TRAX in Daybreak - Real Estate Boost?

As we experience a declining housing market in the U.S., it is important to consider the geography of areas both losing and gaining property value. In Utah we are currently seeing some neighborhoods decline as they are primarily constituted of homes in the higher price ranges. Beyond this trend, there is another subtle trend that I have noticed taking place across the country. Homes within a walkable distance to light-rail stations are fairing better in this down market and some are even gaining value.

The Washington post reported on this trend, showing the percent change in the median home price of individual zip codes of Washington D.C. and its surrounding counties. The paper found that areas without direct access to metro stations - ones that were typically suburban in nature - experienced greater losses in median home value.

In Denver, where they have pushed light-rail construction heavily, the Denver Post reported that values have increased for homes near light-rail stations:

Margarete Humphrey knows her bungalow near the Louisiana Station light-rail stop is in a hot neighborhood. But she was surprised to learn the value of her home has increased over the past two years as much of the metro Denver housing market has declined. Homes near light-rail stations along the southeast line, which opened in November 2006, have increased by an average of nearly 4 percent over the past two years, according to an analysis by Your Castle Real Estate. But the rest of the Denver market declined an average of 7.5 percent.

While most of the studies indicate that transit increases property values, there are a few that have found that it decreases property values. In looking at these studies these negative impacts occur because of the negative side effects that are realized by those properties located right next to rail facilities. The noise, aesthetics, and traffic were cited as the primary culprits. In these studies homes that were in extreme close proximity lost value, but homes further away (but still within walking distance) gained value. However, most of these negative impacts can be mitigated by proper planning. The Daybreak plan looks to mitigate these factors as the TRAX line follows commercial, industrial, and retail properties in its penetration of the community. So these "nuisance effects" are absorbed by these non-residential areas that actually benefit from the traffic of cars and people. Further benefit is realized as these non-residential properties will be using the TRAX parking to their benefit.

So how does transit increase property values? Because it increases access to area destinations for residents in close proximity to transit stations. It is for this very reason that TRAX may be able to add maximum value to the Daybreak community. Daybreak essentially lies on the fringe of development in Southwest Salt Lake County. To get to most destinations, residents must travel either East or North to arrive there. Right now there are limited options to do this and accessibility is definitely a problem. TRAX offers a direct route to Salt Lake City, the University of Utah, various sports complexes, shopping centers, commuter rail, etc. While gas prices have recently gone down drastically, I do not expect them to stay there. The more gas prices increase the more people will see TRAX as their best transportation option. This will only increase property values more.

Overall, transit adds value to communities like Daybreak regardless of the economic climate. Neighborhoods and communities with strong connectivity will thrive in the long-term. Transit has the ability to increase (or at least sustain) value because it provides more people with access to essential destinations in a given area; it also improves one's quality of life in congested metropolitan areas such as the Wasatch Front.

Daybreak Housing Market

The Salt Lake Tribune reported today that homes in the Salt Lake Valley have returned to 2006 levels. According to the median home prices in our zip code (84095), they are correct. If you look at a graph of median home values it is easy to see that we have peaked and that values have decreased since the second quarter of this year. With home values now on the decline, Daybreak, like all other areas, is experiencing a record number of foreclosures. These foreclosures are for every type of property from condos/town homes to 5,000 square ft. single family homes. So now we ride the downhill slippery slope. But how fast and for how long will the market decline? If you can answer that question, then you will probably become a millionaire soon. The market is always unpredictable. However, looking at common sense factors can help establish a good prediction.

One of the largest factors that needs to be considered is Daybreak's success. Daybreak has been steadily increasing its already large share of the new home market. Last year Kennecott Land boasted that for every 10 houses sold in the salt lake valley, one of them was located in Daybreak. This has now increased to one out of every seven new homes. Why? In a market where buyers can be picky, they are choosing a differentiated product. You cannot find a community like Daybreak anywhere else. Another factor to think about is the 7,500 tax credit for new home purchases. The deadline for this credit ends next summer. Buyers will want to take advantage of this for all of the reasons I stated in my previous post on the subject and will not want to miss it.

A third reason is the Village Center. I know, it is definitely late in becoming a reality, but now I can see the skeleton of a retail building being constructed every time I pass Oquirrh Lake. Once this part of Daybreak is finished I expect demand will increase even more. For those of you not familiar with the predominant religion/culture here in Utah, you should not factor out the new temple being built in Eastlake. This like everything else in Daybreak is arriving later than expected, but when complete it will definitely be a major attraction for LDS buyers.

While there are many expensive homes in Daybreak, you can find plenty of affordable options. Most buyers have found themselves priced out of the market, but with options in the 180 to 220 range, some of those buyers will consider Daybreak their best option. Another attraction is that unlike many developments, these townhomes and condos are interspersed with more expensive homes creating a community of variety instead of a mass of town home/condo clones.

Utah as a whole has always been behind the national trend. This would suggest that we have further to go before we see prices increase in a steady fashion. However, Utah's economy is better than most and has not had to wait while congress takes action. Instead, measures were already in the works to boost the housing market long before Utah arrived in a foreclosure "danger zone."

Given these conditions I am betting that Utah and Daybreak especially will have a slower decline that will not last as long as other areas of the country. Especially those homes that are in the low to mid 200s. A local realtor who calls himself Utah Dave brings up an interesting point for those buyers who are looking to upgrade their home. He reasons that while the market for starter homes is still fairly stable, the market for larger, more expensive homes has gone down quite a bit. The old adage "buy low sell high" could apply here. Sell your starter home at a decent price and buy your upgrade at a considerable discount. Not a bad idea.

For those of you who follow this blog regularly you will have noticed that I took a rather long break from writing any posts. I did this for two main reasons: my work has recently taken up much more of my time. I have also been working on integrating a new feature into this blog that will be very informative once complete. Stay tuned...

Daybreak Down Payment Option: First-Time Home Buyer Tax Credit

While Utah has so far enjoyed a relatively small decline in the residential real estate market, many other states have not fared so well. With the strict standards in place for mortgage qualification and the lack of plentiful buyers home values have dropped quite rapidly. In light of this crises, the US government has made efforts to intervene and boost the economy. One of the facets of their efforts is the First-Time Home Buyer Tax Credit. For those who would like to purchase a home in Daybreak any time soon: listen up.

The First-Time Home Buyer Tax Credit is not an actual tax credit. A tax credit is when the government either reduces your tax liability or increases your tax return dollar for dollar. The name sounds like it is free money. It is not free money. However, this does not mean that you should not consider using this program. The First-Time Home Buyer Tax Credit is actually an interest-free loan. You pay the loan back via your taxes for the next fifteen years. At this point you may be asking - is it worth it? My answer is definitely yes.

If you understand the time value of money you will know that a dollar in 1993 was worth more than a dollar now in 2008. Why? Because it had more buying power. It could buy you more bread, electricity, even gas. (Actually then it could buy you about one gallon) That was 15 years ago. In short, while you will have to pay every cent back to the government in the next 15 years you will gain a lot of value with this deal.

The maximum amount that you can qualify for is 10% of the value of the home you intend to buy with a cap of $7500. So if you buy a home in Daybreak you will qualify for the full amount. You can even use the tax credit as a down payment for your new home if you work it right. You get the benefit of the tax credit after you file right? Yes, however, right now FHA financing requires a minimum down payment of 3.5%. On a $250k purchase that is $8,750. The FHA allows a buyer to borrow money from family for down payment. This means that a first time buyer could borrow the down payment from relatives, make a home purchase, then use the tax credit to pay back all or a portion of the borrowed funds.

If your still not sure, consider this: assuming an interest rate of 7%, the home owner saves up to $4,200 in interest payments over the 15-year repayment period. Compared to $7,500 financed through a 30-year mortgage with a 7% interest rate, the home buyer tax credit saves home buyers over $8,100 in interest payments. If you are still a little worried about the housing market in Utah consider this: if it goes down further and you are forced to sell, then you will not have to pay back the government for the tax credit "loan." So if you are on the edge, it would probably be a good idea to jump off before the July 1st, 2009 deadline.

The Future of New Urbanism in Utah

I received an e-mail from a reader not too long ago about my stance on New Urbanism. He insisted that New Urbanism did not have any place in the Utah suburbs. He further suggested that the movement was just a planning fad that would end with only a couple developments in the Salt Lake Valley carrying the banner of New Urbanism. In response, I have decided to post a picture of New Urban developments in the Salt Lake Valley. They are located throughout the valley in all four quadrants branching out from the city center of Salt Lake. While a couple already exist, the majority of these developments are either in the planning or construction phases. As you can see, New Urbanism is not a trend that will go away any time soon and considering the movement has been gaining momentum since the 80s, I do not think it is short term.

In looking at where development is occurring in Utah, the fringes of the community are still popular, but there is a growing trend that is the result of the energy crises. This trend uses transit as a lifeline to the surrounding communities. Numerous TODs (Transportation Oriented Developments) have started already and many more are planned. Any empty space near a proposed TRAX station has become prime real estate for these communities.

Many more New Urban projects are starting all over the state. Ogden, Layton, Farmington, Woods Cross, Park City, Heber, Lehi, Orem, Mapleton, Richfield, Cedar City, and St. George all have projects on the drawing board or being constructed. Of course, none of these projects match the scale of Daybreak or the West Bench which has many more communities planned, but this is clearly the new direction in development. This is by no means an exhaustive list. In fact, if anyone would like to inform me of other communities planned or being built in Utah, then please share. This list is merely what I could gather via the internet.

As for whether or not it belongs in Utah, I would like to refer to another comment that I received: "..let the free market reign." In Utah our demand is being pushed by our demographics. People want to start a family and own a place instead of rent. With housing and land prices going through the roof people need affordable choices. These choices need to save the owners money and time. With the option to ride mass transit, lower utility bills, and maintenance-free options, you can stretch your budget much further. New Urbanism will continue in Utah by choice. This choice has already been seen in the marketplace for housing and will continue well into the future.

Are Houses in Utah Getting Smaller?

Are Utah Homes Shrinking? Since the beginning of suburbia after WWII homes across the country have been getting larger. The average home back then was about 1100 square feet. In the 1970s this size grew to 1600 square feet. Presently the average American home is 2300 square feet. This may still sound fairly small, but the calculations for this figure do not include basements, bonus rooms, or garages. Now this trend is reversing itself. According to recent reports the average size of the American home is beginning to shrink. This downsizing is attributed to rising fuel costs, the “green” movement, and an aging population.

The leading edge of the baby boomer population just turned 62. This demographic is getting ready for retirement and the majority are becoming empty nesters. Since they do not have kids and want to stretch their retirement dollar, buying a smaller home in a nice community is becoming a priority. One of the new features in the new North Shore Village will be residential construction targeted specifically at the aging baby boomer population. While Kennecott had this in mind earlier it did not make it off of the drawing board into Eastlake Village. Now that lending standards have been tightened and less people can qualify for a loan, homes are not selling very well and there is a large inventory on the market. However, these baby boomers usually do not have trouble qualifying for financing and half of them buy their retirement homes with cash. This is a great market to target given the circumstances.

Another target market is the green movement. The whole philosophy behind Daybreak promotes sustainable communities. This “green” philosophy is not necessarily embodied in a 5000 square foot house. (Although some homes in Daybreak exceed this size) Even with the energy saving appliances and energy star certified home, a house that big is an energy waster if you have a small family. More than likely you don’t use half of the rooms of that house daily. Rising utility and maintenance costs of a home that large is becoming more of a disincentive to potential buyers as well. Another disincentive is the rising cost of transportation. If you live in South Jordan , chances are that you work somewhere else in the valley and commute. This will be a problem for Daybreak residents in the near future, but in 2010 TRAX will alleviate that burden for some residents and the Mountain View Corridor (Later) will be the choice of others.

Preferences are changing along with demographics as a survey from the National Association of Home Builders has found that 60% of home buyers now prefer an amenity-rich smaller home. Studies also suggest that buyer preferences toward huge suburban lots are also waning. Caring for a full acre of property can be time-consuming and expensive. With both of these resources becoming more scarce, it is no wonder buyers are looking for small lots or maintenance free communities. If the trend toward smaller homes continues, then it could make a big difference in home values. A recent study by the online appraisal service Zillow.com found that less expensive homes appreciate more than expensive and presumably larger homes. If this trend continues, we will probably find that Mcmansions will represent the weakest portion of the market.

Many will say that with a low-interest mortgage you will get more house for your money. However, you will also get higher insurance premiums, utility bills, maintenance costs, and higher property taxes. With these costs and trends, homes in Utah will definitely get smaller. Those homes that are smaller, energy efficient, and convenient will also see the most appreciation in the future.

Premium for New Urbanism

One of the most popular criticisms of Daybreak that I have heard people use is that the community is overpriced. In my opinion the whole market is overpriced at this point, but holding this factor aside is Daybreak more expensive than comparable homes? Maybe an appraiser or real estate agent might claim that it is about even if not slightly overpriced. However, the general opinion that I have collected from friends and coworkers that live in nearby neighborhoods is that Daybreak is overpriced. I might argue that the amenities justify the price, but my friends eagerly point out that I pay a home owner's association fee for the amenities each month. With these facts in consideration, should a house in Daybreak cost more than the surrounding area? The answer is yes. Why? Because the market has proven that consumers are willing to pay a premium to live in communities that exhibit new urbanism traits.
New urban communities are relatively new. The first community to be dubbed new urban was constructed in Florida in the early 80s. Back then no one really knew to what extent the design features of new urban communities would add value. They could only surmise that people liked the features and thus demand would dictate a premium be paid.

Recent studies now go into detail about the value adding amenities and the amount of value they contribute. One of the first of these was a study called Valuing New Urbanism: The Case of Kentlands. This analysis used a hedonic pricing model in which size, construction quality and other variables were held constant. The conclusion? When compared to homes in conventional suburbs outside of the community, homes in Kentlands exhibited a $24,000 to $30,000 price premium. The study was conducted in 1998 and the gap has widened since then.

Not only will consumers pay a premium to live in new urban communities this premium has grown larger through the years. Another new urban community has exhibited a 14.4 percent higher appreciation rate than comparable homes with all significant factors held constant. This widening gap was attributed to features in the community reaching maturity.

Additional studies conducted by Market Perspectives and the Urban Land Institute compared New Urbanist communities with standard subdivisions. Their study showed a minimum 15 percent premium for houses in New Urbanist communities. These studies were conducted by comparing regionally diverse new urbanist communities with homes in nearby conventional neighborhoods. The authors accounted for site traits, housing characteristics, unit quality, neighborhood, and other market factors. They even considered HOA fees. Even with those factors not being accounted for, new urbanist communities still command a solid 7% price premium.

I'm not sure as to the exact percentage, but from what I can estimate from real estate listings I can see a small, but visible price premium for homes in Daybreak. The turmoil in the market prevents any serious investigation at this point. I have to admit that I generalize the fairly rigorous studies conducted on values because the variables appear to be the same. However, if I am even close in my assumptions, in the years to come Daybreak will appreciate significantly faster than surrounding real estate.

Daybreak Home Sales Slump

The latest home sale stats for Daybreak indicate that the community has more than a year's worth of inventory. In fact, according to the Wasatch Front MLS and Corie Seymour, there are 49 houses currently on the market in Daybreak. That number does not even include new construction in Eastlake or the condos in Founders. While 34 homes were closed (sold) in the first three months of this year, these sales could represent deals made as far back as 6 months. A better indicator is the number of homes put under contract since the beginning of the year. This number is a dismal 12 homes. Can you say buyer's market?

On the new home construction front, Daybreak homebuilders are trying to weather the storm offering incentives that have been promoted by the Smart Buy program. Considering the current state of the market some home builders seem to be doing well, while others have had contracts canceled and are looking to unload inventory quickly. People buying right now definitely have negotiating power with the homebuilders.

I for one sincerely hope that the home builders will be able to sell more homes in the coming months. I imagine that Kennecott Land needs to sell more plots to the homebuilders to maintain cash flow for the company. However, as altruistic as Rio Tinto (owner of Kennecott Land) may seem, they need to be able to produce a profit. I think they will in the long term if they stick with their current plan. However, if for some reason a decision maker decides to take a short-term perspective on things, then the plan that is Daybreak will likely not be realized.

Rio Tinto could have easily sold off Kennecott owned land in chunks to cookie-cutter developers and industrial companies, but Rio Tinto has a sustainability philosophy that pushed the idea of Daybreak forward. In the news today you might have seen that Suncrest, a developer in Draper, filed for chapter 11 bankruptcy. In this case homeowners like that the development will be sold to another developer. Their community has already realized its purpose. The Daybreak community, on the other hand, is the spark of development that will light the entire West side of Salt Lake County with sustainable development. In my opinion Utah needs sustainable development. All we can do is wait and see...

Buy Now in Daybreak?

Many potential Daybreak home buyers are sitting out on the sidelines waiting to see what happens to the housing market. Will prices fall? Probably. If the home you are looking to buy is over 300,000, then you might consider waiting a little longer. The market for homes in that range is definitely trending downward. However, if the home you are looking to buy is under 260,000, then I suggest that you move forward and purchase your Daybreak abode soon. Now is the time to buy for three main reasons. First, many of the home builders are offering incentives that will definitely give you a boost in your purchase. Some home builders give 10,000 to put toward closing costs, upgrades, or to cut down the selling price of the home. An agent I know from one home builder said they would finish the basement of the home for free in addition to incentives already put in place. Another reason is that the market for homes around the 260,000 range and below will stay strong because people can afford these homes, especially the condos. That is the one area of the market that is not suffering right now. The third and final reason is the most compelling.

An article in TIME magazine aptly titled "Ignore the Headlines" illustrated this reason well. Essentially you could buy now at a possibly higher price, but get a lower interest rate. The alternative is to buy later when the price is down, but the interest rates have gone back up. More than likely you will be paying the same monthly payment.

"The thing that will make home prices stop falling is the very same thing that will push mortgage rates higher," says Jim Svinth, chief economist at mortgage firm Lending Tree. So anything you gain by a further drop in prices might be offset by rising financing costs."

Another trend that suggest interests rates will go up is inflation. Oil prices are at record levels which drives up the cost of just about anything that has to be transported (food, goods, building materials). Food prices in particular are rising at a rate which has prompted several news stations to monitor a "basket of goods" to report rates of local inflation. When inflation goes up interest rates go up. Click on the graphic on the left for a graphic comparison of buying now or buying later. With inflation rising and a possible economic recovery home loans will definitely get more expensive.

A Buyer's Market

You hear it all the time on the radio, "It's a buyer's market, hurry don't miss the boat!" These ads are run by mortgage companies, home builder's, etc. Then you here the Utah Association of Realtor's commercial about getting the facts about Utah's housing market, that it is different than California or Florida. Go online and you find blogs and comments that talk of the bubble that is about to burst in Utah or the major price correction. Who are we to believe?

The case for a fairly stable market is strong. Economically Utah has been leading the nation for years. With a low unemployment rate and job growth that led to 55,000 new jobs last year alone, people can easily find jobs. Key sectors of the economy are growing and we have a net in-migration of about 41,000 people a year. Many of these people are equity refugees from other states and are buying houses. We have a bright economic outlook. Interest rates have gone down quickly in the last few months as the fed has cut several key rates. Sounds like a recipe for demand and price increases.

On the other hand, Utah has a big inventory of houses on the market right now. Enough to last about 10 months if nothing else is built. While home prices increased in 2007, the real estate forecast for 2008 is fuzzy. Forecasters have predicted low single-digit gains if not small decreases in home values. This forecast has put many would-be buyers on the sidelines watching and waiting to see what happens. Foreclosures have added to the downward trend with many people who bought homes that they could not truly afford. Possible inflation in the future may drive up interest rates. Just ask those who took out a home loan in the early 80s, to them 12% was a deal. While all this may sound scary most experts feel a major correction is unlikely.

What does this mean for Daybreak? It depends on your point of view. If you intend to stay in your home for five or ten years, then do not fear. If you need to sell your home now, then get ready to make some concessions and lower the price of your house. The market has been divided into two main segments: those houses over 300k and those under 300k. Daybreak includes both of these market segments. However, the under 300k segment is dominated by condos and the over 300k segment is the majority of single family homes in Daybreak. Condos and the low-priced small homes of Daybreak will sell fairly easily. The cheaper they are the easier they will be to sell. That's why Garbett Homes' cannot build their condos fast enough. The higher the price goes over 300k, the more discounts and price slashing will have to be done to sell the home. Unique conditions do exist. A house across the street from the temple, park, school, or other amenity might not have to be discounted at all. Looking at the recent statistics of houses sold in daybreak, prices have been reduced anywhere from 100k to 5k on homes ranging from 600k to 230k. Home builders in Eastlake have made concessions and reductions in price as much as 30k. The existing home market is where the big discounts are. Either way, for now it is definitely a buyer's market.

Real Estate in Daybreak

When considering real estate in Daybreak you should know that Daybreak represents a unique market within a unique market. The Wasatch front is a unique real estate market that has bucked some of the national housing trends in the last year and a half. This digression has been fueled in part by our strong economy and low unemployment rate. However, I would argue that Daybreak is a unique market within the Wasatch front because of the amenities, architecture, and new urbanism concepts that are followed by the community planners. On average, homes are definitely more expensive in daybreak than in the surrounding areas because of these factors. So how will this affect future values? Daybreak was modeled after other prominent neighborhoods in Utah including the Harvard - Yale area. This particular area is also a unique market that has unique trends when compared to surrounding real estate. Because of the quality of life in the Harvard - Yale area, the property values are extremely high. A modest 3500 sq ft 4 bedroom house in this area could easily run you a million dollars. This value has been gained over time and will remain as long as the quality of life in this area remains high. Considering that most people who live in daybreak had to pay a premium to live there, they have a vested community interest in the quality of life in and around their neighborhood. This vested interest is different than other communities along the Wasatch front because of the uniqueness of Daybreak. You literally cannot find another neighborhood like it. If you want to move to a neighborhood that is similar , where would you move? In the long-term, house values in the Daybreak area should climb higher than values of surrounding homes because of the initial design and the continued interest that residents have in creating a high quality of life.