Some Real Numbers About the Runup - and Downturn

There have been a lot of numbers bandied about recently about the price run up on real estate here in Sullivan County — and the possible relationship between the steepness of the appreciation curve to the potential depth of a downturn. I've been collecting data now for over 5 years and decided to post the quarterly median sales price (for single family sales reported through the Sullivan County MLS) from the 1st quarter of 2002. If you're a regular reader of my "Current Market Conditions" monthly report, you know that I'm a staunch believer in looking at the median sales price (the price at which half of the properties sold for more, half for less) because it tends to be a more stable indicator of trends, and isn't as affected by a few large sales in a short period of time. The average is more volatile than the median, but over time has tracked at an 'average' of 21.5% above the median.

The 4th quarter 2007 data is preliminary, as we haven't closed out Dec. yet. But given that there's only 1 business day left in the year, I doubt we'll see much change in the $165,000 median sales number for the 4th quarter after the last sales are reported. If the number holds, the median sales price for the 4th quarter will come in 13.7% below the 4th quarter a year earlier, and down 17% below the peak of $198,000 in the 2nd quarter of 2007.

The 4th quarter 2007 downturn, though, needs to be qualified somewhat. The drop in prices can likely be partially attributed to buyers downshifting to lower priced properties, and not just an across the board 17% fall in property prices. I'm sure there's some type of statistical analysis that could eek out that answer, but we're burdened here by small sample sizes that make micro-analysis difficult to interpret. (A dream job for me would be to work for one of the real estate consulting firms or big brokerages in the city, and be able to data mine with thousands of data points.)

Note that this data only covers single family residential sales. There has been a lot of discussion on this blog about raw land prices, but I just haven't collected that data over time. Also, you may also notice that in the past few years there have been a few down quarters. But of the 4 single down quarters prior to mid-2007, 3 were the 1st quarter of the year, which traditionally has had lower closing prices due to more primary and less second home closing activity during mid-winter.a final point to consider is that the housing stock hasn't remained static since 2001. Particularly in the second home segment, its improved considerably. Dozens, if not hundreds, of old houses were renovated, updated and resold. There was considerable new construction, like the Catskills Farms farmhouses that weren't part of the inventory in 2001. Pundits and nay-sayers may counter, "Better inventory? You've got to be kidding." But as someone who was selling real estate here in 2001, I can assure you the inventory is MUCH better today.

Comments

[Jeff]

Oddly enough, these numbers are . . . reassuring. The median price in the fourth quarter of 2007 ($165K) is 50% above the median five years earlier ($110K in Q4 '02). That translates to price increases of roughly 8.5% a year over this five-year period. That rate is well above inflation, and higher than historical long-term increases, but far short of a massive bubble.

On the other hand, as David noted, there were quarters where prices skyrocketed, and the median for the fourth quarter of this year is 17% off the peak. So today's median price reflects a market correction that is well under way in Sullivan County. This is painful for those who bought at the peak or who missed an opportunity to sell before prices dropped. But it's hardly the end of the world.

It's impossible to predict what will happen -- beware the soothsayer's comments in the adjacent post who is predicting real estate prices 12 years hence -- but it's reasonable to think that sale prices could continue to drop. Who knows how far and for how long. I don't know what the relationship here is between the cost of renting versus owning, but that ratio has been out of whack in much of the country. Some economists are saying prices nationally may need to come down 30% from their peaks to be in line with traditional valuation measures. Thirty percent off the peak of $198K is $138.6K. If that's the pessimistic scenario, there is a more optimistic one: if prices start approaching that level, you might well see renewed interest from potential second home buyers. Enjoying what Sullivan County has to offer at 2004 prices might seem like terrific value.

[TR]

DK,
Those are very interesting numbers about the median price.

Note that it wasn't until two to three years *after* 9/11 that the median price began to reach into the mid 100's up here.

Most people seem to believe that the flight from the city to Sullivan County - which occured in the fall of 2001 - ushered in the price boom.

Not really.

The price surge began in earnest only three plus years ago - early 2004 - compared to other parts of the northeast - and specifically to other second home markets like the Berkshires in Massachusetts and Columbia and Ulster Counties in New York.

The idea of 'Sullivan County' - to both the trendy New York press and the Manhattan cognescenti was construed to be either an 1)unknown backwater or 2) a blight of bungalows or 3) a relic from the days when Freddie Roman, Red Buttons and Henny Youngman preformed schtick at the hotels for ones parents or grandparents.

I believe it was ad exec / Hamptons restauranteur Jerry Della Famina who said in a New York magazine article that one only went to the Catskills to "hide out" {from the cops, IRS, etc.} And in the same article, designer Betsy Johnson was pained that she wouldn't move to an area that didn't have or serve fresh leeks - or maybe it was free range chickens.

Oh well.

All that changed by 2004 with the frequent write ups about Narrowsburg, Callicoon, Livingston Manor, Bethel, Bethel Woods, etc. etc. that occured about 'afforable rustic country chic' with regularity in the The Times, TimeOut NY, Details and New York magazine.

For the better part of the 1990's - and after the correction of 1991 - 1993 -the Sullivan County median was flat - with median prices in the high 80's to low 90's - an remained there well into 2002.

That's over a decade.

So, now the median is down to the mid 160's - and chances are that it will probably reach a bottom in the mid 140's to the mid 150's by the Fall of 2008 which would be an additional 6 to 10% correction from where we are now.

However - and more importantly - the marketplace currently has a glut of unsold inventory with many properties in the mid to the upper 200's that need to come down much much further.

The psychological gap between buyers and sellers is currently very wide and it has been metioned more than a few times by different posters on this blog that the buyer doesn't want to catch - let alone, get in the way - of a falling knife.

I couldn't agree more since there are too many uncertaincies with regards to the economic climate of 2008.

That said - my best wishes to all for a happy and healthy New Year,
TR
Narrowsburg, NY

[TR]

An addendum.

I couldn't resist giving a plug to my town.

And, I'll try to invite Jerry and Betsy to have dinner there.

~TR

Yesterday's story at:

http://www.recordonline.com/apps/pbcs.dll/article?AID=/20071228/ENTERTAIN/712280327

Restaurant 15 Main

Restaurant 15 Main Street in Narrowsburg, one of Bill Guilfoyle's top ten.

By Bill Guilfoyle
For the Times Herald-Record
December 28, 2007

Narrowsburg is a neat little town, and, true to its name, it is also quite narrow. It's almost smack-dab between routes 17 and 84, and it's not that easy to get to.

Consisting of about two blocks of businesses, this little town has lot going for it: an art gallery, a gourmet coffee shop, a fine wine and spirits store and a whole bunch of businesses that any village would be proud of... {snipped}

Article continues at:

http://www.recordonline.com/apps/pbcs.dll/article?AID=/20071228/ENTERTAIN/712280327

[JM]

Jeff writes: "Enjoying what Sullivan County has to offer at 2004 prices might seem like terrific value."

The equivalent would be to say in 1991, "enjoy Sullivan County at 1988 prices"
It took people who purchased property in 1988 about 12 years to sell the very same property at the exact price they purchased it in 1988.

[CP]

Nice work - DK - very illuminating and adds great perspective to all the hyperbole.

[TR]

{DK}
"But as someone who was selling real estate here in 2001, I can assure you the inventory is MUCH better today."
---------------

DK - The inventory, to quote you, can "be MUCH better today (as opposed to 2001)" - but regardless - if much of the inventory is overpriced relative to the current economic and psychological market conditions that we face - all it becomes is eye candy if the sellers are resistant to lower their expectations along with being blind to current data and facts about the state of real property at the end of 2007.

TR

[Jeff]

JM: You could be right. It's possible that sales prices in 12 years will not have moved. It's also possible that prioes over the next dozen years could rise at the rate of inflation. It's also possible that prices could fall and stagnate for a few years, and then start rising again at historical rates of appreciation. It's also possible that New York City's economy will remain fundamentally strong, pushing growth and commercial development further north and west. That would mean more growth in Orange County, which could put upward pressure on prices here. A strong NYC economy would also keep apartment prices out of reach for many people who would be considered affluent anywhere else. Some of them might choose to keep renting in the city and buy second homes in Sullivan County, a trend David has written about.

In other words, there are numerous possible and realistics scenarios. How it plays out in 12 years time will depend upon many interrelated factors, few of which are in focus and some of which we can't even anticipate. Saying that SC real estate prices won't be any higher at the end of 2019 is a guess. It may be a correct guess, but any correct guess about timing of the market is a lucky one. I was predicting the collapse of the real estate market for years. Ultimately, I was correct -- those annual gains wwere unsustainable. But my timing was off by more than 5 years.

There is one thing everyone can probably agree on: we won't be seeing a return to the kind of market we saw from 02-06 any day soon.

[tom fry's ghost]

"...we won't be seeing a return to the kind of market we saw from 02-06 any day soon."

Indeed not. There are, however, simply too many variables to extrapolate for any accurate prediction. The diversity in location, price and actual structure again underlies this observation. Are Black Lake homes to be viewed in the same fashion as White Lake and Swann Lake? They all possess similar proximities. Is rural land in the West to be viewed in the same light as pockets of rural land in the South?

It's fair to say that as long as sellers are being told that a bottom is in place they will NOT be willing to change their demands. I have no issue with that since it does take considerable time for capitulation to occur.

Comparing medians is misleadng since they are always skewed to the right at the end of every cycle when cash becomes the dominant form of transaction as traditional financing tightens up. (Do you really want to include a $2+million dollar sale on the Toronto?)
Fortunately, this cycle will not be any different from those in the past.

Lastly, IMO, you really do need a larger sampling to make accurate calls. This in and of itself may be both the county's achilles heal as well as its savior. Scarcity, scarcity, scarcity.

The very best to one and all for the New Year.

[tom fry's ghost]

DK,

I am suggesting that if you use quartiles you do want to exclude your "outliners."

The "median" issue has been debated elsewhere.

[David Knudsen]

TFG, I think the median does adjust better for 'outliers' than the average does, which is why I tend to look to it for trends. The average can be greatly affected by one or two $1M+ transactions in a given month or quarter. Which is why, in a period with a few large transactions, I always qualify the average calculation, and run it both with those 1 or 2 transactions included and without --- although the 'official' average number I post on the website does include them because they were closed sales. If I threw out the top 5 and bottom 5 transactions, it would likely bring the average down, but the median would remain the same. I'm also not seeing an increase in all-cash transactions versus financing; if anything, I'm seeing fewer all-cash buyers right now. That may also be a function of seeing more moderate income buyers, and fewer wealthier buyers.

And regarding larger sample sizes, I don't "sample" at all, but include every transaction in the MLS. (I've periodically checked the MLS sales numbers against another local resource that includes all real estate transactions, albeit with less data on each, and the MLS consistently 'captures' about 85% of single family residential sales in the county.) I would love to be able to work with a larger 'sample' size, but we just don't have the number of transactions. Finally, I've always used a 3 month running sample (which typically will include 140 to 220 transactions) rather than single month data to have a reasonable sample size. I've always taken issue with the monthly statistics for Sullivan County sometimes reported in the press. When you have a month with only 40 or 45 transactions, it can vary wildly from month to month.

[David Knudsen]

Tony, my comment about the inventory being better is to make the point that the 50% appreciation since Q4 2002 may not be totally attributable to market run up, but the sales in 2007 may have included more larger, better houses. Consider a Honda Accord. It may cost twice as much as it did 10 years ago, but its also larger, heavier and has more features (air bags, traction control, etc.) than it did 10 years ago. So how much of that price increase can be attributed to inflation and how much to being 'more car.' But your point is well taken, and to go back to the car analogy --- it doesn't matter how much more Accord you get today for your $30,000, if you're feeling stretched and can't (or won't) spend $30,000 for a car, you're not going to buy it. Its going to be interesting to see, in the next year, if buyers are going to be willing to pay a premium for "luxury" features, like designer renovations, bluestone countertops, grand master suites and outdoor fireplaces. Or maybe frugal will become hip again, and folks will brag about how inexpensive their new Formica countertops are.

[JM]

Study suggests lengthy U.S. home price decline

http://www.reuters.com/article/economicNews/idUSN0324942320080103