Market Update
Property Values in Thurston County
By: Jake Belman - Realtor/Consultant
The objective of this paper is to provide an overview of the real estate market based on an evaluation of the existing market forces and statistical data. Though the focus will center on land values, several observations about the housing market and its impact on home builders and developers – specifically with regard to new construction and development projects - will aid in this understanding and are presented at the outset.
The market peaked in 2005, both nationally and locally. At that time, the largest national builders – Lennar Corporation, D.R. Horton, Pulte Homes and so forth – were enjoying record-breaking years and profit margins. Locally, Triway Enterprises, Quadrant Homes, Epic Homes (formerly Gemini) and Deering & Nelson were experiencing similar booms.
Real property appreciation topped out at 20 percent per year in 2005 (Thurston County statistics). Because 2005 capped three consecutive years of robust and much higher-than-average home and land appreciation – 11 percent in 2004 and 10 percent in 2003 – price speculation began to occur with greater frequency. Essentially, investors (including many land developers) were willing to pay premium prices on raw land based on a projected future value and not on the actual value at the time of purchase. As long as real estate values continued to appreciate – meaning as long as demand stayed high relative to supply – the market would move forward.
But things started to change in 2006. Demand for homes began to ebb and the number of homes on the market steadily increased. By 2007 the number of homes had increased to nearly a year’s supply. To put those numbers in perspective, at the height of the Seller’s market in Thurston County in 2005, there was less than a two-month’s supply of homes on the market! The national trend mirrored the local numbers, the former hitting a low of a four-month’s supply in late summer of 2005. The inventory since then has tripled.
Because of dwindling demand, a number of homebuilders and developers have scaled back their construction projects, rescinded existing contracts to purchase additional land, offered a plethora of incentives to prospective buyers on existing home stocks, and in a growing number of instances, listed existing plats and projects on the open market for resale. Not surprising, prices have fallen precipitously as a result.
Locally, Triway Enterprises recently listed 10 different projects for sale in what could be a move toward liquidation. Likewise D.R. Horton rescinded on a number of purchase & sale agreements to acquire new lands in 2007 (both nationally and locally) and placed a number of others on the market. I was contacted by Quadrant Homes at the start of 2007 regarding a piece of property I had listed in the Tumwater UGA as part of a larger acquisition strategy to satisfy what they described as an “insatiable appetite” for land and large subdivisions.
Less than six months later that appetite had dried up: Quadrant Homes – along with the three other home builders that make up Weyerhauser’s real estate division – is no longer in the market for land or subdivision projects. They currently have three subdivisions in Thurston County, all of them “build-outs” – land development + home construction – and none of them are selling quickly. In fact, the movement is glacial.
The reasons for the market downturn have been well-documented in the media and can essentially be broken down into three components:
1. Dwindling Demand
2. Over-Construction
3. Tightening Credit
All three variables have significant ramifications for future development. Dwindling demand means fewer buyers and longer holding times, which translates into greater risk and less profit. Over-construction means more competition (i.e., more homes or lots on the market), larger inventories, and deflationary price pressures. Tightening credit means fewer qualified buyers, which means still greater risk and a smaller absorption rate. The absorption rate refers to the rate at which existing and imminent inventory can be sold, which is projected by the number of buyers in the marketplace at any given time. Add to this the land development costs and the timeframes associated with regulatory approval – which can sometimes stretch into years – and the market outlook remains dubious.
Currently in Thurston County there are enough platted lots or lots-on-line to satisfy the market for the next three years. Another way to state the same truth would be to say that if no other projects came on line, Thurston County wouldn’t run out of inventory or lots to build on until sometime in late 2010 or possibly 2011.
Land prices have declined across the board in 2007. Finished infill lots in Olympia and Tumwater are worth approximately $75,000 apiece. Lots that are listed over that price simply do not sell. In evaluating MLS and CBA data, most land listings taken in 2007 have expired or failed to sell, even after significant price adjustments were made.
Raw land prices, as a general rule, shouldn’t exceed 10-15 percent of the finished land price. In other words, if a lot is worth $75,000 at final – that is, when the lot is ready to build on – with grading, street improvements, utilities and appurtenant infrastructure in place, the raw land price shouldn’t exceed $11,250.
Recent sales data support these numbers and indicate that after several years of price speculation, land investors and developers are returning to economic fundamentals when evaluating properties for acquisition. This is a healthy development, albeit one that will result in land prices depreciating over the next few years as the market resets and corrects itself to reflect actual values and not future or perceived ones.
