June 2017 Market Update - Luxury Homes/Top Towns

3 Signs Your Neighbor’s House May Be a Teardown

Friends, neighbors, clients ask, in a crescendo of frequency: What’s with all the teardowns in my neighborhood? Why aren’t families buying these homes and enjoying them as they are? What will these new “monstrosities” do to my property value? Today’s post is not about my views on new construction, nor the architectural trends that builders and buyers favor, just the economics.

You’ll see in the charts later, that some towns are much more new-construction prone than others, and within towns, neighborhoods vary too. This story is just about the towns that receive this update. They are densely populated towns with terrific selling propositions for affluent forming families: highly reputed schools, favorable commuting, and happening town centers. These towns were 98% fully developed by the middle of the baby boom. The post-war building of “affordable” houses didn’t always maximize the lots, and some homes were not gems of design and craftsmanship. So, demand for new construction means demand for destruction.

What makes a house a candidate? It is decidedly not correlated to age. Most homes built before the depression are far less likely to be replaced. Look instead for a house whose size and condition, relative to the lot size and location, make it more attractive to replace than refurbish.

Does your neighborhood support new construction sales at prices 2.5 times, or more, the market value of the most obsolescent home on the block? Some houses’ architecture or floor plan, position on the lot, workmanship, or “delayed maintenance” dictate a very low value to end-users. The vast majority of new end-users both work long hours, leaving little bandwidth or patience to resuscitate a “diamond in the rough.” And they tend to be cash tight, so while they can afford a higher purchase through financing, they cannot afford extensive renovation after closing. What about compromising on condition or cosmetics, improving a little at a time, with an addition in the future? The current buying generation just isn’t wired for delayed gratification. There are also many buyers who want only the latest floor plans, color schemes and materials, or who believe only a new house is a good house.
Can a wider house than the existing one be built on the lot? The builders are paying steeply for teardowns now and have to aim high in the new construction price range for their finished product. One component in the new home buyers’ decision-making is ostentation. Why spend over a $1 million on a new house if your in-laws don’t gasp with envy from the curb? This also explains why so many new homes have front garages. It is a consequence of the need to build the widest overall edifice the zoning allows.
Are there precedents on the block? This is a double driver. Homeowners who seek to avoid appraisals, inspections, and maybe even leave all their paint cans and National Geographics behind when they move out, copy the neighbor who sold to a builder, or ask agents to do so. (If you know anyone in this position I am delighted to help them reach a wide range of bidders, and barely charge them for my always exceptional service.) And new home buyers like to look up and down the block and see other homes like theirs. So, each new home tends to be more valuable than its antecedent.

And how, dear reader is your home value impacted? All to the good. The new homes raise the average value on your block. The statistical principle, regression to the mean, tells us that all house values increase according to the rising mean. Your house is worth more and you can expect more ROI from your future home improvements. Rejoice!

Teardown economics