Craig Frazer, Davis & Salt Lake County Real Estate, RE/MAX Metro

As many people in the Davis County communities of Farmington, Kaysville, Layton, Clearfield, Syracuse and Clinton know, the Utah Department of Transportation (UDOT), in cooperation with the Federal Highway Administration, is preparing an Environmental Impact Statement (EIS) to study a potential transportation corridor in western Davis and Weber counties. This transportation corridor is informally known as "Legacy North" and by it now semi-official name of West Davis Corridor. Its proposed function is to create a northern expansion of the existing Legacy Parkway that currently runs from I-215 and terminates at the Station Park complex in Farmington.

There has been a good deal of discussion surrounding the location of this proposed highway extension (as any major roadway project will) due to the disruption of neighborhoods and the taking of property through eminent domain proceedings. The Farmington City Council voted and passed a resolution favoring a 'preferred alignment,' known as C-1, during their January 4, 2011 meeting. The most recent Farmington News newsletter reported on the resolution and its adoption. This alignment could have significant impact on the property values for homes located in the Oakridge Country Club Estates, Shepard Creek and Rose Cove PUDs, Farmington Crossing South, and Oakridge Farms subdivisions as well as properties on Shepard Lane.

This is particularly important now that the City of Farmington has publicly identified a preferred alignment choice. By identifying their preferred routing, market values are going to be impacted due to the concerns of potential buyers to the impact of the roadway design on these areas. This is even more concerning given the "gap" in current Utah property law which does not require government agencies to compensate homeowners if their property is de-valued by a project. This is especially true when property is tainted by the process known as "corridor preservation" where an area is targeted for a project but construction is many years away. The agencies are only required to pay compensation if a property is actually "taken" (this information was provided during a conversation with the Office of Utah Property Rights Ombudsman).

In Kaysville, an entire subdivision is at risk of being eliminated due to the proposed alignment of the roadway and in West Haven, West Davis Corridor would split the city in two. Although nothing is final (according to UDOT), the determination of a preferred alignment option will likely apply downward pressure to home values in the area impacted by the proposed options, regardless of when construction begins.

Three open house public meetings to review the alternatives will be conducted this week in addition to an online meeting to be held this evening from 4:30 to 8:00. Tonight there will be a meeting at West Point City Hall, on Wednesday at the Legacy Events Center in Farmington, and Thursday at the West Haven Elementary School. All meetings start at 4:30. For more information you can connect to the UDOT West Davis Corridor Website.

I encourage everyone living in close proximity to this proposed highway project attend a meeting to become more informed relative to the potential impact to your property’s value as well as to understand what rights you have (and those you don't) as it relates to this project.

Over the weekend I was able to get some new photos of the Station Park development (finally a near sunny day) and also get an update on anticipated timelines for some of the early openings.

Harmons continues to plan for a May opening. Based on construction to date, it certainly looks like that will be a realistic timeline. As you see from the photo, the main structure's walls are now well developed and with a good deal of the brick facia Harmon's stores are known for already in place. A good deal of interior work is also being completed as roofing has been put in place. Some of the interior concrete has also been poured. Harmons' construction crews are busy this year as they are working on both the Station Park and City Creek projects.

The Cinemark building is also taking shape in its location as the southern anchor to the complex. This location is anticpated to have 14 screens when completed. A June grand opening is currently planned. For residents of Farmington, Kaysville, Fruit Heights and Centerville, there is going to be much more convenient access to summer blockbuster movies.

The main Village Plaza component of the project is still slated for a spring/summer 2012 opening. To get a sense for what the project will look like upon completion, please see the artist rendition to the left. In the rendition you can get a better feel for the position of both the Harmons and Cinemark locations relative to the rest of the project. Also, if you look closely, you will see several of the tenants who have initiated intent to lease agreements. If you've driven by the project recently, you'll know that most of the east parking lot facility is already in place and the main roundabout is completed.

There should be some new tenant announcements coming up and I will be sure to report on them as soon as they are made available to the public. If you have any questions about the project, let me know and I will be sure to ask them the next time I meet with the project's coordinators.

Believe it or not, another year has come and gone. To the left is a link to my year-end Farmington Inventory Summary which highlights real estate activity in Farmington (and Davis County) over the course of the past year. It’s been an interesting year in the local real estate industry. There was the first-time homebuyer tax credit (still available for some military families), increases in foreclosure and short sale activity, historically low interest rates and continued elevated unemployment levels.

Let's start with the overall numbers: There were 554 new listings in Farmington during the year of which 39% either sold or were under contract at year-end. For the 237 properties which closed escrow during 2010 (up from 183 in 2009), the average sale price was $288,157 (down just under 6% from 2009). 2010 represents the third consecutive calendar year in which average sale prices were lower than the year before. Overall average sale prices in Farmington at the end of 2010 were 20% below the peak average sale prices which occurred during the summer of 2006.

The cause of the drop in overall average sale prices was very apparent in the data. While the percentage of homes selling in the $200,000 to $300,000 price range in 2010 was identical to the 2009 percentage (46%), the decline in average and median sale prices can be attributed to nearly double the number of properties selling below $200,000 from the previous year. Nearly two-thirds of those sales were for townhomes with most of those sales occurring in the Farmington Crossing and Village at Old Farm complexes. This isn’t surprising given the economic conditions during 2010.

Farmington’s 29% increase in sales in 2010 (only two other cities in Davis County reported higher property sales in 2010 versus 2009) demonstrates the value to a community of a diversified housing inventory. Several cities in Davis County experienced decreases of 25% or more due in large part to their lack of housing stock diversity. This diversity also provides a long term advantage: creating local "built in" buyers for move up purchases (or those looking to downsize). It allows current residents to remain in Farmington as their housing needs adjust over time. Farmington’s diverse housing stock, coupled with it’s upcoming retail capacity (Station Park) and transit hub status, should bode well over time.

Overall, inventory levels in Farmington remain elevated with seven months of inventory currently available (six months is generally considered a neutral market). However, in several price ranges we are beginning to see much more balanced inventory levels. This is a good sign indicating a slow but steady stabilization of buyer demand and seller supply. The first few months of 2011 will provide additional indications of market direction.

Another data metric I track is "under contract" activity (not in this particular summary). This is simply a count of the properties which go under contract in any given time period. A property goes under contract when a buyer and seller agree to the terms of a sale but the transaction has yet to close escrow (that process can take anywhere from two weeks to two months to complete – and sometimes even longer for short sales). I like this data point as it more accurately depicts when buyers are actually making offers on properties and therefore is a good indicator of actual buyer demand at a specific point in time.

As an example, the first four months of the year (when the buyer tax credit was in effect) 98 homes went under contract in 2010 compared to just 51 in 2009. Then again, we see a large disparity at the end of the year when during the last three months of the year (typically the slowest time period) 57 properties went under contract in 2010 versus just 43 in 2009. Much of the activity at the end of 2010 can be attributed to exceptionally low interest rates significantly increasing buyer purchasing power. Many buyers (including investors) who were waiting to make a purchase are now taking advantage of the lower prices coupled with low financing costs.

Does 2010 mark the bottom of the market? I doubt anyone can call a market bottom accurately until after the fact, however, there are numerous data metrics suggesting a continued stabilization of market inventory and pricing levels. I will be doing another blog post in the near future on what the long-term may look like (dusting off the old crystal ball).

With continued elevated inventory levels and interest rates at generationally low levels, I have conversations about the viability of real estate as an investment on a regular basis. Now, for those of you who recall my earlier post about homeownership, I do not consider residential real estate an "investment" if you plan to live in the property (I consider that a lifestyle choice vis-à-vis renting or living with your parents). However, real estate can be an investment (and a very lucrative one) if done based on the return it can provide relative to one’s invested capital.

I routinely provide data to prospective investors as to the estimated return on investment a particular property could potentially provide (disclaimer time: past performance does not guarantee future results….).

The illustration to the left (click for a larger image) provides a summarized version of a synopsis for a prospective investment property. This is a simplified version for illustration purposes. My more detailed analysis also provides an estimated taxable income versus cash flow analysis along with depreciation schedules, re-capture provisions as well as an overall IRR at the point a property is sold. For the purposes of this blog post, this summary will suffice.

The illustration is based on a property purchased for $200,000, which is the median sale price in Davis County for calendar year 2010 (it’s $208,000 for Salt Lake County). The analysis then makes certain assumptions as to down payment, closing costs and rental rates for this property. Where I see beginning real estate investors make a mistake is how they determine their return on investment (ROI). Many compare their gain/loss to their purchase price rather than their invested capital (e.g. down payment, cash closing costs, etc). This leads many to believe they cannot make money on real estate investments.

Using this simple illustration, you will see that when you compare your gain/loss against invested capital, the return is actually quite reasonable given current market conditions. This result does not even factor in the overall return based on the equity accumulation from the renter, any potential appreciation over the course of the holding period or even the value of depreciation on deferring tax liability on positive cash flow. However, even this simple illustration demonstrates the principle most successful real estate investors understand: the power of leverage to produce a viable ROI.

Interest rates on the other hand can eat away at your return on investment much faster than changes in acquisition prices. The example utilized a 4.75% interest rate, however, if I increase the interest rate to just 6% (still historically low), the rate of return is completely wiped out (basically a break even proposition without consideration to tax and equity advantages). Many would be investors have been holding off waiting for the market to hit that mystical "bottom." This can be devastating from an investment perspective. If you’re leveraging 80% of the acquisition, just a 1% increase in interest rates will completely wipe out an acquisition price decline of 10%. In fact, your cash on cash ROI would be less than paying 10% more at the lower interest rate.

The concept of leverage and actual cash on cash ROI is something successful investors have figured out and is a wealth building concept they take full advantage; especially in economic down cylces such as this which feature lower priced inventory coupled with exceptionally low funding costs. If you are thinking about real estate as an investment, you really can’t ask for a better opportunity to engage that process than the economic conditions we are experiencing now.

Well with just a few weeks left before the end of the year, here is my real estate Inventory Summary for Farmington through the end of November. There are a couple of interesting data elements that, eleven months into the year, may surprise some who haven’t followed the market throughout the year.

Of note is the fact that listing activity is up over 30% from the year before and will likely end the year well above 2009 levels. With all the talk about "shadow inventory" levels and the down market, the data suggesta sellers were willing to put their homes on the market this past year.

Also, a bit surprising for most casual observers is the fact unit sales activity is up over 22% from last year. Much of the increase in unit sales occurred in the first trimester of the year when the home buyer tax credit was in effect. Even though market activity slowed after the tax credit expired, activity still tracked well with the previous year holding on to much of the unit sale gains posted in those first four months.

The increase in unit sales, however, did not prevent average and median home sales prices in Farmington (or Davis County for that matter) from falling for the third straight year. However, the decline in sale prices was a modest 3-4%. Since the market peak in terms of median sale prices (which occurred in the second quarter of 2007), there has been an 18% drop in median sale prices in Farmington. For Davis County as a whole the drop over the same time frame is approximately 10%. Farmington has been hit a bit more due to two factors: one, an overall higher priced housing inventory and two, a large increase in lower priced condominium and townhome sales in the past three years. Year to date, two thirds of unit sales occurred below $300,000 in Farmington. For reference, in 2007 only half of the sales occurred at price points below $300,000.

Overall inventory levels continue to remain somewhat high (especially at this time of year), however, we are seeing some months inventory levels at or near six months which historically is considered a balanced market. This could be contributing factor to the stabilization of the median and average sale prices over the past several months.

There is good news in the data for both buyers and sellers. For buyers, inventory levels remain good (lots of options) and price points remain much more affordable than just three years ago (and let’s not forget interest rates at 50 year lows). For sellers, homes are selling, in fact at a much better rate than just a year ago and sale prices are stabilizing with inventory levels improving slightly (and historically low interest rates are good for you as well as more buyers can qualify to purchase your home).

I don’t expect to see any significant changes to the data once we get the December figures as historically there isn’t enough activity in either November or December to create massive changes in the overall data for the year. I will have a year-end review completed by the end of January (as I allow about three weeks after the year-end for all of the year end transaction data to get processed).

If you have any questions, don’t hesitate to contact me.