COMMENT OF THE DAY: WHAT’S GALVESTON GOT THAT HOUSTON DOESN’T? “Interesting that two nearby residents both say that the old Tudor at 1212 Hyde Park was not salvageable. I’m sorry that it became a home for crackheads and that it was neglected for so long, but I have real trouble believing that it was not salvageable. I’ve seen too many historic houses in Galveston that are older than this one and worth less than this one restored and put on display in home tours. I’ve seen burned-out, collapsed, flood-damaged houses which looked far, far worse than 1212 Hyde Park rebuilt in Galveston, many times. I don’t really think the economic conditions, pre-Ike, were all that much better on Galveston. What’s the difference? A city government that is actually committed to preserving historic houses? I’m actually serious about that question.” [marmer, commenting on Swamplot Price Adjuster: Last Resort in Montrose]
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A derelict house on Hyde Park is essentially debris on a lot; it starts off detracting from the property value. Even if someone spends an aggregious amount of money to fix up real nice, it’s only destined to return to lot value, just as it would’ve done without being fixed up. And to the extent that there is a viable market for remodels, the fact that other homes in the neighborhood that are in better shape can be remodeled less expensively crowds out the crappier homes.
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Contrast that with Galveston, where indeed part of the story is that there is a protective bureaucracy at work, but also where land isn’t anywhere near as pricey and isn’t poised to rise rapidly over the next decade. Major remodels can still make financial sense.
Thanks, Niche. I had hoped you would respond, with your knowledge of Galveston. As attractive as they are (very!) it is hard for me to understand the economics of some of the remodels I’ve seen down there. I guess the pull of wanting to live in a historic house in Galveston (even in a sketchy neighborhood) is very strong for some people. But I really am having a hard time understanding the Hyde Park situation. That was a large, spectacular house, even in neglect. If someone purchased it for, say, $750,000 (I think it may have been on the market for that but I could be wrong.) and remodeled it for $1,000,000, wouldn’t this be worth 2 million plus in say, ten years? Sure, you can’t predict absolutely but isn’t this neighborhood increasing in value? And in the meantime you get to live in a spectacular historic home in a desirable location?
If you had $1.75 million invested at only 2% in ten years it would be worth about $2.13 million.
Hardly the return you would want after the hard work and the risk, and the carrying cost, etc. of renovating an old house.
Housing in Houston (and now in most of the country) is really just someplace to live.
People live in old homes (I do) because they like to live in old homes. Not because they think they are going to make big bucks.
of course, your mileage may vary.
vr
Let’s say that the value of the lot is $1,750k land and $250k improvements. You’ve essentially sacrificed the value of $750k over ten years for housing, and the whole investment would be gone in 12.5 years. That is, looking through the lens of opportunity cost. Never mind that in the short term, you’d probably be upside down on the deal.
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Residential improvements depreciate, and that’s a fact. But this one would have a 12.5-year life instead of 30+ years, like most everything else. Not a good deal.
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Let’s say that you had instead purchased the land on Hyde Park, scraped it bare, and left it alone. Meanwhile, you purchase a McMansion in West U for $1 mil. and live there. You sell your lot and your McMansion in 2019 for a combined $3.5 million. You doubled your money in ten years and were at much less risk of ever seeing liquidation value fall below book value.
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There’s nothing to say that you couldn’t do this if you had the spare cash, which most people don’t. It’s just not a very sane financial decision. Even then, you’d do much better for yourself to remodel a home that’s at lot value that wasn’t in such bad shape.