Facing up to market realities

We noticed this week that after almost 800 days on the market, the neighborhood’s most expensive spec house just moved from “active” to “pending sale,” thus providing us with a convenient jumping off point for a broader discussion of current market realities and how sellers are coping.  The spec house in question, located at 821 34th Avenue E., was featured on this blog a little over a year ago.  At that time, the 5,500 sq. ft. Georgian Colonial mansion was still for sale at its initial listing price of $5,650,000, which worked out to an eye-popping $1,027 per square foot.

Built in 2009, the Washington Park home featured, among other amenities, a “chef’s kitchen,” a large media room, a fitness center, and—naturally—a staging kitchen for catered events.  The property was conceived as an elegant abode for “the right buyer who will appreciate the value,” said house designer and co-developer Milan Heger at the time.  It appears, however, that the verdict of the market currently places the value at something closer to $3 million than $6 million.  The amount of the pending offer is not disclosed, but it apparently was made one day after the house’s listing price was reduced from $3,995,00 to $3,195,000, according to Redfin.  It seems the house has finally “chased the market down.”  Unfortunately for the sellers, it probably means a sale at 57% of the initial asking price, or less.

Meanwhile, another long-time-on-the-market speculative property finally changed hands in June. That 7,000 sq. ft. Washington Park home was initially offered for $4,290,000 in 2009.  Following a reduction in the listing price to $3,600,000 this spring, it finally sold for $3,250,000, according to the Northwest Multiple Listing Service (MLS). That’s a 24% discount from the original offering price.

These are just two of the more extreme examples of sellers having to face up to current market realities.  Many other Madison Park home sellers, those not in the speculative-home-building business, have had to do the same this year.  Through end the May a total of 30 houses and condos were sold in the neighborhood.  Of these, all but four sold at a discount to their original offering price.  The average discount at sale was 12%, though the actual range of discounts accepted by sellers varied between 1% and 42%, with seven properties selling for more than a 12% discount from the initial price.

We excluded one property that sold during the period from our discount analysis, however, because it was a real outlier.  That property, shown above, is the foreclosed view home located across from the Seattle Tennis Club at 1115 McGilvra Boulevard E. It was listed for sale by the bank at a below-market $587,500 and very quickly sold for $805,000 in May, a hefty 37% premium over the asking price.   We hear there were multiple officers.  In today’s environment, however, typical sellers of properties should be expecting neither premiums nor bidding wars.   Maybe next year.

An aside concerning ‘pending sales’

That very interesting—and often contrarian—website, Seattle Bubble, had an informative posting earlier this month on the subject of pending sales (aka pendings).   Especially when there are few home sales in a given period, real estate brokers and agents often point to the list of pendings as a sign that things are looking up. In past markets, houses that moved from “active” to “pending” usually did end up on the “sold” list within 30 or 60 days. So even if only two houses sold in a market in a given month, for example, the fact that 10 houses were listed as pending sale meant that the following months would probably be much brighter.

Today, that’s not necessarily true.  As reported by Seattle Bubble founder Tim Ellis, there is currently a huge discrepancy in the Seattle market between pending and closed ratios relative to historic levels. He compared the number of pending sales in typical market conditions (January through April 2002) to the average number of actual sales recorded in the succeeding months (February through May 2002) and found that the difference was just 4.1%.  By implication then, almost 96% of pending sales were ultimately resulting in actual sales in 2002.

For this year, over the same two four-month periods, the difference between the average number of pendings and average subsequent sales was 31.7%.  In other words, only about two thirds of pending sales, on average, are currently being translated into closings in future months.  Several factors could be involved, including sales falling through due to lack of financing and a possible lengthening of the time it takes to get a home sold in today’s market.

Since our records for Madison Park do not go back to what would be considered a “normal” market, we can’t verify the extent to which there’s a difference between today’s situation and what transpired in the past in our part of town.  But we are able to look at the relationship between pendings and sold properties over the past year or so (March 2010 to February 2011 for pendings and May 2010 to April 2011 for sales). Doing so, we found that while there were 11 pendings per month, there were only 8 closings per month on average.  That’s a 27% difference, slightly better than the recent numbers for Seattle as a whole, but telling a similar story.

We’ve noticed that several Madison Park properties over the past year have gone from “active” to “pending” and back to “active” on more than one occasion.  It's not the kind of thing sellers—or their agents—like to contemplate.