What's Selling . . . East Edina

Where: 4617 Tower St.
What: 5 BR/5 Bath new construction by Elevation (division of Streeter)
How much: $1.2 million asking price
When: sold in one day earlier this month (with more buyers reportedly waiting in the wings).
Who: listed by Marian Peterson and Noelle Varecka of Edina Realty

It's not hard to tell what the Buyer liked about this home: an exceptionally open, flowing floor plan; a state-of-the-art Kitchen; and wide halls, tall ceilings and oversize windows that make the actual square footage (just under 4,400 FSF) feel even bigger -- all on a big (.25 acre) lot.

The East Edina location, east of Highway 100 and south of Country Club, is attracting lots of attention from builders and remodelers because of the combination of large lots and older, modestly-sized (and priced) existing housing stock.

Bet on Country Club

No More New Construction?

Buy land. They're not making it anymore.

--Mark Twain

Twain was clearly wrong about land (and real estate generally) always being a good investment; when credit is cheap and demand strong, prices can and do reach unsustainably high prices.

However, his basic insight -- look for something where supply is constrained -- is still right.

Which part of the Twin Cities housing market best fits that description today?

My candidate is new construction in Country Club, the tony Edina neighborhood just northwest of 50th & France (and east of 100).

Limited Supply

Country Club has just over 500 large, very well-built homes constructed mainly between the two World Wars.

Thanks to its historical designation, no home built there before 1944 can be torn down and replaced.

On top of that, Edina and Minnesota have enacted increasingly rigorous requirements for new construction, governing everything from setbacks and variances to maximum lot coverage (ironically, many of these restrictions were a response to go-go construction a couple years ago, and are now becoming law as the new construction tide is very much going out).

Bottom line: if you want a new(er) Country Club home . . . you're going to have to buy one that already exists.

New vs. Existing Housing

"How's the Housing Market?" -- Vol. 27

"Where" (location) is certainly one of the key qualifiers for anyone seeking to divine the health and direction of the housing market.

But so is "what?" -- as in "what kind of housing?"

In the housing market, the key distinction is between existing and new housing.

Conflicting Signals

That distinction explains how, literally in the same paper (the Star Tribune, on July 30), the front page ran a story saying that new housing inventory was shrinking, and that new permit applications were up.

Conclusion: things are getting better.

Meanwhile, the lead article in the business section attested to the slow-down in sales of existing housing, and an uptick in foreclosures.

The takeaway?

Things are getting worse.

Relative Size

Certainly by size, what happens to existing housing matters much, more more: existing homes account for more than 90% of the market, or about 5 million units annually, vs. less than 500,000 units for new construction.

However, economically, new construction exerts an influence far greater than its 10% market share would suggest.

That's because each new home represents tens (if not hundreds of thousands) spent on labor, material, land, appliances, furniture, etc. -- expenditures that reverberate through the economy many times over due to what's called the multiplier effect.

Overlapping Demand

It's also true that new homes frequently compete with existing ones for Buyers, just as used (pre-owned) cars compete with new ones.

So, the supply (and therefore) price of new homes affects the supply (and price) of existing homes -- and vice versa.

However, at least in the Twin Cities, my experience is that the two markets -- existing and new -- overlap less than elsewhere.

I see two reasons for that: 1) the vast majority of new housing locally is put up in the outer suburbs ("exurbs"), where land is cheapest; and 2) the price difference between a new home in the 'burbs, vs. an existing one closer in, isn't as extreme in the Twin Cities as it is elsewhere -- for example, the Bay Area.

Going back to "location, location, location," most Buyers first settle on "where," before they get to "what" (kind of housing).

P.S.: is Jim Buchta back? The long-time real estate reporter for the Star Tribune -- switched to the travel section 2(?) years ago -- has has several housing article bylines in the last few weeks.

If true, that's very good news!

Toll Bros. & the Twin Cities Housing Market

Cleaning Up After the Elephants; or,
"Love 'em and Leave 'em"

It was fun -- sort of -- while it lasted. But what a hangover!

In 2004, when local land went for $120k an acre, national home builder Toll Brothers swept into the Twin Cities paying . . . $200k an acre.

Why?

Because it could.

Just like the commercial REIT's ("Real Estate Investment Trusts"), large, publicly traded builders such as Toll and Pulte had access to cheap capital, allowing them to bid up local land prices 50% - 75% practically overnight.

While providing a windfall for the first wave of land sellers, the bubble created many more casualties than winners.

They include:

--Local builders, whose land acquisition costs got driven sky-high;
--New home buyers, who the builders passed their costs on to, and who were left holding the bag when prices collapsed;
--Municipalities also left holding the "foreclosure bag" when underwater homeowners defaulted, leaving decimated, half-built subdivisions in their wake.
--Banks whose balance sheets were left in tatters.

At least Toll hung around to help clean up their mess, right?

Wrong.

The 3 subdivisions Toll built in the last 5 years still have many unsold units (surprise!), but Toll appears to have exited the Twin Cities new construction market about two years ago (Note: if anyone's heard otherwise -- please let me know!).

Sign of the times: empty lot

Where: 7508 West Lake St. in St. Louis Park

What: .24 acre lot

How much: sold for $75k

When: deal closed just after Labor Day

Who: listing agent - Ross Kaplan; broker - Edina Realty

So what's the big deal about an empty lot in St. Louis Park?

It's not just a lot -- it's a lot I listed and sold for the owner. Almost 3 months ago.

And it IS Minnesota, where the ground is predictably going to freeze sometime soon, closing the window for digging out foundations (and thereby building) until Spring.

No Sign of Life

After a recent trip to Sam's Club, I swung by to see if the Buyer -- who had just gotten married and intended to build a new home -- had broken ground yet (the lot is a couple blocks west).

Nope.

In fact, the only change I noticed was some debris that hadn't been there before.

Following a hunch, I looked up the Buyer's St. Louis Park condo, which had been on the market since July.

Yup, there it was: 'Expired' (as of Oct. 31).

Now THAT's Dramatic

Bryn Mawr New Construction

What: 4 BA/4BA new construction with 3,500 FSF.

Where: 20xx Laurel Ave., in Minneapolis' Bryn Mawr neighborhood (just southwest of downtown).

How (much): $739.9k list price

Who: Coldwell Banker Burnet (broker); Steven Gouert (agent)

When: on market 11/16/09

Hard not to notice this dramatic new list -- that's the point!

The asking price -- low $700's -- is a stretch for Bryn Mawr, a great, pocket neighborhood between downtown Minneapolis and Theodore Wirth Park on the city's West side.

Confession: I bought my first house there, in 1987.

Forget about paying what I paid then (don't ask); prevailing prices now range from high $200's for a small, starter home to high $500's, for bigger and/or more updated.

This home is part of a mini-trend of new construction trying to push Bryn Mawr's range to $600k-$800k.

It'll be interesting to watch this one . . .

Spec Builders Play it Safe(r)

More Singles & Doubles, Fewer Home Runs

Baseball batters facing a strong pitcher and defense adjust by hitting for singles and doubles rather than home runs.

Similarly, in a tough economy, more builders and contractors appear to be adjusting by hitting economic "singles" and "doubles" rather than home runs.

So, instead of paying $400k-$600k for a lot (or tear-down), than putting up a $1.5M-$2M home, I'm seeing more instances of $80k-$140k lots being turned into $250k-$350k new homes.

Or, the same contractors are paying the bills by doing $100k-$250k major remodels.

No, the margins aren't as good, but it keeps crews busy (and intact). It also takes a lot less time to sell a $300k new home in a tough economy than a $2M home.

The Twin Cities neighborhoods that appear to be benefiting most from this "downshifting" trend have three things in common: 1) good location; 2) older, often under-sized housing stock; and 3) relatively modest prices

Where's that?

Neighborhoods such as Minneapolis' Longfellow and Seward neighborhoods, St. Louis Park's Birchwood neighborhood, and parts of Golden Valley and Hopkins.

High-Tech Servants' Entrance

High-End Trend?

Wouldn't it be nice to be able to let the furnace contractor in* without waiting for them to show up during their seemingly days-long "window"? Or, once they got there, if they could proceed directly to the utility room, without traipsing through your front hall (and past your messy Kitchen)?

The (very high-end) new home just being finished at the south end of Minneapolis' Lake Calhoun has that one solved: the utilities room has its own contractors' entrance. That's where the mechanicals, plus the "central nervous system" that runs this high-tech home, are located.

Like to see it (or partake of the view)?

You'd better know the owners (or perhaps, be a big sponsor of the major league sports team they own): the home isn't on the market.

*The rest of us will just have to rely on lockboxes, drop cloths, etc.

Contender or . . . Pretender?

"They're Asking How Much??"

Where: 5500 Park Place, in Edina's South Harriet Park neighborhood
Asking Price: $549,900 (white picket fence included)
Key Stats: 3 BR/2BA; 1,500 FSF. Year built: 1947
Lot Size: 60' x 134.8'
Time on Market: 64 days

In any other Twin Cities neighborhood, this unassuming 3BR/2BA home with a white picket fence would be worth $150,000, tops. If there were any foreclosures nearby, that number could easily drop to $100,000.

But it's not (in just any neighborhood, that is).

It's just south of Minnehaha Creek, in Edina's up-and-coming South Harriet park neighborhood. The lots are nice-sized, and the location is prime -- just south of Edina's tony Country Club area. Best of all, the existing stock of housing is older and undersized.

Voila! Tear-down territory.

As someone whose clients have bought and sold several tear-down's the last few years, I've found that a good rule of thumb is to multiply the projected selling price of the would-be tear-down by 3.5. If the resulting number makes sense for new construction on the immediate block . . . the house is a bona fide tear-down candidate.

So if a house is worth $300,000, to be a tear-down, the neighborhood would have to support new construction over $1 million (I call this "tear-down leapfrog," or "the last shall be first" phenomenon, because the former tear-down often gives way to the nicest home on the block).

Contender . . or Pretender?

So is this house for real? Or more to the point, is the land underneath it worth anywhere near the asking price?

To find out, you start at the end -- namely, by determining the upper price limit of the immediate block (and to lesser extent, the surrounding neighborhood).

In this case, a brand-new, 4,000 FSF house just sold for $1.5 million a block away (in fact, it sold before hitting the market, a good omen). So clearly, the block has lots of upside.

The next step is sizing up the particular lot.

At 60' x 138', it's not gigantic, but it's still more than 30% bigger than a typical, 40' x 120' city lot. It's also comparable to other East Edina lots that now have new construction.

It's also a corner lot, which is a plus to some, and a negative to others. Net those out, and it's a wash.

More important is the fact that the lot gently slopes towards the rear. That makes it suitable for a walkout, which allows more light in the lower level and allows better access to the backyard.

So what's the verdict?

Contender. (If you want to know what it's likely to sell for, though, you'll have to call me . . .)

What's Selling: East Edina

Demographics + New Construction + East Edina = Sold!

In a market where new construction is supposedly dead, and high net worth Buyers are thought to be licking their wounds, some developers are still finding strong demand for their product.

Case in point: 5420 Park Place in Edina.

Built "spec" (speculative, as in no upfront buyer) by a local boutique builder, Great Neighborhood Homes, this 4,000 FSF craftsman just sold --before it hit the market. List price: $1.5M.

What did it have going for it?

Multiple, overlapping selling points (see diagram):

--A location in coveted East Edina, on a large lot close to Minnehaha Creek
--New construction with quality finishes, classic design, and minimal maintenance
--A size (4 BR/4BA; 4,000 FSF) and floor plan that appeals to a wide range of Buyers, including families with small children as well as empty nesters interested in a condo alternative.

Build it right, in the right spot . . . and they'll (still) come.