Gauging Value In Real Estate As Prices Slide

The Wall Street Journal


In Many Markets, the Outlook Varies Widely by Community

In this battered housing market, choosing the right neighborhood is more important than ever.

Some six million Americans are expected to buy a house this year. Whether first-time home buyers scouting the Chicago suburbs or a midcareer worker relocating to Denver, they are all contemplating what may be the most significant purchase of their lives at a time when no one is certain how much lower prices might go.

In Maricopa, a rapidly growing suburb 35 miles south of Phoenix, Mike Mendoza, an agent with Keller Williams Realty International, has a listing for a house that has been on the market more than six months. The house, which the owners originally spent $525,000 buying and upgrading in late 2005, is now priced at $449,000 — “and buyers aren’t rushing to it as a bargain,” Mr. Mendoza says.


By contrast, Tempe, with no room to expand and a location closer to Phoenix’s job centers, has an 11-month supply of houses. Tempe’s average selling price per square foot in 2007 was just $1 lower than in 2006, according to Multiple Listing Service data.

Like many house hunters these days, Langford and Carol Jordan are concerned about all these issues. This month, the couple is moving to Denver from Minneapolis for Mr. Jordan’s job as a divisional manager for Synergetic Design Inc., an engineering-consulting firm based in Charlotte, N.C. They have visited the city three times and compiled reams of research “because there’s a likelihood we may leave Denver in three to five years, and we want to buy something we can sell and not take a bath on it,” Mr. Jordan says.

The couple wants a good school district and an established community. They settled on two towns, Highlands Ranch and Castle Rock, and ultimately chose the latter “because it is an established city with its own downtown,” says Mr. Jordan. “It’s smaller, and there’s a mix of homes — an area that would appeal to a family like we are when it comes time for us to resell. Highlands Ranch seemed overpopulated and trendy.”

For the Jordans, a key issue is that Castle Rock is relatively close to work and retail centers in both Denver and Colorado Springs. In many cities during the housing boom, developers ventured far afield to buy cheaper land, expecting that if they built it, buyers would come. And buyers did. But now they aren’t so eager for two reasons: Gas is topping $3 a gallon, increasing their commuting costs, and the necessary infrastructure such as schools and retail and medical facilities often haven’t sprung up yet.

Consider Adams County, a once-hot suburban community 20 miles northeast of Denver. “Home building in the last two years grew faster than the supporting pieces” there, says Larry McGee, managing broker at Denver real-estate firm Berkshire Group. And as the economy softens, “the money to build those supporting pieces isn’t there, so the lag will probably be worse than elsewhere in Denver.” Last year, prices in Adams County fell by about 4.3%, compared with Denver’s overall fall of 2.9%, according to Mr. McGee.

Though buyers generally get more house for their dollar in more-remote communities, many buyers today are forsaking size for the conveniences of being close to the city, often in areas that are redeveloping.

In the Salt Lake City area, one of the nation’s stronger housing markets, communities such as Holladay, built in the 1930s, 1940s and 1950s and less than 10 miles from downtown, are maintaining their value, while those farther out are struggling. Newly remodeled homes in Holladay sell within 30 to 60 days and often have multiple offers, typically without the owners having to cut the price. Homes there are appreciating at 6% to 8% annually, says Dougan Jones, CEO of Prudential Utah Real Estate.

Twenty miles south of Salt Lake City, by contrast, homes in Riverton take 120 days or more to sell, don’t typically have multiple offers and are usually discounted several thousand dollars off the list price — though they are just a few years old and are generally larger. Home-price appreciation in Riverton has slowed to about 4% from as much as 12% during the go-go years, says Mr. Jones.

One key variable between the two cities: available land. Holladay has no opportunities for new subdivisions, but “developers in the outlying areas grabbed large tracts of land [contiguous to existing neighborhoods] that are still not developed,” Mr. Jones says. “You can rest assured they will be, and that new supply will impact prices of nearby existing homes.”

Neighborhoods with significant numbers of foreclosures also typically suffer weaker housing prices. In Herndon, Va., an otherwise desirable metropolitan Washington community, “there are pockets of town where foreclosures are a problem, and that is undercutting prices” of nearby homes, says Stephen Fuller, director for the Center for Regional Analysis at George Mason University. “A couple blocks west or north, and you don’t find that problem.”

Similarly, while home prices are up in most of Alexandria and Arlington, Va., prices are down 10% to 15% in Prince William County, about 25 miles outside of Washington. There, nearly a quarter of all the homes on the market are either in foreclosure or are so-called short sales, in which the house is valued at less than the mortgaged amount. Real-estate agents can access a variety of data on foreclosures in a given area, as well as other information to help buyers gauge a particular area.

Don’t forget that home buying is always a street-by-street exercise, and that is particularly true in a weak market. In a strong market, buyers scarf up homes on busy streets or less-than-desirable locations. But in a down market, things change. Just about anything sold in the hot market of 2004 and 2005, but now “it’s location, location, location — more than ever,” says Lori Dahl, an agent in Summit, N.J., with Burgdorff Realty ERA.