The front page of today’s NY Times Business Section features an article on the "Hot Market for Second Homes Slumps." I have to agree with much of what they said — even though Realtors in Naples, Florida and the Hamptons are probably planning convocations of real estate agents to burn the reporters in effigy.
Second homes are discretionary purchases and the second home market is more likely to be sensitive to shifts in the economic winds. The lead paragraph in the NY Times article talks about an investor in the Hamptons who built a spec house and put it on the market for $4.6M, got no takers, and has now reduced the price twice, down to $4 million Wow! That’s still $4 million for what is essentially a luxury bauble. Then there’s the Naples., FL condo owner who bought an oceanfront condo in 2004 for $515,000, put it on the market last year for $999,000, got no offers and has now reduced his price to $799,000 — which he says is a "real bargain." The craziness of that example is that the owner of that condo thought he could almost double his money in 2 years, and now thinks that a 50% return on his investment in the same time period is almost giving it away.
One problem in the current market is that sellers’ ROI (return on investment) expectations are way out of whack. For most of my adult life, the widely held belief was that a house was considered a good investment because it would generally appreciate a few percentage points faster than inflation. So if inflation was running at 4%, a house might increase by 6% or 7% annually. And if you bought a house and needed to sell it before you owned it for a couple of years, you’d probably take a loss because of your costs to buy and sell the property. In owner occupied, non-investment real estate, folks weren’t looking to make a killing. In the last couple of years, many people think they made a bad investment if it "only" increased 10% or 15% a year!
I’ve been saying to my clients for quite a while that they should look at a second home purchase as a ‘recreational expense’ rather than solely as an investment. The carrying costs (including mortage interest, taxes, utilities and maintenance) on a $300,000 second home can run $20,000 a year after adjusting for tax breaks. Considering you may get 20 to 40 weekends of use, and still have an investment, its well within the range of many middle class families, and certainly less than the cost of a summer rental in the Hamptons or on Fire Island. Appreciation is sort of like icing on the cake, not the cake.
The second home market here in Sullivan County is chugging along just fine this summer. A little slower and more cautious to be sure, but people are looking and buying. I was a little freaked in early June when, after closing a sale, I realized that for the first time in 5 years I had no deals in contract. Now, 2 months later, I have 4 deals moving towards closing — less than last year, but certainly better than late spring.
One very common element among buyers, though, is a pull back to more modest properties and price points. Every home sale I’ve made lately has been in the low $200’s. Yes, I’m talking with people considering more expensive properties, but they aren’t buying. And at the upper end of the market, I’m not seeing much action at all. Trophy properties that were so hot a year or two ago, like renovated farmhouses on acreage or fabulous lakefront lots at Chapin, just don’t seem to be moving — or at least moving at the prices people are asking for them.
The market hasn’t died, by any means. We’re retooling to a ‘back to basics’ mode. I’m actually finding a shortage of a certain type of property — houses that are attractive to the second home market with nice features and settings under $300,000. Because there are definitely buyers in this range.