only) remained between 16.7% and 18.0%, and in 7 of those years, it was even tighter, between 16.6% and 17.1%. Not a lot of variance.

But in 2012, we saw a major shift. In Oct of 2011, builders began getting advance warning from their suppliers that prices were going up. Drywall, lumber, you name it… Prices went up. And we’re not talking 2% here. In 2012, prices on drywall went up roughly 30%. And in January of this year, prices went up another 20%+. 2012 saw lumber prices up 44%. And that drives new home prices up. Nationally, the average new home contains roughly 45% of it’s cost in materials. And when they go up as significantly as they have, there is little way to protect the profit without ratcheting prices up.

But good news may be on the horizon. Lumber commodity future point to as much as a 25% decline in prices from mills as China demand decreases and output from Canada increases.

So, here is the interesting thing. 2012, saw the first major drop in new construction. Builders may not have even noticed. The actual number of new homes sold in 2012 (266) was the highest in any year since 2007 (376 – so we are still a long way off the bubble path). But while there was a 4.7% increase in new construction sales in Charlottesville and Albemarle, that paled in comparison to the 15.7% increase in total sales. End result is that the percentage of homes sold in Charlottesville and Albemarle that were new construction went from 16.7% to 15.1%. (Explanation of the Graph: Blue and Green columns represent the total number of homes sold and total number of new construction homes each year. The yellow line is the ratio of new construction to total market.)

NewConstructionWhat brings this back? Two things are possible, likely a combination of the two will play out.

The first is that material prices come back down. As the lumber news points, there should be some relief from manufacturers as output increases. This won’t bring it back to par, but it will allow some relaxing of prices.

The second option is that resale homes will see a price increase. (It has been many years since I said that and it feels pretty good.) As long as resale prices remain depressed, the builder market will have a tough time competing. My bet is that 2013 sees better numbers than 2012 for new construction, but not back to the 2011 16.7%.

Quick Look Back

New Year, New Plan…

I have found over the last year since I studied and wrote consistently that I have really missed it. I have missed the conversation. I have missed the structure. But I have genuinely missed just digging into data. I am going to do my best to get back to a schedule that is doable and valuable. While I have continued to stay on top of numbers, probably not as much as I should have, and certainly not as much as I used to. Time to get back to that.

Looking at 2012 is a tough thing to do at this date. While all the closings that will happen in 2012 have indeed happened. It is not true that all those closings have been entered into our MLS and thus the data is not right. But, what we do know is that all the data is too conservative. Very little probability that closings will disappear. Very high probability that two weeks from now a good number of new deals will be in the MLS changing our data and making the year look even better. So where are we right now?

City2012

To the left are some brief numbers on the Charlottesville City market. Sheer number of closings are up 23.4% from year prior and 31.6% from two years ago. Total volume is up an even more impressive 26.8% from year prior. And shockingly, the median price, which fell $15,000 from 2010 to 2011, rose $5,000 to $235,000 in 2012. Still down fairly significantly from the 2007 peak of $280,000 in 2007, this is showing a positive trend that we did not expect to see until we had a more sustained recovery.

County 2012

For Albemarle County, numbers are similar, although not quick quite as significant. Closings are up 12.6% from year prior and 16.4% from two years prior. The median prices in 2012 exceeded both 2010 and 2011, by reaching $292,000. For the county, this is the highest median price since 2008, when the number was $320,000, and takes us back to a pre-bubble median price from 2005 when the median price reached $289,000.

Median PricesKeep in mind that for all these prices and sales figures, while we are showing extrememly positive trends (escpecially in the City), these numbers are to date, incomplete. We anticipate a good number of transactions to be reflected by the MLS in the next two weeks that are still not showing today. We will update them in the near future as they are recorded. In the last 48 hours, we have had 9 closings updated in the MLS going back as far as Dec. 14. It will be likely 10 more days until we have accurate 2012 total data.

Lockboxes – Limitations

I recently posted a study on lockboxes in the Charlottesville area on our Nest Report site. We keep that information up to date all the time in house. But we don’t release it very often in the public realm. The reason for that is that sometimes information exists that is hard to interpret, and which can include inaccuracies. This is one of those areas. We like our lockbox data, but I want to explain the limitations and potential errors.

First and foremost, these boxes are great, and I can’t imagine my job without them. In terms of functionality, they rank super high in the customer satisfaction ratings. If you ask agents if they like them, they probably don’t even think much about them, because they just plain work… almost all the time.

A primer on how these boxes work. There are two parts to the lockbox, There is the lockbox itself which stores the actual key for the house and stays attached to a doorknob or rail. The other half is the actual key that agents carry with them. When an agent arrives at a listing, a passcode is entered into the key and it communicates via IR technology to the lockbox which subsequently opens. The key then stores the lockbox serial number in its memory along Google Image Result for.jpg with a time stamp. Each evening, the key must communicate via either computer or phone line with GE who takes that serial number and time stamp and alerts the listing agent of who showed which house and when.

Then, Nest collects that data from GE and puts together the trendline info you saw in the article. But there are some real limitations to the information.

Agent cooperation: The key that is used to open the lockbox is sometimes a smart phone, and sometimes a little black box like the one pictured here. When Real Estate Keys.jpg it is a phone, no problem. The phone automatically updates pretty much instantly that the house is being shown. But… if the little black box is being used, the agent needs to take some action for the upload to occur. Let’s say an agent shows a listing, but doesn’t go out for another week or so to show more clients. That agent doesn’t NEED to update their key, and so the info takes as much as a few weeks to update. The listing agent finds out 10 days later that their home was shown. And our data gets updated 2 weeks late.

Workaround: We looked every week for several months at the weekly data. We compared Week X data at the end of the period, a week later, two weeks later and so on out about 2 months or so. What we found is that at the end of the week, as few as 60% of showings are accounted for. BUT, within 2 weeks, roughly 95% of showings are in the system. So, we just ignore the most recent two weeks. We start paying attention about 14 days out. As more and more agents are going smart phone, the time delay is going down.

Agents opening boxes, but not showing property: You may not think this is a problem, but it is. Remember, we can’t see what boxes are being opened, or by whom, or why. So, an agent who is listing a new property may very well be in his office and open a lockbox to check that there is no key inside. He then may go to the house and open it again to insert a key. He may then go back with a photographer, or a contractor, or a floor plan artist. The house still isn’t listed, and a lockbox associated with it has been opened 5 times.

Now, think about the other end. When a house sells, typically a buyer looks at a house multiple times, then puts in an offer. After under contract, the buyer goes back for at least one inspection. Plus a contractor to price repairs. Plus the termite inspector. Plus the listing agent getting the key out. Again, this is 4 openings of a lockbox that do not count as a showing. All AFTER the contract is written.

How about the listing agent. On a vacant property, a listing agent might check the property as often as once every other week. Again, openings that don’t count as showings.

So, what is the trendline good for? Lots. All these openings that don’t count… They provide us with a baseline. Even if no one shows a single house in all of Charlottesville, there are still going to be some openings. You just get used to this. So what we look at is not the actual number of openings, but the change in that number from period to period. We are looking to see if showings are up or down from last week to this week and from this time last year to this week this year.

But, because there is a baseline, and we can’t know EXACTLY what that number is, it means that a 5% shift is really MORE than a 5% shift. Up or Down.

Take the change from the weeks of Sept 1st to the week of Sept 8th. The lockboxes showed a decrease from 1390 to 1299, a decrease of 6.5%. BUT, if the number of those openings that wasn’t really a showing was say 400 in each period, then the real shift is from 990 to 899. And that difference is 9.2%. However, it is easier and more consistent for us to just use the actual numbers than for us to try and determine what the “true showing value is” plus… we’d never get it right.

RiverBluff – In the Residents’ Own Words

At Nest we represent a lot of different clients in different types of projects. I have been honored to be a part of a great project in RiverBluff. Comprised of nearly 19 acres along the banks and bluffs of the Rivanna River, RiverBluff is only a mile from the Downtown Mall and part of the nearly 20 mile trail that surrounds the whole city, meaning that biking and walking is convenient. And of the 19 acres, only about three acres is actually built on, leaving the remaining space as common land.

Hear what our residents have to say about living at RiverBluff and why the chose to live there.

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