It All Comes Down to Psychology

In other parts of the country, there are very tangible factors contributing to the real estate downturn. In the south, particularly in Florida, investor/speculators who put hefty downpayments on unbuilt condos and houses are looking to dump them. Builders are flush with unsold inventory and slashing prices to make sales. In the south and west, stretched borrowers who bought houses in ever expanding cookie cutter suburbs with risky mortgages under the assumption that house prices would climb skyward forever, are losing their houses to foreclosure. Those foreclosure sales are starting to drive neighboring property values down. In the northeast, foreclosures will also start to take a bite, as adjustable rate mortgages reset and owners find they can't meet the payments. But New York may be a bit more immune, because this state traditionally has a lower rate of ARMs and negative amoritization loans than places like Georgia or Florida, and New York has already put in place a mechanism through SONYMA (the State of NY Mortgage Authority) to aid threatened homeowners and keep them in their homes.

For the most part, the factors that are creating panic in some areas of the country just aren't at work here. There isn't a a high percentage of speculator and investor participation in this market, or at least not at levels that would encourage dumping. There's been very little speculative building, and almost no large developments where builders have a lot of unsold inventory of houses to move. (Although there are a number of developments with unsold land parcels.) Sullivan County is a large second home market, and second home buyers don't tend to be subprime borrowers. In fact, almost every deal I've done in the past 6 years has been with very traditional conventional financing, with qualified borrowers at fixed rates. Second home owners from the city are likely to have assets outside of their Sullivan County home they want to protect, and are unlikely to risk foreclosure. I just don't think we're going to see a lot of foreclosure activity in the Sullivan second home market.

If financing wasn't available, or rates were sharply climbing, that would be a big brake on the market. But that isn't happening, either. Mortgage rates have dropped about 30 basis points since they peaked during the crisis in mid-August, and the spread between conventional conforming and jumbo mortgages has narrowed to about 60 basis points, still higher than the 25 to 30 basis point spread last year, but about half the spread during the spike in August. While rates have dropped, underwriting requirements are tighter. You actually have to be able to afford a house now before a bank will lend you the money for it!

The economy in our mothership, New York City, continues to be stable and robust. There hasn't been any widespread drop off in employment or income. The coddled Wall Streeters may not walk home with the same multi-million dollar bonuses this coming January, but they aren't a significant part of this market except for the very upper end. Sullivan County is traditionally a middle class market, not really driven by Wall Street bonuses.

If you look at the likely Sullivan County second home buyers, they haven't changed a lot, either. 30-somethings living in cramped New York City apartments haven't stopped having children. Mountain bikers and fly fishers haven't had a sudden mass lifestyle shift to opera and stamp collecting that would keep them in the city. And there isn't any indication that New York City will become cooler and less stifling in the summer, or that there's going to be a mass exodus from the city that will miraculously reduce crowds and congestion.  If anything, the 'green' trend will continue and that's good news for Sullivan, with clean air, open spaces, clean water and locally grown vegetables.

When I put at all of this together, and look for the reasons for a real estate market slowdown here, the only thing I come up with is psychology. Buyers are just nervous about buying real estate. And who can blame them, with all the negative news reports. I think it will take a few months of stability to reinstate buyer confidence, and that may take some time.

Interestingly, the market here is much slower, but it isn't dead. I'm aware of quite a few deals on interesting properties at a range of prices, from under $200,000 to over $1 million. While properties selling across that range aren't at all similar at first glance, they share two important qualities. They all have something compelling or interesting about their setting, whether privacy, view or water. And they are all well priced for what they offer. While prices on some of these houses may fluctuate in the short term, they all have that 'something special' that gives them long term staying power.

Comments

[Tony Ritter]

DK:
"But New York may be a bit more immune, because this state traditionally has a lower rate of ARMs and negative amoritization loans than places like Georgia or Florida, and New York has already put in place a mechanism through SONYMA (the State of NY Mortgage Authority) to aid threatened homeowners and keep them in their homes."

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Only time will tell David.

Take a look at how long it takes to foreclose on a home in New York - 12 to 19 *months*!

Whereas, in Californoa, Georgia, Nevada, Michigan and Florida - among others - the foreclosure process is way shorter - it takes only 60 to 180 days (2 to 3 months) to foreclose depending on the specific state and most of time it is non-judicial - it doesn't get bogged down to a court calendar.

IMO, New Yorker's really won't know about how bad the foreclosure stats are from the credit cruch/sub-prime debacle until the 1 and 2Q of 2008 due to this state's statutes on foreclosure.

Source:

http://www.foreclosures.com/www/pages/state_laws2.asp?state=NY

Second, I think there were just as many sub-prime loans (2/28; 5/25, piggy-backs, etc.) written on primary homes in this state as others.

The ARM note might have been written by some bank in Tennesee, Missouri or whereever for a home in Narrowsburg, New York and then the mortgage was packaged, assigned and sold off to somebody else.

The buyer usually couldn't care less where the money came from (and, sadly, many didn't care about reading the terms until it was too late) - as long as they could get the dough wired to them in time for their transaction to close.
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DK:

"Second home owners from the city are likely to have assets outside of their Sullivan County home they want to protect, and are unlikely to risk foreclosure. I just don't think we're going to see a lot of foreclosure activity in the Sullivan second home market."

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True. But...

The same second home owners who have a primary home in New Jersey or in the suburbs of New York will want to protect their primary home and not risk it to foreclosure due to the fact that they probably have more equity in their primary home and it is worth more than the country home - and that they are still using that home as a primary residence and don't want to be out on the street.

The same individuals might have a second home up here and - if push comes to shove - might walk away from their second home since many took out loans with little down payments and that they have little equity in it.

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DK:

"Sullivan County is traditionally a middle class market, not really driven by Wall Street bonuses."
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Amen to that.

I think that topic of who purchases what and for how much came up about three weeks ago in another post and I repiled with kind of the same thoughts.

Thank you.

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{previous post}

DSS writes:
"So assume a median of $170,000. My question: What can you buy for $170,000 in Sullivan County? (I assume, based on what I've read on this blog, that the listings don't answer this question because asking prices bear little relation to the price where sales get done.)

Posted by: DSS | October 25, 2007 at 08:02 AM"
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Photos and details are at:

http://www.ilovethecatskills.com/ru.htm

That property was sold for $170,000 back in 1Q of 2007...and I wish (along with other realtors)that we had more properties like that.

Quiet road, views, some acreage, less than 200k.

Kindest regards from Narrowsburg,
Tony Ritter

[David Knudsen]

Tony, you may be more correct than my original assertion regarding riskier loans in New York state. There was an article I read a month or two ago comparing ARM originations state-by-state, that showed Georgia way at the top, without around 50%, and New York towards the bottom of the pack, with less than 20% ARM originations. Unfortunately, I can't find that article again, and don't recall the time period it referred to. But I did find a very interesting interactive map from the Wall Street Journal at http://online.wsj.com/public/resources/documents/retro-SUBPRIME07.html. It looks at high rate loan originations by state, metro area and year for 2004, 2005 and 2006. They're using high rate loans as a correlate of subprime originations. New York State isn't at the top of the pack, but there has been a surge of these type loan originations. In 2004, high rate loans only accounted for 15% of loan originations in New York, while in 2006 that number had climbed to 27.9%.

Its really interesting to look at metro areas, and sort the list from highest to lowest by percentage. In Miami in 2006, 48.2% of mortgage originations were these high rate loans, compared to 28.3% in metro NYC. Metro areas in Florida and Texas take up the lion's share of the top spots.

[Tony Ritter]

To all,
Here is a sub-prime mortgage graph from today's New York Times:

http://www.nytimes.com/interactive/2007/10/12/nyregion/20071012_SUBPRIME_GRAPHIC.html#

When the viewer zooms in - it details the township and hamlet within Sullivan County.

Subprime loans - Countywide:
35%

Thompson:
55%

Tusten:
24%

Delaware:
23%

Rockland:
35%

Liberty:
42%

etc...

Kindest regards from Narrowsburg,
Tony Ritter

[David Knudsen]

Tony, thanks for that link. Its a really fascinating resource. Interestingly, the areas that have been the most 'desireable' for a lot of second home buyers from the city (and generally have higher prices) are the areas with the lowest percentages of subprime mortgages. There are definitely some troubling areas on the map, namely Monticello and Liberty.