Friday, February 5, 2010

Starter Homes, Fixers…What’s in a Name?

While I am a full service Realtor here in Humboldt County, California, I specialize in listing luxury homes. I sell mobiles, starter homes, fixer homes, apartments, businesses, commercial space, raw land – you name it. But my passion is marketing executive and luxury homes on the internet. And while all of this stuff is easy to say, what exactly does it mean? What is the difference between a starter home and a fixer home? And why are starter homes so hard to find, while luxury homes sit stagnant on the MLS?

The first step is to define our terms. Single family residential real estate can be divided into 5 basic groups: fixers, starters, mid-range homes, executive homes, and luxury homes. In a perfect world, mid-range homes would occupy the middle 40% of the price curve. On the down-money side, starters would occupy the 20% below mid-range homes, while executive homes would occupy the 20% above. Fixers would get the lowest 10%, while luxury homes would get the highest 10%. Of course, the world isn’t perfect, and to create arbitrary lines at exact percentile points is not very informative. It doesn’t really help answer why starter homes in Eureka are so hard to find, while luxury homes in Trinidad are everywhere.

For example, in 2004 in Humboldt County, there were 1531 homes sold. Within the cheapest 115 of them, up to a price of about $160,000, the majority were in less than comfortable condition. They needed work. They wouldn’t have qualified for FHA financing. They were fixers. These homes occupied the lowest 7.5% of the market instead of my ideal 10%, but pretty close.

Somewhere around $200,000 and house # 380 the size of a typical home started bumping up against 1500 square feet. Three bedrooms and two baths and 2 car garages became very common. If this is the line between our starter homes and our mid-range homes, that would put us at the 25th percentile, a little shy of the 30% in my perfect world, but pretty close.

At $300,000 and house # 1045 the typical size started settling around 2000+ square feet, and custom features started appearing, such as granite counters and larger lots. This would put us at 68% of the homes sold that year, really close to the 70% we would have predicted for executive homes with my model.

At $400,000 and house #1328 exclusive features like ocean views, large and private lots, exclusive addresses, and square footage in excess of 2300 began to slowly dominate the listings. This would put our luxury home market beginning at the 87th percentile.

To summarize, Humboldt County’s 2004 real estate market could be described like this:


2004 Humboldt County Housing Market Segments

• Fixers – up to $160,000                     7.5% of the market
• Starters - $160,000 - $200,000       17.5% of the market
• Mid-range - $200,000 - $300,000   43% of the market
• Executive - $300,000 - $400,000     19% of the market
• Luxury - $400,000 and up                 13% of the market

When you remember that 2004 was 3 years into a real estate boom where prices were going higher and higher, in many cases doubling, it makes sense that homes would be moving from one category into another simply based on increased sales price, not increased quality of the home. Prices went up in 2005 as well. There were 1,432 homes sold in 2005, broken down like this:

2005 Humboldt County Housing Market Segments?

• Fixers – up to $160,000                     2.8% of the market
• Starters - $160,000 - $200,000          3.9% of the market
• Mid-range - $200,000 - $300,000    38.3% of the market
• Executive - $300,000 - $400,000      30.8% of the market
• Luxury - $400,000 and up                 24.2% of the market


Many of the homes selling in the starter home range were clearly fixers. Many of the homes with mid-range amenities were selling for executive prices. There were more “luxury” homes sold than fixers or starters combined. With rising home prices skewing our market segments out of proportion, an adjustment is necessary.

Adjusted 2005 Humboldt County Housing Market Segments

• Fixers – up to $225,000                   14.4% of the market
• Starters - $225,000 - $275,000        20.1% of the market
• Mid-range - $275,000 - $400,000    41.3% of the market
• Executive - $400,000 - $500,000     15.4% of the market
• Luxury - $500,000 and up                   8.8% of the market


Moving our price brackets up a bit restores our percentage breakdown to something resembling our model, and brings home features more into line with our segment criteria. And it gives our market some room to move up. In 2006, our break down looked like this:

2006 Humboldt County Housing Market Segments

• Fixers – up to $225,000                    12.2% of the market
• Starters - $225,000 - $275,000        19.4% of the market
• Mid-range - $275,000 - $400,000    44.6% of the market
• Executive - $400,000 - $500,000      10.2% of the market
• Luxury - $500,000 and up                  13.6% of the market

Pretty good breakdown, with the anomaly of having more luxury homes sold than executive homes. Let’s look at 2007 and see if our breakdown continues to work.

2007 Humboldt County Housing Market Segments

• Fixers – up to $225,000                    14.8% of the market
• Starters - $225,000 - $275,000        17.2% of the market
• Mid-range - $275,000 - $400,000    43% of the market
• Executive - $400,000 - $500,000      10.8% of the market
• Luxury - $500,000 and up                 14.2% of the market


In 2008, the market decline began in earnest. We went from 1200 homes sold in 2007 to 876 homes sold in 2008. How did that affect our prices within various market segments?

2008 Humboldt County Housing Market Segments

• Fixers – up to $225,000                     22.8% of the market
• Starters - $225,000 - $275,000         18.9% of the market
• Mid-range - $275,000 - $400,000     38.6% of the market
• Executive - $400,000 - $500,000       10.7% of the market
• Luxury - $500,000 and up                    9% of the market



Our fixer homes increased as a percentage of the market, but not because of price deflation or blurring of segment features. Rather, the number of fixer homes sold remained stable relative to the number of homes sold in the market overall. Similarly, both starter home sales, mid-range home sales, and executive home sales remained relatively stable. But luxury home sales fell 37%, from 14.2% to 9% of the total market.

2009 Humboldt County Housing Market Segments

• Fixers – up to $225,000                     24% of the market
• Starters - $225,000 - $275,000         31.3% of the market
• Mid-range - $275,000 - $400,000     29.7% of the market
• Executive - $400,000 - $500,000         8.2% of the market
• Luxury - $500,000 and up                    6.8 % of the market


In 2009, luxury homes and executive homes continued their decline in sales volume, as did mid-range homes. Starter homes ballooned in number, and fixers increased even more. With such a large deviation from our model market, one might ask, “Is it time to adjust our segment parameters?” Perhaps. One must be careful, though. We could arbitrarily adjust every single year so that the market matched our model perfectly, but then it would be less helpful in looking at the dynamics within the market. Are huge variations from our model justified by other, more objective data?

I would argue that in 2009 our range of fixers should stay the same. Up to the $225,000 mark, most of the homes are physically in need of some type of serious repair, making it difficult to get pest clearances and to qualify for FHA loans. The fact that they are such a large percentage of sold homes has more to do with underperformance in the other segments of the market than anything else.


If we reduced the upper threshold of starter homes to $250,000, that would bring that segment’s share of the market down to 19.2%, and the midrange segment’s share up to 41.8%. This corresponds to our model market almost exactly, and fits with the physical qualities of the homes like lot size and square footage and bed & baths. It does make for an exceedingly skinny starter home price segment in the market, though. It’s amazing that such a large share of the market can sell in such a narrow price range.

• Starters - $225,000 - $250,000         19.2% of the market
• Mid-range - $250,000 - $400,000      41.8% of the market

The telling numbers, though, are how the top end of the market has been hammered over the past 2 years. While they account for 32% of the active homes on the market, they account for only 15% of the sold homes. And while starters comprise 19.2% of the sold homes, they make up only 8.2% of the active homes on the MLS.

Jan 2010 Active Humboldt County Housing Market Segments

• Fixers – up to $225,000                     19.2% of the market
• Starters - $225,000 - $250,000           8.2 % of the market
• Mid-range - $250,000 - $400,000     40.6 % of the market
• Executive - $400,000 - $500,000       13.7 % of the market
• Luxury - $500,000 and up                   18.3% of the market

In short, the excess demand for fixers and starters keep those prices stable and those segments of the market active. The relatively balanced supply and demand for mid-range homes is a positive environment for both buyers and sellers, providing choices and options for buyers, and giving sellers confidence that their homes will indeed sell for predictable prices. The lack of demand for executive and luxury homes, coupled with the excess supply, makes it very difficult for these sellers to sell their homes at what they perceive to be fair market prices.

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