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Thursday, December 21, 2006

Reader Question: Redmond New Construction

Here's a series of questions from a reader that was posted in a recent thread. (The questions were originally posted under the name "Sash," but due to a strange bug in the transition to the new Blogger the comments now show as "anonymous".)

Folks, you seem to have a lot of data on the housing prospects in 2007 and forward. I would like to request your advice for/against considering buying a new home (new construction) in the Redmond area.

Over the past year I have seen prices climb to astronomical levels in properties being built on 116th St in Redmond (Education Hill area). In your expert opinion are those prices going to "stay" the same in the years to come?

I see that the real estate marked is 'slowing'. Prices for 30 year old homes are now showing signs of reduced price. But in my opinion even after price reduction, some these homes are so over priced. What's your take here?

Last but not least what would you price a new construction of 2500 sqft in the Education Hill area at today?
First off, I want to make it clear that I am not particularly an "expert." I'm just a guy that has been following the market closely, digging up some data, and making some graphs. I know more (possibly a lot more?) about the local real estate scene than your average stranger on the street, but I don't call myself an expert.

Although I don't have much personal knowledge about the specific neighborhoods Sash is asking about, I will address the questions in a more general sense. First and foremost, if you don't feel comfortable buying a house, then just don't. Purchasing a house is the single largest financial decision most people will ever make, and it's not something you should enter into lightly or out of emotion (especially fear of being "priced out forever").

As far as prices staying the same on new construction, I will just point out that what has been happening around the country is that builders are offering greater and greater "incentives" on new construction such as cash back, paying closing costs, subsidized super-low-interest loans, free upgrades, etc. So even if the purchase price is technically the same, you're getting more for your money. That being said, even the purchase prices have been dropping (in real dollars) across the country. And although most media reports claim that the Seattle-area housing market is still super-strong, builders are beginning to feel the squeeze here. I wouldn't be surprised to see increasing incentives and a softening of prices here soon.

My general advice is that if you don't have to buy a house right now (and who really "needs" to?) I recommend holding off, and saving/investing the difference between what you would be paying on a mortgage and what you are presently paying on rent.

If you feel that you must buy now, you'll be fine if you plan on staying put at least five years, stick to 20% down, get a fixed-rate loan, and keep your total monthly housing costs at or below 30% of your income. If you leave out any of those, you're essentially gambling that continued appreciation will bail you out of any potential financial crunch in the near future. Personally, that's not a bet that I'm ever willing to take, but especially not right now.

So what's your advice for Sash? Does anyone out there have any specific thoughts about the Redmond area?

16 comments:

seattle_slow said...

My advice is to start drinking heavily (insert snare hit/cymbal crash).

Seriously, If I were Sash, I'd wait it out. This bubble is more bloated than a three week old beached whale. I'd at least wait until there's more inventory on the market. If you're going to overpay, it should at least be for something you like, rather than be some POS you bought in a panic purchase out of FUD (Fear, Uncertainty and Doubt) spun by your local Realtor and mainstream media shills.

My $.01

-slow

octopuswithafez said...

how many folks out there are looking to trade up vs. first time buyers? My wife and I are in a house in North Seattle ( no, not Ballard). Its an ok house for a couple, but with a little one, the layout is very awkward and no way I am sending a child to Seattle public schools ( tantamount to abuse, I'd say )

MisterBubble said...

I think your advice is dead-on, Tim. The only thing I'd change is the outlook -- right now, I wouldn't even think about purchasing a home in Seattle unless my outlook was for 10 years or longer.

My logic is simple: the 5-year outlook suggestion is traditional for a "normal" market. The thing is, we're well beyond "normal" by now -- I don't think anyone can debate that point.

More speculatively, I don't think we'll begin to see the full effects of the ARM implosion until at least late next year, and more likely, late 2008. And if prices were to drop by 30%, it would cause such a psychological panic that people would be reluctant to buy for years...it could easily take a decade to recover at a normal ~3% rate of appreciation....

octopuswithafez said...

I wouldn't even think about purchasing a home in Seattle unless my outlook was for 10 years or longer.

you can chalk me up in that category, I am looking for the "family" house, still disheartening to see what little your dollar gets

redmondjp said...

I'd advise against buying now as well, but if you do buy, you need to have a financial contingency plan, such as a year's worth of mortgage payments socked away. What if you get laid off, run out of cash, and need to sell your house but it is then worth 10-??% less than you paid for it, and/or the RE market is flat at that time?

If you don't know, don't buy. If you can afford to take a loss on your house if it comes to that, OK then, proceed with caution.

Not to gloat, but I bought a fixer (still is) in Redmond in '98 for under $200K, and I did get laid off a few years ago. On unemployment, I could actually afford my house payments, utility bills, and had some $ left over to buy food and gasoline (Note: I opted to take the payments pre-tax, knowing that my annual income would be very low if I didn't find work that year--it worked out OK, and I didn't end up owing any penalties to the IRS).

I realize that I am very fortunate to have bought before things really went crazy, but the advice to be prepared in case of an unplanned financial situation (loss of job, accident, car dies, lawsuit, etc) still holds.

I live in the Grasslawn neighborhood, where the older houses are $5-800K, and the new Costco-sized crackerboxes down the street are selling for almost $1M a pop. Beats me how people can afford it--I'm guessing interest-only loans, and/or CA equity locusts.

Alan said...

Off-topic, but I did not want to wait for the next open thread.

Is anyone tracking foreclosure auction and short sales numbers? My wife pointed me to these two:

http://seattle.craigslist.org/est/rfs/251779789.html

http://seattle.craigslist.org/est/rfs/251806007.html

The second one was "appraised in June for $600k". That puts it at a 25% "drop in value".

Are sales like this pretty common for the area or has the dam holding in the equity resevoir just sprung a leak?

Lionel said...

All your comments about schools in Seattle are starting to scare me. Coming from LA, it would be hard to imagine a worse system, but it doesn't sound great up there. Any recommendations as to neighborhoods with public schools that don't stink, and which are not too far from UW (I'll be getting a PhD there -- hopefully.) Mydaughter would be five, so kindergartens, grammar schools would be important. I am NOT an equity locust, so please don't spend a lot of time trying to dissuade me. I'll likely be renting for at least two years before I think of buying.

Russell said...

I'd love to know more about schools as well. My understanding was that some of the schools north of downtown were quite good.

seattle long term owner said...

buy if you must... and if you do lowball and lowball and lowball...

you'll be amazed how desperate new builders want to get rid of their inventory so they can move on...

submit a real offer and lowball it by 5% or so...

If you bring your own agent, they pay that agent his commission anyway so there's always room for them to negotiate...

Ask for all incentives, get that granite for free... check all the upgrade boxes and ask they cut the total in half (they make exorbitant profit on it anyway)...

If you must buy, you're better off with a new home that has better resale than an old house with potential problems...

good luck

E-sidedave said...

Seattle Times School Guide

Gary Franke said...

Some of the best schools are on the Eastside (Bellevue, Kirkland, Redmond areas)!

The areas near MSFT have appreciated significantly over the past few years (due to their massive increase in employees). Overall if you are going to buy, the Eastside is probably a better choice. However, I chose to buy in Seattle since it is closer to Seattle University (in the MBA Program and work downtown). The Eastside has significantly lower property taxes (Seattle = 2.86% per $1000 and Bellevue is the lowest in the region at $1.04 per $1000, saw it in the PI or Seattle Times this weekend). Guess I should have bought on the Eastside since Im generally a tax avoider, lol.

Gary Franke said...
This comment has been removed by the author.
octopuswithafez said...

I'd love to know more about schools as well. My understanding was that some of the schools north of downtown were quite good.

Which is why half of the school-age children in North Seattle go to private or parochial schools...

biliruben said...

If you must buy, you're better off with a new home that has better resale than an old house with potential problems...

That's about the worst advice I've read on these boards.

The exact opposite is true in the Seattle area:
http://seattletimes.nwsource.com/homevalues/archive/mainstory2005.html

In the last downturn, I've heard that new homes took an absolute bath; particularly new condos.

There is a price premium for buying new, and as soon as you buy that premium goes away.

Also, around here new homes usually are on smaller lots in crappier areas, further from job centers.

matthew said...

my advice is "BUY NOW OR BE FOREVER PRICED OUT!"

sash said...

RedmondJp,

Do you see the prices depreciating given the robust growth in jobs on the east side (yes, Microsoft)? I dont.