Everything You Know About Philly Real Estate Is Wrong
From the city to the suburbs to the Shore, here’s why the Philly market is better than you’re being told
THE STATE OF REAL ESTATE. You hear a lot about it these days — most of it bad. Sub-prime disasters. Spiraling prices. Stagnant sales. But take heart, Philly. Because there’s one thing you may not have heard, yet: that real estate, like politics, is local. And our industry insiders actually have good news for you about buying, selling, owning, borrowing, wheeling and dealing, in Philadelphia … and beyond. On the following pages, we address the most common perceptions out there about the region’s housing market, and present you with the truth about real estate, right here, right now — including the inside scoop on best-bet neighborhoods, a detailed look at local home prices, and (free!) real estate advice from the pros.
Plus: What your million bucks buys these days, how to sell your place faster than your neighbors sell theirs, and why you should ignore everything Katie Couric says about the housing market.
The real estate market is just crappy right now — everywhere.
The Philly reality: It’s Bernanke-affirmed: The downturn in the American housing market has been huge. Home prices have dropped, sales of new homes have fallen, and there are more homes for sale than there are buyers — all classic indicators of a down market. And even, some economists think, of a recession.
But you, Philly, get a pass — at least in part. Metropolitan Philadelphia, historically a stable market, continues to fare far better than the rest of the country.
“Over the holidays, I traveled to Arizona and California,” says Allan Domb, president of Allan Domb Real Estate and king of the Center City condo scene. “In those local newspapers, I saw ads from realtors who showed 12 listings, eight of which were bank repos, foreclosures. And we’re not talking inexpensive prices; one was $977,000, in a beautiful area. You don’t open the paper here and see 66 percent of houses for sale as foreclosures. You just don’t.” Of course, realtors have a vested interest in painting a pretty market picture. But that doesn’t mean Domb’s insight isn’t on target.
Here’s why: First to feel the pinch in a down market tend to be the secondary and tertiary housing markets — a.k.a. vacation homes. (When interest rates shoot up, these are the first on the chopping block.) Greater Philly is a region of primary residences, with owners who live where they work and contribute to the local economy. That economy is based on industries that go beyond new construction and tourism (and into manufacturing, government, health, education, financial services). These are key factors in a stable market. So while “we’re definitely going to come away from this cycle bruised,” economist Ryan Sweet, of Moody’s Economy.com, notes, “we’re not going to have the black eye other markets have.”
Even the ’burbs continue to do relatively well. Though Robert Toll, the Horsham builder of national McMansion fame, has fared better than many other big-time builders, his company has suffered record losses since the slide took hold two years ago. But he remains optimistic about the Philadelphia area.
“Philly suburbs are an anomaly,” Toll says. “Chester and Bucks counties are exceeding our expectations. It’s because there’s a diverse employment base, constrained supply, and some of the best school systems in the country. They are good places to live, so people — and businesses — continue to move there. When places grow, you’ve got buyers.”
There has also been a difference in market activity over the past several years between Philly and harder-hit areas. Many investors in lucrative markets raked in the cash from buying and building low, for cheap loans, and reselling at high prices. And then the bubble burst, rates went up, prices dropped, and investors fell hard. Almost none of this characterized the market in good old Negadelphia, though, where a time-honored skepticism among buyers and investors and very little new building worked in our favor. Put plainly: We didn’t fly quite as high, so we didn’t have as far to fall.
But you still might want to hold off on the schadenfreude. Even in Philly, in the second half of 2007, median home prices dropped for the first time since 2003. Building in some areas of the suburbs and South Jersey slowed by as much as half, with no signs of picking up for at least a year. And though we’re still lower than the national average, the number of Philly-area foreclosures rose, as did the number of delinquent mortgage payments. Sellers are having a harder go of it than they’ve had in years, even in historically desirable places. It is, undeniably, a soft market. (To see how your neighborhood fared, check out our comprehensive chart on page 104.)
“I think Philly — particularly the Main Line — is essentially a recession-proof, economically immune, bulletproof area,” says Lavinia Smerconish, a Prudential Fox & Roach agent and longtime real estate player on the Main Line. “But we aren’t media-proof. The sub-prime lending fallout? Eh. Not so much here. But we all read about it. So the buyers stay home — and it becomes a self-fulfilled prophecy.” (For more on the Realtor vs. the Reporter, see Smerconish’s essay on page 101.)
What it may mean to you: As Sweet notes, it’s too soon to sound the “all-clear signal” for Philly (particularly when the national economy is shaky). But hey — pat yourself on the back for not buying that $3 million fixer-upper in Modesto two years ago. And an even more useful takeaway: To keep up with Philly real estate news (good or bad), read Philly news, not USA Today.
Anyplace that hasn’t crashed yet — like Philly — is just going to crash next year.
The Philly reality: By all accounts, 2008 promises to be another tough year. But economists say a devastating crash of the caliber we’ve seen in many cities is unlikely because of the stable nature of the market; it’s much more probable that the deflation of the Philly bubble will simply continue.
“Housing downturns tend to be longer downturns,” says Kevin Gillen, a Wharton economist and Econsult vice president. “Our last one went from 1989 to 1994. That was a hard landing, because the city was in a fiscally challenged state, and this time, at least we don’t have that. The city is in way better shape. But we’re still searching for a bottom, and we haven’t hit it yet. Look for the number of inventories — that is, homes listed for sale — to start coming down. When that happens, then we can predict when the prices of homes will be back up and the market will return to a balance.”
But, says Gillen, how hard or soft the city’s actual landing will be is impacted by more than just the next few months of market activity. The pending property tax reassessment will inevitably change how much many Philadelphians pay in taxes each year. If City Council cuts tax rates enough to offset the higher assessments, those reassessments won’t cripple the already fragile market. If taxes remain high, though, the reassessed houses (in many cases, now worth more) could wind up on the already-flooded market — with buyers even more reluctant to pony up.
What it may mean to you: For now, patience … not panic.
When in doubt, follow the three rules of real estate: location, location, location.
The Philly reality: It seems like a paradox: The places that hold their value best in the long run tend to be some of the most volatile in the short term. But if you’re looking to buy a place and stay for a while, betting on a good location pays off. “Think of it like darts,” Domb says. “If you’re talking Center City, the red bull’s-eye is Rittenhouse Square, Washington Square. The next ring out is the Rittenhouse District, the next is Fitler Square, the next may be Graduate Hospital, and so on. You can overpay in a good location and it’s still a good value, because they’re not building more.”
The constrained supply also accounts for the volatility, Gillen explains. In a good market, when there’s lots of demand, prices rise noticeably in time-honored favorites (like Rittenhouse and Bryn Mawr), because “unlike a place like Omaha, where there’s lots of cheap land on which to build more homes to meet demand,” what’s there is there. Conversely, in a down market, prices drop farther in these areas than in others, to more closely match what a wider public can afford, so they’ll appeal to more potential buyers. But, says Gillen, outside short-term market fluctuations, the most desirable areas do reliably appreciate through time.
According to the Prudential Fox & Roach HomExpert Market Report, even though average prices in Rittenhouse have dropped almost 10 percent since 2006, folks selling there in 2007 still got the highest median sale price in Center City (at $440,000, more than twice that of a decade ago), followed by Old City ($407,500), Washington Square ($360,000), Broad and Arch ($335,000) and Northern Liberties/Fishtown ($326,000). On the Main Line, Villanova led the pack at a $920,000 median selling price — even after an eight percent drop — followed by Gladwyne ($900,000), Merion Station ($537,000), Bryn Mawr ($532,000) and Bala Cynwyd ($471,500). No big surprise.
What it may mean to you: The Bryn Mawr 4BR/3BA colonial today: $600,000. Knowing it will hold its value 12 years from now: Priceless.
Best hang onto your houses, Philly. You won’t sell ’em now.
The Philly reality: On average, Gillen says, houses for sale now are on the market about 67 days, nearly double what they would be in a balanced market. Thus, inventories in metropolitan Philly are very high, he says, and the number of homes actually selling is low.
“At this rate of turnover,” he says, “it would take approximately 10 to 12 months to burn off all the homes available for sale, and that’s if no homes are added to the current inventory, which they almost certainly will be once the spring selling season arrives. To call this a ‘buyer’s market’ would be an understatement.”
Nevertheless, the same market has created a sort of perfect storm — a pervasive fear of mortgages and interest rates after the sub-prime mess; stricter standards from lenders; people who have to wait longer to sell before they can then buy — that has buyers staying home, and houses withering on the vine.
A solution will work itself out, Gillen says, as sellers adjust to the idea that they can’t sell their homes for what they could in, say, 2005. “Sellers are beginning to give up a little,” he says, “and it’s slowly trending downwards, with asking prices dropping about $20,000 on average.” They will drop still lower, he says. (Depending on which economist you talk to, prices will go down between two to 12 percent more before we hit bottom.) Which hurts if you’re the seller — but for the market, it’s a good thing. “It helps us return to a balance, where houses sell more quickly,” Gillen says.
What it may mean to you: There are a few exceptions (we’ll get to those in a bit), but potential sellers should seriously consider not adding to the glut of houses for sale right now. Have to sell? Remember, as Domb says, that the market’s needs, not yours, dictate the value of your house. And polish, polish, polish, advises Smerconish: “I’ve staged more houses this year than I’ve done in a lifetime — packing furniture away, replacing Corian countertops with granite. It’s not that you don’t need that type of attention in strong markets, but now it’s essential.”
Now is clearly not the time to invest in real estate.
The Philly reality: Almost across the board, prices are lower than they’ve been in years. Even if 2008 brings the predicted two percent decrease in house prices for the area, if you’re buying a home in which you plan to live for a while (as opposed to buying an investment to turn around quickly), it’s smart to take advantage of the inventory. Translation: For many Philadelphians, now is the time to buy.
“A lot of people are waiting to see when the market’s going to hit bottom,” Domb says. “But you can’t pick the bottom.” The bottom, he notes, is only determined in retrospect, after prices have risen — after it’s gone. Already, he says, first-time buyers are “suddenly coming out of the woodwork” — prompted by low interest rates — and will likely set off a chain reaction as those sellers look to upgrade.
“People with an inclination to buy now who are waiting for lower prices are going to kick themselves,” echoes Toll. “The market will reverse, and they’ll be sorry they missed the opportunity. It’s like Bernard Baruch said: ‘You shouldn’t try to hit the high or hit the low. Just get somewhere close, and you’ll be rich.’ Okay, well, actually, that’s some Baruch, mostly Toll.”
Sure, it’s realtors talking again. But Center City is a fairly large exception to the rule of dropping prices — many properties are still appreciating, and show promise of continued appreciation, making for good buys as well. Wachovia mortgage consultant Anthony Iezzi, who has worked with buyers purchasing Center City condos, points to the recent purchase of a Liberty Court townhome in Society Hill. “The starting price four years ago was $960,000,” he says. “But when it sold and settled in November, it went for $1.4 million — and that’s in a supposedly declining market. Another one in the same development started at $1.5 and resold for over $1.9 million,” he says. “I could go on.”
Success stories are beginning to trickle out of the ’burbs, too. “I see smart people living in $600,000-to-$1.5 million houses who are selling now, and trading up,” Smerconish says. “That bracket — $600,000 to $1.5 million — is still hot; it’s hard to get into the Main Line on those prices. And these people are trading up to the $2 million to $2.7 million range and getting good deals.”
But, Smerconish says, there are people who should resist the urge to buy a new place right now, to avoid that bitter pill of a net loss: the downsizers. “When you trade up, you enjoy the deficit in the market,” she says — you may take less for your current home than you’d like, but you make up the difference with the home you’re buying. “But when you’re downsizing, you’re a victim of the market. These are difficult people to counsel, because I’m there to add value to a transaction, not just stick a sign in the ground and get them out. And we’re talking about smart, successful people. For them, the idea of 20 percent coming off a major investment is terrible.”
What it may mean to you: House-hunting. “The best opportunity to buy is when people think it’s the darkest,” Domb says. “Right now, people probably think it’s close to the darkest.”
So what if house prices are low? It’s too hard to get a decent mortgage nowadays.
The Philly reality: The perception of mortgage difficulty, says Jason Schaeffer, president of South Jersey builder Tim Schaeffer Communities, stems from an affordability problem — the exact thing that kicked off the sub-prime mess.
“For the past few years, people were getting these crazy mortgages that they couldn’t afford,” he says. “Now, that’s stopped, and the pendulum has swung the other way, and underwriters are erring on the side of conservatism. In the end, people who can afford homes are getting them, no problem, and people who can’t, or who are on the cusp, aren’t.”
So while, yes, lenders have raised their standards when it comes to who gets money, the process remains case-by-case. Many of the people having problems are “the ones who have been late with mortgage payments, or people with high credit-card debt that they’re not on time paying,” Iezzi says. For most conventional buyers, he adds, there is money available, including jumbo mortgages (loans exceeding $417,000) and loans for second and third homes.
And another thing: Current interest rates are the lowest they’ve been in years. “I remember, growing up, that if the mortgage rates would drop just below eight percent, my parents would say it was a good time to buy,” Smerconish says. The rate for a 30-year fixed mortgage at press time was 5.67 percent. “Now seems to be a magic witching time to buy.”
What it may mean to you: The loan you want, with a super-low interest rate to boot. Seriously.
The Shore: One big hot mess.
The reality: This perception grows from a deep-rooted truth: The rules that dictate the Philly market don’t apply at the Shore, which is heavily influenced by investor buying and largely made up of secondary homes. (In Cape May County, about 80 percent of the homes are classified as vacation homes — compared to 30 percent for Atlantic County, and 15 percent for the national average. Ocean City has more investor — as opposed to resident — share than anywhere in the nation, says Sean Maher, associate economist with Moody’s Economy.com.) And like most areas that experienced rapid increases in home prices and rampant building, parts of the Shore fell hard — with house prices dropping almost twice the national average.
Another key difference at play is the Shore’s relatively stagnant market. “I personally think that even though prices are down a bit already, it’s not a bad idea to sell now, if you plan to sell anytime soon,” Maher says. “In the 1990s, when prices everywhere were dropping, the prices on the Shore stayed flat for a decade. After they bottom out in the next year or so, it will likely be a similar pattern. If investors try to ride it out, it might be a long wait.”
For some owners, happy with their beach houses and fixed-rate mortgages, that’s fine. But for folks with reasons to sell — those with a lack of equity built up in the home, or who are mired in interest-only or sub-prime mortgages whose payments have skyrocketed — “Now’s the time,” Maher says.
“Right now, Cape May County is losing residents,” he adds. “The economy in that area isn’t as vibrant as it is in Philly or the rest of New Jersey. It lacks the industries those places have — education, services, health — and relies on construction and tourism.” And as the economists (and the builders, developers and lenders) keep saying, when the economy grows or slows, so does the housing market.
Which leads to what may be the newest Shore thing: Atlantic City, of all places. Despite suffering remarkable job losses in 2007, A.C., predicts Maher, is going to make a big-time comeback. “Atlantic City has the gaming industry, obviously,” Maher says. “The upmarket casino development plans right now are impressive, and that’s generating new jobs, and I think more people will want to live close to where they work. A developed economy means more stable housing.”
If the theory holds true, with the expansions of Harrah’s, the Borgata and the Taj (and each new hotel room creates the need for 2.9 employees, Maher says), plus handfuls of ritzy new condo projects, A.C. looks to be one of the best bets on the beach.
What it may mean to you: On the Shore, stay put, sell quick, or buy up … in A.C.!?!
Center City is the new Big Apple.
The Philly reality: Okay, so we’re the ones who predicted last year that Center City would become a hot spot for the modern homeowner. But to a great extent, that has been the case.
“From a Main Line perspective, town has gotten really hot,” Smerconish says. “People who used to downsize on the Main Line are moving to Center City. Aging baby boomers want to be connected, to enjoy the arts, their favorite restaurants, all the things they had to drive in for, and now they’re just moving, buying something in one of the newly developing areas. And truth is, Philly has always been a good bargain.”
Sweet affirms that demographic trends are showing more and more bodies in Center City — and the eagerness of condo developers to get in on the action (when most residential builders have been pulling way back) is further proof of the new(ish) appeal of urban living.
“The thing that gets us excited as developers is the street-front, and the incredible retail that Philly has been getting in recent years,” says Chris Martorella, the Philly-born CEO of New York’s Urban Residential — and the brains behind Center City’s high-profile Aria condo project, and also the new W. “That’s what’s creating the energy, getting people out. Even having grown up in Philly, I wouldn’t build there if I didn’t think these positive things were going to draw people inside and outside the city, or if I didn’t think it was going to keep getting better.”
The optimism regarding continued growth in Center City is widespread — and heartening. “I think we’re in the hands of a great mayor,” Domb says. “And that’s huge for the city. For the past eight years, we’ve had no job growth, and in spite of it managed to grow. Imagine if we can bring jobs into the community — and I think we can, now. You gotta put your money on Mayor Nutter, that he’s going to bring people and business into the city.”
What it may mean to you: More shopping, restaurants and arts in Center City — and, down the road, more jobs, fewer cars as people adapt to a more walkable lifestyle, and better city schools as Philly strives to keep all its new taxpayers. We hope.
So many condos, so fast, is going to mean the same oversupply we’ve seen with traditional homes.
The Philly reality: When it comes to condos, “Not only has Philly not overbuilt,” says Tom Scannapieco, president of Scannapieco Development, “but for a long time, I think Philly under-built. The city is catching up now, and navigating the cycle better than any city of our size.” Furthermore, says Sweet, overbuilding would be more of a concern if conversion projects weren’t an option. But the simple fact that condos can — if need be — be rented as apartments, should there be a surfeit of unsalable properties on the market, is a safety net. Nobody appears to be too concerned about current supply overshooting the demand for condos, especially considering that a new generation of upwardly mobile Gen Y’ers is entering the urban market — with money.
“I know the existing condo market has very little inventory available,” Domb says. “At the Wanamaker House [at 20th and Walnut], there are 333 residences. Three are available right now.”
But what about the fact that new condos are taking about twice as long to sell as they did two years ago? “People are taking longer to buy now,” Iezzi says. “They have more choice, and they’re looking around. But they are eventually buying. The market also appears slower because we’re talking about a lot of million-dollar condos, and Philly’s not used to that.”
Agreed, says Sweet. “The current sluggishness in the condo market in Center City is attributable to developers focusing on the million-dollar buyer, rather than on the larger pool of people looking for homes in the $350,000 to $650,000 range.”
But we’d all better get used to the million-dollar mark: “That’s going to be the new magic number,” Iezzi says. And what’s more: “The bottom will not hit with condos, I don’t think. Because they’re working with all the best places — Rittenhouse Square, Washington Square, the waterfront.”
What it may mean to you: The chance to buy into big-city life … for a paltry million.
We’ll stop seeing the word “slump” in Inky headlines by the end of 2008.
The Philly reality: Depending on whom you ask, we’ve either hit the bottom, and will bounce along for another year; we haven’t hit the bottom and won’t for another year; or we’re possibly facing a bottom that’s farther and lower than anybody’s guessed. Fact is, nobody has a crystal ball, and nobody can say for sure what a recession could do to the market correction.
But. Pretty much everyone agrees that the best-case scenario for Philly is another 12 to 18 months in the slide (no new building, continued price-dropping, continued slow buying activity and a slowed-down economy) before a bounce-back.
“It will be a multi-stage recovery, with a baseline forecast — barring recession — of 2009 for a price pickup,” Maher says. “When people think we’ve reached the bottom, sales will pick up first, then building activity, and construction will pick up after that. Then more workers will be hired to make up for the job losses, and prices will be the last thing to rebound.”
People also seem to agree that a healthier market hinges on Philly’s general economy and livability. “Center City made tremendous progress under Rendell, and I think it will continue under Nutter,” Toll says. “If we could get decent public schools, then you’d really see something happening. What you see happening in New York City” — the strongest market in the country — “is a whole group of people who have kids and decide to stay in the city. And they have schools to send their kids to.”
“I’m hopeful that the new mayor will create jobs and influence corporations to move back to Center City,” Domb says. “The key to our economy is job creation, not building development. We need employment. We need to stop the brain drain. We need jobs, not just incentives to buy properties.”
What it may mean to you: Peace of mind and an even better Philly … eventually.