Quitter - Bellwether?

Posted by Dave Fratello on Thursday, October 18th, 2007 at 5:34pm.

After more than a year on the market, the new construction at 2709 Oak is gone.

The house is still there, of course, but the agent's signs are down, it's off the MLS, and who knows what's next. We're guessing it went rental, as the home was offered for a time at $8,500/mo. (See "Just Rent It.")

New construction nearby at 2609 Oak similarly vanished from the MLS in July after 425 DOM. We also guessed rental there.

2709 Oak was listed at $2.299m for 5br/5ba, 3600 sq. ft. The listing began at $2.395m on Aug. 15, 2006, so it never took big price cuts from there. In parallel, 2609 Oak started at $2.399 a few months earlier, and never cut below $2.299m before quitting.

2709 Oak was (is) quite lovely, a spacious feel, bright, with big kids' bedrooms (no sardine cans here) and a bonus basement/media room. We didn't like the stapled-on stone, but it could be overlooked. There was just one un-fixable problem – location – and one that apparently was too hard for the builder to fix: price.

It's difficult to imagine that a sale below $2.3m was going to cause a loss. The lot was purchased for $920k in April 2005. That leaves almost $1.4m to cover construction, costs of holding and sale, and profit. Construction costs at $250/sq. ft. would have been $900k, so there might have been as much as a half million dollars' worth of wiggle room.

This cancellation is partly a story about Oak, but it's also about unwanted, overpriced new construction. Demand is slow in the Tree Section $2m+ segment (see, "Measuring Activity in the Trees at $2m+"), and obviously slower in poor locations. What is supposed to happen to all these new houses?

We've been watching, mostly in vain, for builders to take the first step and adjust prices downward. It's only logical that they would, but we don't see it much. (Not completely in vain, that is – we've seen some new homes near $2m take $100k-$200k off to sell, and some list prices are down by about that much.)

Another option is to just get off the market. As we all discussed in the "Just Rent It" thread, pressure to produce some income (especially from lenders) may force builders to the rental option, at peril to the future value of the homes. By renting it out, you lose the cache of "new" construction when the time comes for a future sale, and, if the market dips, you lose even more money than you might have by selling now at a discount. So it's a desperate move to quit.

One to watch on Oak: A slightly smaller new home at 2105 Oak (click for details at agent's site) is still active, now at $2.099m after starting at $2.349m in May of this year.

Another quitter on Oak: 3013 Oak is a different kind of case, as it was a small remodel, and only tried the market for 40 days. Its dropout this week mainly tells us that Oak is a challenging location, even on the "right side" (i.e., odd numbers, not abutting Sepulveda). But you knew that.

Back to the big question: What is supposed to happen to all the new houses – more than 20 in the Trees – priced over $2m for which demand has, apparently, softened so badly?

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UPDATE: One of the higher-priced new homes in the Trees, 1821 Walnut (click for details), cut its price today by $150k, now at $2.599m.
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