The Value of PlacePART
1: The Carmel Premium
|
|
Newcomers to Carmel are often astounded by the high price of real estate. The first of the two articles that follows summarizes a study done for the city of Carmel-by-the-Sea on the elements of real estate values in our quaint coastal village. As one would expect, there is a high premium for being in Carmel. In fact, the study found that from 40% to 72% of the value of Carmel real estate was accounted for by factors external to an individual property itself. There is an ambiance to Carmel that is so attractive that it translates into many extra dollars for its real estate. In the second piece we look at the role of "historic preservation" in the maintenance of the Carmel mystique. For anyone interested in Carmel real estate, these two background articles are must reading. Feel free to call or email about the issues addressed or any questions you may have about Carmel real estate.
Part 1 of a 2 part series
Published Originally in The Carmel Pine Cone
By Paul & Nellie Brocchini
How much value does the charm and mystique of Carmel-by-the-Sea add to your home? In other words, what is the Carmel Premium?
We all know that the Carmel Premium is substantial, but how do we figure out how much? Donovan Rypkema, analyst for the Real Estate Services Group in Washington D.C., grappled with this issue in an enlightening report submitted to the City of Carmel in May, 1998. The title of that report is "The Design Traditions of Carmel: Real Estate in Carmel: The Value of Place." His report is surprisingly good reading and his methodology impressive. Readers who would like a fuller understanding of what follows may wish to read it.
Mr. Rypkema is a real estate economist who has been practicing since 1975. He has won recognition as a leader in the economics of preserving areas of special character. His analysis, by the way, is limited to Carmel-by-the-Sea. It does not include Carmel Point, Carmel Woods, Hatton Fields and the other close by neighborhoods, all of which benefit to a greater or lesser degree from the Carmel Premium.
Land use and design issues are always on the front burner in Carmel. All of us Carmelites have our own opinions, often colored by our individual financial and personal interests. If we have a view, we want to keep it. If we have a property with sub-par amenities, we want to be able to improve it. If there is a threatening tree near our house, we want to cut it down. If we are content with what we have, our house meets our needs, the neighbor's pine is not about to split us in two, we often don't want anyone else to be able to change anything!
Our Piece of Paradise
Where there is unanimity is that we are all interested in the value of our piece of paradise. It is instructive, therefore, to look at what the elements of value are. Rypkema did a statistical analysis of real estate values here measuring the relative importance of place (i.e., Carmel), neighborhood, lot and house.
The obvious finding is that the value of "Place," is extraordinarily high in Carmel. Take any house in Carmel, from the most exalted to the humblest, move it to Modesto, and what is it worth? Everybody knows it would be lower, but Rypkema attempts to quantify it which is fascinating. What he finds is that the "external factors" of value (place and neighborhood) constitute from 40% to 72% of the total value of your property and ours.
Think about that, 42% to 72% of total value is wrapped up in into issues and impressions over which individuals have no control. The overall mystique which makes up the idea of Carmel is something that is beyond our influence as individuals. Its preservation and enhancement is a community challenge.
Collectively the people of Carmel create the elements of community value. They include our attractive neighborhoods and downtown, our cultural opportunities and the unique quality of life found here. We all contribute, but policy and direction from the City is key to the preservation or erosion of the Carmel mystique..
Carmel Premium by Neighborhood
Rypkema divided Carmel-by-the-Sea roughly along the same lines that our local Multiple Listing Service does: Northwest, Northeast, Central, which the MLS calls Southwest and which I refer to as the Golden Rectangle, and Southeast. He added a category, properties on Scenic, which is a good idea. Scenic Road has its own price level.
Rypkema then divided value into four components: the houses, the lot, the neighborhood premium and the Carmel Premium. The chart, Components of Value By Neighborhood, Existing House, shows that the Carmel premium is 42% of value in the Northeast, which is the least expensive part of town. Rypkema uses the Northeast neighborhood as a base for comparison. For this reason he assigns a zero value to it and a relatively high value of 26% for the house. It turns out that the Northeast has the highest Carmel Premium and the highest value assigned to the house portion of value in Carmel.
At the opposite end of the spectrum is Scenic, where the Carmel premium is a relatively modest 21% of value and the neighborhood is a whopping 51% of total value. The house itself on Scenic is assigned the lowest percentage value in town, only 13%.
New Houses
New houses are valued highly by buyers to the point where the Carmel Premium and the other external elements of value are reduced. Let's compare the Northeast with Scenic again.
In the Northeast the house component of value jumps to 57% when a new house is offered to the market and the Carmel premium drops to 24% from 42%. Even on Scenic, new houses command a larger share of the overall value pie, jumping up to 36%, three times the 13% value assigned to a used house.
Although new houses substantially reduce the external factors of value, only in the Northeast does the house component exceed 50%. The Carmel Premium still plays a substantial role in value in all cases.
Not a Market for Everyone
Carmel, snug in its one square mile, is not big enough, argues Rypkema, to serve the housing needs of many groups of buyers. There is not room for lots of apartments and condominiums. The lots and houses, for the most part, are small and do not meet the needs of many families. There is not much if any low cost housing. There are many houses that would be considered wrecks elsewhere, but they certainly are not low cost.
We had a listing a few years ago of a cute little charmer on a sub-par 1,800 square foot lot. The house had one bath, a tiny kitchen and no bedrooms. The only suitable place to sleep, other than the living room, was a porch. The location was terrific, close to town and the beach. A woman came to an open house Paul had there and looked around in amazement. She glared at him and sternly exclaimed, "It should be against the law to sell a house like this!"
What could he say? He was tempted to give her a good old New York, "Get outa here,!", but professionally squashed that urge, shrugged and smiled. The house, by the way, sold for an excellent price to savvy buyers who knew they weren't acquiring much in the way of amenities, but that they were getting a Carmel location for at least $200,000 less than any other house in the proximate neighborhood.
On the issue of offering housing to a broader market, Rypkema concludes that "to try to accommodate every market in the need of housing would ... diminish the sustainable value of the community as a whole."
"Should families be welcome here?" he asks. "Of course. But the family choosing to buy here should adjust their style of life to the pattern of Carmel and not expect the community to revise an 80 year urban design tradition to meet the needs of what a 1998 family thinks it has to have."
Historic Preservation
Part of Rypkema's analysis looks at the importance of historic preservation in Carmel. He argues that the exceedingly high value of external components of value in Carmel clearly show that historic preservation is essential to the maintenance of overall value.
According to Rypkema, historic preservation raises many concerns among property owners. These concerns, Rypkema states, combine two threads: first, historic requirements "could adversely affect property values and diminish marketability." Second, "houses that potentially could be designated as 'historic'" generated comments like these:
Preservation as a Store of Value
Rypkema agrees that all of the above are legitimate concerns. He argues, however, that these same objections were voiced in other areas that have been designated as historic such as the townhouses in Georgetown and Dupont Circle in Washington D.C.; the Upper East Side brownstones in New York; adobe houses in Santa Fe; the Victorian painted ladies in San Francisco. It would be hard to argue that this preservation work was not valuable to the public at large as well as the homeowners in those areas.
Rypkema adds that none of the older Carmel houses are of the "George Washington slept here" or the "San Simeon" type historic property. But the older homes are, he continues, "very much part of the fabric of Carmel and contribute much to the character of the community." Finally, he concludes that "Carmel will be poorer if its historic resources are lost." In essence he is saying that historic preservation is a "store of value" for the community and individual property owners.
Fear of Historic Preservation
Carmel has a list of houses and buildings that are considered historic. There is a lot of fear within the real estate community and among home owners of historically significant properties that this listing can have serious, negative economic consequences. There is little understanding of how the process works and what the positives and negatives may be for the individual home owner. In next week's article I will address the historic preservation process and attempt to explain exactly how it works.
NEXT: The Value Of Place, Part 2: The Role of Historic Preservation
We have lived on the Monterey Peninsula since 1978 and in the heart of Carmel since 1986. We know the market, would be happy to evaluate the market value of your house at no charge or to answer your real estate questions. Please call. You can reach us day or night at 831 624-1414 or E-mail us.
PS. If your home is currently listed for sale, this is not intended as a solicitation.