Have Developers Horribly Misread the Market?

Last week I learned that the developer of Eagle Nest Estates, an upmarket development with Delaware River views and lot prices in the mid $300's, is looking to sell the whole development, lock, stock and barrel. The developer of Swan Lake Estates, with lakefront parcels starting in the mid-$400's, has also put the whole development on the market. A number of builders have put up spec houses in the $450K to $600K range in the last year, and a lot of them are still sitting on the market.

In the last few years, there has been a lot of 'upscale exhuberence' here, following the stunning success of the Chapin Estate, the opening of the Bethel Woods Center for the Arts, and the general buzz about Sullivan County in the NY press. All the talk about the Catskills as 'The New Hamptons' went to people's heads, and many saw a surge of million dollar buyers streaming up Route 17 to grab their spot in up and coming Sullivan County.

Amid all this heady self congratulatory backslapping, we may have lost sight of our knitting. Notwithstanding the occasional celebrity buy, we're still firmly a middle class second home market — the role that Sullivan County has played for over a century. Affordability is the key to the success of Sullivan County — for middle class working people in the city, Sullivan remains the best second home getaway value within 2 to 2 1/2 hours of NYC. Sure, the work that the working people coming here has changed; mid-level creative professionals have greatly contributed to the resurgence of Sullivan County, along with early career financial types.  But we're still not the getaway of choice, for the most part, of the wealth class — the partners in the law firms, the CEOs of Fortune 500 companies or coupon clipping trust fund babies. yes, there is the occasional J. Lo spotting, but Entertainment Tonight and Access Hollywood have yet to send crews here to track celebrities. And thank heavens we're not on Paris Hilton's radar. Frankly, we just don't have the infrastructure yet for broad appeal to the very upper end. Sullivan County doesn't have a gourmet grocery or artisan bakery, no luxury hotels and the landscape of better restaurants in still pretty thin.

While upper end sales have lagged here this year (its been 6 months since I've made a sale at Chapin), houses in the moderate price range have been flying off the shelves. Most buyers I've been talking to in the past few months have been looking in the $250,000 to $350,000 range, with some below that but few above that. Demand is absolutely there, but the key is affordability. For the right property, some of the buyers in the upper end of that range would stretch to $400,000, but they're not going to $500,000 or above.

And that's where I think that developers have midread the market. There's tremendous demand for $300,000 getaways, plus or minus $50,000. Modest, interesting (e.g. not vinyl-sided modular ranches or capes) 1,500 sq. ft. houses on a few acres with privacy. The 30-something first time home buyers in this price range don't have grand expectations; cozy, comfortable, cleverly designed with a fireplace and some place to stash house guests is the right recipe, not a 3,500 sq. ft. cedar McMansion with a media room.

A number of new developments are in the planning stages — the RM Farm subdivision near Livingston Manor, the Menderis Road subdivision near Youngsville and the New Turnpike Road subdivision in Cochecton. All the developers refer to their projects as upscale and luxury, which means they're not targeted to that $300,000 buyer. Which is a mistake because, in my opinion, that's where the market is.

Comments

[Tracey]

A little water in the reservoir might help Chapin, dont you think? Any update on Mirant's progress? Thanks.

[John]

I agree with Tracey. Chapin doesn't strike me as looking for the $500k buyer. That seems like a $1mm+ type place. Those buyers are looking for it all and while they may mind paying up, they can afford it. But no lake is far from providing it all. It's no wonder you have not made any Chapin sales in 6 months.

Maybe I'm naive, but with the lake filled back up, I have to believe the high-end buyers will return. Where else can you get 5 wooded acres and 300+ feet of waterfront? If you want that, you're forced to buy in Chapin with a few exceptions.

Please share any news on the reservoir you have. Last heard, the refilling was to start this month.

[Dean]

Time to build $175,000 - $250,000 homes. I have been searching the market for about a year now, and nothing I found in that range was a nice home to move into. They were either neglected, very old, no land, etc. Even near $300,000.

When I watch the home finder shows in other locations on TV, the buyers have many choices. The home is either very nice, fixed up and ready to move in or it needs a complete renovation.

People do not do much in this area to make their homes more desirable for sale.

[robin]

If you google Swinging Bridges Resevoir, the first link is to the ferc.gov site. Click on there, and on the far right of the page, in blue, you will see a status and history of the Dam Safety Remediation Project.

[Ed]

"Sullivan County doesn't have a gourmet grocery"

What about River Market in Barryville???

[marie]

Just wondering what "no land" is considered in the $250-$300K range. We are looking in this range and think that 2-3 acres is acceptable (for the price), but is that considered "no land" in Sullivan County? Just curious what others think.

[Dean]

I would say "no land" is under 2 acres for me. 2-3 acres is very acceptable with a nice home.

[marie]

Thanks, Dean.

[Chuck Petersheim]

David is right on (once again) with his analysis of developers and builders heading in the wrong direction with high end, expensive homes. Just like the car industry, you make more money off a cadillac then an escort, so builders have flocked to the highend marketplace. When you are building and selling a house for 450k+, there is plenty of room for overpaying for the initial land, overpaying subcontractors, and making a few mistakes along the way - and you can still make money.

To build and sell under $300k is the true product Sullivan County needs. The problem is that it is not that easy to do - because whether you are selling at $500k or $250k, you still need a driveway, electric to the house, site clearing, a septic - which are really costs independent of the size of the house.

The builder who can make the numbers work by supplying a good house under $300k will do the area a great service.

[John]

I don't think $250-300K is realistic for new construction. Even a couple of acres will cost you $30-50K plus $150-200/sq ft for a decent 1,500 sq ft home puts you at $255-350K which doesn't leave much profit for the developer. $350-400K is more likely the range.

[Chuck Petersheim]

John, you're analysis seems right - it's definitely not an easy proposition.

[David Knudsen]

Wow, this thread got more comments than any other thread I ever posted. Regarding Chapin, there has been water in Toronto Reservoir all along. Its Swinging Bridge, on the other side of Chapin, that has been 'water challenged' for the past 18 months. So I don't think that the lack of water in SB has been the sole, or even primary, factor for the soft sales at Chapin. What I've seen, overall, in the past year is a real softening in the upper end of the market, with some exceptions. I don't think its a long term problem, and quality over the long term will attract buyers. But I do think the upper end of the market here was greatly driven by exhuberence, and a definite caution has settled in.

I'd like to comment on the last couple of comments from Chuck Petersheim and John. Bringing in a good product in the $300,000 range, particularly that appeals to the changing second home market, requires a change in thinking among buyers, developers and government officials. Stick-built homes on individual 5 acre lots with privacy and all the bells and whistles isn't really possible at that price point. I've asked a few times in this blog, "Where is the Smallwood for the 21st century?" A development of affordable getaways that appeal to a younger, hipper consumer.

One thing I notice is that the younger urban buyers I work with are generally environmentally conscious. They're attracted to beautiful, protected areas and want access to land, not necesarily ownership of it. Town planning boards here are sometimes in the dark ages when it comes to land use planning and preservation. We should be actively promoting developments that cluster houses and preserve green space, rather than dictate "5 acres and 200 frontage foot" subdivision minimums. Developers should get concessions and tax breaks in exchange for preserving open space and farmland (and I mean really preserving, not giving lip service to 'conservation development' by including a walking trail around the edge of a property.) Some archaic subdivision requirements, like the type of private roads required within a subdivision, actually encourage high density traditional subdivision rather than low density conservation oriented development. Tax breaks and concessions for preservation could help reduce the fianl raw land costs for developers and help bring in a moderate priced product.

Builders also need to rethink the type of house they build. Custom on-site stick built construction is just plain expensive, and we don't have production builders in this area with specialized crews (that can reduce costs). The "Dwell" prefab modern movement has been anything but a cost-saver; prefab modern houses can be surprisingly expensive. Traditional modular companies (e.g. Brookside) bring in houses at a fraction of the cost of stick-built. But those houses --- typically vinyl sided ranches, capes and 'builders colonials' --- aren't particularly appealing to this new second home buyers. Maybe there's a way to create a hybrid, using modular components finished onsite with more modern finishes and site built components, to bring in an appealing house at $150 a square foot.

John, $350K to $400K isn't out of the question, if its an appealing product, but I definitely don't see the sweet spot of the market above that. But in response to Dean's comments, I don't see much possibility for new construction in the $175K to $250K range, except possibly condos or attached townhouses because of the cost of land and NY's very stringent building codes and energy standards.

[David Knudsen]

About Dean's comment that he's been searching for a year in the $175K to $250K range, even up to $300K, and not finding a house. I would agree that finding something appealing under $200K with some land can be challenging, but I've found a number of houses for my clients in the $210K to $280K range on a few acres in nice settings. One issue may be where your expectations are --- in terms of amount of land, size of house or style of house. One of the big challenges over the last year has been buyer expectations. I've worked with a number of people who have $350,000 tastes but $250,000 budgets. A renovated farmhouse on 10 acres with privacy and views just isn't going to happen here at $250K. I would agree that the farmhouses in that price range are pretty much wrecks. But I've had other clients who've brought their expectations in line with their budgets and have found some pretty great places.

[Chuck Petersheim]

When the speculators and carpetbaggers get burned bad enough, and some of the real estate agents that were able to sell properties for more than any real valuation could justify, and buyers and banks focus more on real and quantifiable appraisals, and subcontractors who bought a lot of equipment and expanded their business see a slowdown (in business, not interest charges) - then there is a real possibility of a healthy correction in land and construction costs - which will then make land/house packages more affordable.

5 acres of land 3 yrs ago was $30k. Now its double that (or more). I think with fewer buyers, and lower prices it presents an overall more healthy and affordable picture for the long-term success of Sullivan County. The gold rush is probably over, but by no means does that mean there is no room for good businesses who pay attention to the market and business fundamentals. If the marketplace becomes more challenging, that's probably a good thing for everyone.

[John]

You should NOT be paying more that 3 to 4K per acre for large acreage in Sullivan Co in 2006-2007.
2008 and 2009 will be a great time to buy as bargains will pop-up.
Mingling with locals over the years has tought me alot. Other than casino talk (for 30+ years), there is nothing going for Sullivan county. Why pay today's prices when things will be 30% cheaper or more in about 2 years? All those speculators will be stuck with thier properties for a ong time. Things are extremely SLOW on Long Island and NYC metro area (and rates are still low, unemployment is low). What will happen to housing if these things change for the worse? Upstate will get hit harder than downstate. Wait for the bargains.

[David Knudsen]

John, I think a lot of people reading this board would challenge your statement "there is nothing going for Sullivan county." Kind of depends on which part of the elephant you're looking at. Bethel Woods is open, Cappelli is in the final approval stages for the redevelopment of the Concord, and we're still the best value second home destination within 2 hours of NYC. However, I would agree that more 'traditional' economic indicators (focused more on a local primary rather than second home market) aren't all that rosy. Plenty of high hopes for the shovel ready Emerald Corporate park, but it still doesn't have tenants. The last big corporate announcement was Kohl's warehouse coming to Wurtsboro.

The economic bright spot for this county over the past few years has been the second home and NYC vacation market, and it should be something the county nurtures and encourages. But we still have a ways to go to reach the tipping point --- better public transportation to and from NYC, a rural high speed internet initiative, progressive land use planning that encourages attractive development, new hotels (that will bring in transient guests who will support new restaurants) and some attractions that will lengthen the season.

While I do agree that large acreage land prices seem to have risen beyond their supportable development potential, I don't think that $3K to $4K per acre is a reasonable fall back target. The reason? There are upper end buyers looking for nice large acreage properties for their personal use, not for subdivision. Over the past few years, they've been priced out of the market by investor-developers buying for subdivision. If developers get out of the fray and prices pull back on large raw land parcels, I think you'll see some of these large acreage 'trophy' buyers coming into the market and supporting prices before they bottom out at a $3K to $4K acre point.