Another Take on a Builder's Take

By Dave Fratello | April 14th, 2014

It was about 6 years ago. The last real estate upcycle had begun to stall out. New construction sales slowed. A local builder took it upon himself to convince wary buyers that it was an excellent time to buy.

In our January 2008 post here at MBC (see "A Builder's Take"), we copied this extraordinary half-page print ad placed by the builder and discussed the ad's message. (Click to enlarge.)

Memorably titled, "The Crystal Ball Story," the ad said that new home prices could not go lower, and that buying in early 2008, you'd find your investment up 20% in 5 years.

As time has passed, the message of the half-page ad has proved to be about half right and about half wrong.

The wrong parts are easy to spot. The ad noted that many (then) new homes were built on sites acquired by builders for around $1.3M. Could lot values drop to $700K-$800K? Balderdash, the ad said.

Well, that happened. Lot values in the Tree Section (the general area described by the ad) dipped during the down cycle very close to $800K for a standard plot when the builders left the market from 2008-2011 and, for the most part, individual buyers were not chasing lots for custom builds, either.

However, lot values have skyrocketed since, returning to the past cycle's boom-time levels and jumping from there. Two of the top land prices paid recently, at 750 30th ($1.515M) and 738 29th ($1.750M, pictured) imply a near-doubling of land values in the space of just a few years. That's what competition can do.

Dave recently represented buyers on the purchase of 1500 N. Poinsettia ($1.399M), a charming older cottage that will get some improvements, but does not need to be scraped. Builders were interested in that 4200 sq. ft. lot at prices quite near what the buyers paid for the lot plus the house. We see similar activity and interest in the property at 1600 N. Poinsettia (list: $1.350M, in escrow) – and both of these are smaller-than-average lots.

In all of those cases, you're seeing the market for Tree Section land hitting the low-to-mid $300s per square foot of dirt, quite a comeback.

The other testable claim made in the ad was that if you would have just gone ahead and bought new construction in early 2008, taking your pick among then lingering inventory, you'd be up 20% within 5 years.

We did a ton of research, but did not find one clear example of a new home sold in the first half of 2008 that has resold from January 2013 to the present. (Five years, give or take.) We did see some sold before 2013 that took a loss or resold for a very small markup in later years.

Still, the theme or the hypothesis put forth in the ad does look pretty solid over time.

We just have to reframe the question. Instead of looking for a specific example of a resold property at 20% or more above acquisition, we can just look at some of the sales of new homes from the first half of 2008 and guess as to what the market value for those might be today.

Here is a selection of properties from way-back-when (sold Jan. 1-June 30, 2008) – links to past sales go to Redfin:

2709 Oak (5br/5ba, 3600 sq. ft.) is a 2007-built home, labeled a Cape Cod, with more interior square footage than you would typically get now on a 4480 sq. ft. lot. It's a pretty favorable location even for Oak Ave. The builders bought the lot in '05 for $920K, hoped to sell the new house for $2.4M (based on the first listings), and ultimately closed for $1.950M in March 2008. To get 20% more than that, as the builder's ad predicted, the owners would have to sell today for $2.3M+. Zillow rates it as $2.5M. We'd hazard that they could get close to their 20% number, though Zillow seems much too optimistic here.

1821 Walnut (5br/5ba, 3400 sq. ft.) is a Tuscan built new in 2007 on a plot acquired for $1.350M in 2005. As with 2709 Oak, the developers' initial ambitions did not pan out – they asked $2.750M but got $500K less, $2.250M in June 2008. Mark that up 20% today and you'd have to sell it for $2.700M (much as the developer read the market in 2007). We do see some new construction hitting those heights these days – like notably smaller 1733 Pine (asking $2.749M, in escrow). Maybe.

2705 Palm (5br/5ba, 3300 sq. ft.), a Cape Cod by a well-regarded local builder, sold new in 2008 for $2.587M (call it $2.6M), then resold in the market's depths for $2.250M (ouch). In October 2013, the neighboring home, same size and builder, 2701 Palm (5br/4ba, 3300 sq. ft.) sold for $2.950M. Does that mean 2705 Palm could fetch $3.1M now (20% higher than '08)? Probably a stretch, but $3M can't be called crazy, simply in light of the next-door neighbor's success last Fall.

3104 Pacific (5br/5ba, 3200 sq. ft.) is a Cape Cod that was first listed for $2.149M but sold in February 2008 for $1.950M. As with the first property on this list, 2709 Oak, the home has something of a location issue and would have to sell for $2.3M+ to reach that predicted 20% markup. Yet with limited inventory, a $2.2-$2.3M figure for this Pacific house does not seem impossible today. Oddly, here Zillow plays the pessimist, estimating a market value of $2.043M.

1417 Elm (5br/5ba, 3000 sq. ft.) is smallish as things go, squeezing 5br into less interior space than is the norm these days. (The 4250 sq. ft. lot limited the new build.) However, it's a very well done Cape Cod, and its close proximity to school and such made it attractive in 2008 – and again for an off-market resale in 2012. The developer paid $925K for the lot in 2006, asked $2.175M and got $2.065M in June 2008. The resale at $2.149M in late 2012 hinted at the recovery already under way in local home values.

Based on craftsmanship and location, could 1417 Elm now approach $2.475M, a 20% markup over 2008? That seems to push the ceiling for just 3000 sq. ft., but something in the 2.3s looks easy and, since we're trying not to be too easily shocked these days, we'd state up front that a sale in the 2.4s would not cause a heart flutter, either.

So, if you bought low in early 2008, relying on the notion that within 5 years or so you'd have made money – that looked like a good bet. (Provided, of course, that you stayed in the house, which not all the buyers from then did. You can lose money with a short hold in a down cycle.)

Sure, it was silly for the builder to argue that new home prices "will not and can not come down another 10%," or to dismiss the idea of lot values ever dropping under $1M.   

But however it was stated, was it good advice to get while the getting was good in Manhattan Beach, lock in and hold on? Time has validated that message.

Please see our blog disclaimer.

Latest Listings Among
Manhattan Beach Homes For Sale