Real Estate News

October Real Estate Newsletter

October – Real Estate Newsletter

“Historically low mortgage rates, increased household formations, and a firming labor market will help keep housing on an upward path during the rest of the year” – Robert Dietz, National Association of Home Builders?

TOP STORY: Mansionization Pros and Cons

It’s hard to express the surprise felt by Joe and Myrna Wiseowner when a wrecking crew began knocking down the house next door. The fictitious couple, who are meant to symbolize thousands of homeowners in similar situations, were even more startled when cement mixers began pouring the foundation for a home far larger than their own.

The house next door, like the home of the Wiseowners, was originally a 1,200- square-foot bungalow on a single level. Like the Wiseowner home, again, the house next door had a 20-foot setback from the curb. When construction reached completion a few months later, however, the neighboring house was three stories tall and 5,200 square feet in area. And rather than standing behind a front yard, the new house fronted directly onto the sidewalk, an aberration in this 50-year- old neighborhood.

“If I’m not mistaken,” said Mr. Wiseowner after the dust had cleared, “l think our neighborhood has been mansionized.”

“Mansion, blanchen, I don’t care what you call it,” snapped Mrs. Wiseowner. “All I know is that house next door is too big, and I don’t like it.”

What is Mansionization?

Mansionization is a term for the act of demolishing a home and replacing it with a much larger residence, in many cases the maximum size allowed by local laws. The practice is popular in California, Texas, Washington and other states with high land values and fast-appreciating real estatemarkets.

Not surprisingly, mansionization is controversial. Owners of neighboring homes claim that many enlarged homes (sometimes derisively called “mini-mansions” or “McMansions”) spoil both the appearance and the scale of existing neighborhoods. And in several cities, homeowners are pushing back with new laws limiting both the height and the footprint of future super-sized homes.

Mansionization has defenders as well as critics, however. Realtors point out that homes in the immediate area of these giantized homes tend to gain in value, due, in part, to the likelihood that the neighborhood will attract other man-sionizers. The California Association of Realtors (CAR), however, says that in some cases the values of neighboring properties can fall when a Paul Bunyan- sized home pops up next door. In addition, critics claim that many McMansions are, well, ugly.

The Economics Behind the Trend

The high cost of land and construction are driving forces in mansionization, according to a 2015 report from CAR. “As a result of the high value of land, it is often more feasible for a developer or property owner to tear down an existing structure and rebuild it than it is to build or purchase a newly constructed home.”

With only labor and materials to pay for, “a developer or owner can double the size of an existing house for half the price of building or purchasing a new one of the same size.”

In Silicon Valley, for example, mansionization is both commonplace and a purportedly sound investment. In the city of Mountain View, home builders routinely bulldoze older homes and replace them with larger dwellings, according to Real- tor.com. “As homes go up for sale, developers swoop in to bulldoze older, smaller homes to make room for, say, a 4,000- square-foot home that can fetch more than $3 million.”

The economics of real estate is a motivating factor in mansionization. If homes in a given neighborhood are trading at a hypothetical $300 per square foot, the mansionizer may believe a house with two or three times the floor area of surrounding homes should rise in value correspondingly (although researchers say there are often limits to this rule.)

The Plus Side of Scrape-and-Rebuild

Beyond potential financial advantage, mansionization is also an expression of the freedom to use one’s property as one pleases, within legal limits. “If people are paying millions for the dirt on which a teardown sits, they want to be able to make their own decisions regarding the housing,” a lawyer tells Realtor.com.

Many people, in fact, find the idea of extra-big homes appealing, such as Brooklyn-based author Alex Sherwin. “The older I get, the more my desire to stretch out seems to outweigh my love of city life and my environmental leanings,” he writes in Realtor.com. “And what’s not to love? Tons of space? Want it. Some yard? Need it. Big Kitchen? Crave it. Extra rooms for my (stuff)? Do you have to ask? Parking? Please!”

“I don’t want a Hummer, or even an Escalade,” he adds, “but a McMansion? Sign me up.”

Trouble With the Neighbors

It’s unclear whether people support mansionization or oppose it represent the majority. One thing is certain, however: People who dislike McMansions are highly vocal.

As the housing market rebounds “many homeowners complain that mansionization has revved up-reigniting longstanding policy battles and sometimes bitter fence fights over the face and feel of L.A.’s neighborhoods,” writes reporter Emily Alpert Reyes in the Los Angeles Times. “Builders are snapping up smaller, older homes, razing them and replacing them with bigger dwellings. Increasingly, sleek, square structures are popping up along streets known for quaint bungalows.”

Neighbors of some mansionized homes have complaints, according to the CAR report. Some owners claim that over-sized.

CONSUMER CONFIDENCE RUNNING HIGH

The consumer confidence indicator published by the Conference Board ticked down from 97.4 in June to 97.3 in July, remaining near the highest level that has been registered since October 2015. July’s print fared better than market expectations of a drop to 96.0, which suggests that Brexit fears were overdone and that U.S. consumer spending will continue undeterred…. According to the Conference Board, “consumers were slightly more positive about current business and labor market conditions, suggesting the economy will continue to expand at a moderate pace. Expectations regarding business and labor market conditions, as well as personal income prospects, declined slightly as consumers remain cautiously optimistic about growth in the near-term” Focus.economics.com neighbors present a structural hazard to their homes. “Some residents argue that the larger homes affect the ground below, which in turn affects the physical integrity of their homes,” the CAR report states.

In other cases, although far from the majority, some claim that mansionization drives down the cost of neighboring properties. “Some neighboring owners even argue that the ‘incompatible’ house lowers their own home’s property value.”

Pushback Against Giant Homes

Some neighbors additionally complain that the tall, bulky houses block their views and deprive their homes of sunlight. A Seattle resident told Realtor.com that the newly built 4,000-square-foot mansion next door to her 1,000-square- foot ranch home is “so much higher than my house, virtually every window looks out into my backyard.” The owner says she planted Italian cypress trees to shield her from the view of the behemoth next door.

One architecture critic claims that McMansions are unfriendly. “These houses are often akin to fortress walls on city streets,” according to Greg Goldin, curator at the A+D Architecture and Design Museum in Los Angeles, “People in big houses tend to lead non-communitarian, non-civic lives…. They are anti-city.”

Whether or not that is true, many home- owners in neighborhoods affected by mansionization have sought to limit the size 6f home enlargements. Many people “feel that the present practice of tearing down older homes and replacing them with much larger ones constitutes such an offense to the neighborhood that it warrants some sort of government regulation,” according to the CAR report.

Encouraged by homeowner groups, Los Angeles City Council adopted a Mansionization Ordinance in 2008 which attempted to control the size of McMansions. The primary way that cities limit the size of homes are maximum floor-to- area ratios (FAR), which limits the livable area of a home in relation to the square- foot area of the lot. For example, if a city has a 50% FAR, a home built on a 5,000 square foot lot could have a maximum of 2,500 square feet of floor space. (This formula may not include garages and other non-residential structures, however.) One proposed amendment to the Los Angeles law lowers the FAR in some neighborhoods to 45%.

One possible limitation of FAR zoning is that it controls only the amount of development, as opposed to the shape of the house. A home that conforms to the density limit may still be tall in relation to its neighbors, blocking sunlight and views. Other cities in California have enacted ordinances that set limits to the degree that the profile of the house can extrude from the street or hillside. Critics of the ordinance, however, claim that numerous loopholes in the law made it ineffective.

Loopholes in the Law

This past summer, the Los Angeles City Council considered a new set of amendments to the law that would eliminate loopholes, such as not counting outdoor covered porches and overhangs as floor space. Covered porches are often prominent features of a mansionized home, and some have drawn complaints from neighbors.

Other cities have enacted other kinds of guidelines, such as requirements to set back the upper stories of extra-tall homes to protect the views and sunlight enjoyed by neighbors.

From the militant tone of some homeowners in Los Angeles, the controversy seems unlikely to die down. Yet angry neighbors are not the only thing to be considered by McMansion owners before they embark on a home enlargement.

BUILDERS FEELING OPTIMISTIC

A shortage of existing homes for sale is boosting the market for newly-built homes, and fueling confidence among builders right along with it. A monthly reading of builder sentiment rose two points to 60 in August; anything above 50 is considered positive on the National Association of Home Builders/Wells Fargo Housing Market Index, July’s reading was revised down one point. The index stood at 61 in August of 2015. Not all components of the .NAHB index, however, saw gains. Current sales conditions rose two points to 65, and sales expectations over the next six months increased one point to 67, but buyer traffic fell one point to 44, still mired in negative territory. Diane Olick, CNBC.

SALES LEVELS ECHO 2015

46,500 new and resale home transactions closed escrow in California during June 2016. In step with the seasonal sales cycle, sales volume was up slightly from the prior month. This was roughly level with a year earlier, continuing a deceleration in year-over year sales volume in recent months. 2015 ended with 450,700 home sales in California…or 9% more sales than took place in 2014. For perspective, the number of homes sold in 2015 is still 303,203, or 40%, below peak sales volume experienced in 2005. The number of homes sold year-to-date is 2% higher than 2015 as of May 2016. However, this percentage has steadily decreased in recent months, and it’s likely 2016 sales volume will end level with or below 2015. Firstluesday.com

The Question of Over- Improvement

One possible danger of mansionization is that owners will “over-improve” their homes, that is, put more money into the homes than is justified by the market. That’s not a problem if the owner does not plan to move in the near future, because the market would be a moot point, according to Pat V. Combs, a past president of the National Association of Realtors (NAR). “Go ahead and over-improve if you’re going to stay there a long time,” she tells Realtor.com. Smart homeowners, she adds, value their home for the enjoyment it gives them, not just its return on investment.

“If you just bought the house of your dreams and you’re planning to stay there for the next 20 years, do it and enjoy the heck out of it,” Combs says. “If you’re planning to move in the next three to five years, bite your tongue and bide your time.”

A Realtor in Colorado Springs, CO, agrees. Over-improving one’s property is perfectly fine, she tells Bankrate.com, “if you don’t care if you get your money back when you sell.”

The Wiseowners Have the Last Word

M r. Wiseowner, the fictitious McMansion neighbor puts in his two cents worth: “Call me over-cautious, but spending more money on the house than it’s worth goes against everything I’ve ever heard”

“Well, I guess it doesn’t matter if you’re going to live in your darned old McMansion forever,” replied Mrs. Wiseowner.

“True,” replies her husband, “but life has a habit of surprising us, and I personally do not wish to risk taking a loss on my home.”

Are you thinking about enlarging your home, but unsure how much is prudent to spend in view of the current market? Give a call. We have some sensible ideas on how to approach your home-improvement project in ways that have the best chance of preserving and improving your home equity.