Yesterday, Microsoft CEO Steve Ballmer made a notable statement when announcing the software giant's first mass layoffs in history. He said that the economy isn't really in a recession — there's a resetting in the economy to a "lower level of business and consumer spending" based largely on reduced leverage in the economy. Now, Ballmer's statements have p.r. flack spin written all over them. And whatever "R" word you use — resetting or recession — the economy is still in a world of hurt. But Ballmer's statement really stuck with me and got me thinking about how it applies to real estate here.
Eight years ago, when I started selling real estate here, Sullivan County seemed like a veritable bargain bin of real estate. I paid cash for the 18 acres of view property I bought in the Beechwoods to build my house for $30,000. Folks looking for a charming little farmhouse on a few acres to update could easily find something for $150,000. A nicer or larger farmhouse, or with more acres, could regularly be had in the mid $200's. In 2002, my highest sale was a house on the Delaware River just north of Callicoon for $312,000 (that resold in 2007 for $525,000.) In 2002/2003, a Smallwood year rounder would typically change hands around $100,000, and a modest 3 bedroom lakefront house was around $250,000 to $300,000.
I could go on and on with other examples. But the common element is that 5 or 6 years ago, it just didn't seem that expensive or extravagant for middle class New Yorkers to buy a country getaway here. Purchases also weren't fueled by the "wealth effect." Middle class folks looked at their income, their assets and the expenses associated with carrying a second home and made a decision about what they could afford. Buyers, for the most part, weren't tapping the equity in their appreciated NYC apartments, churning bonuses into real estate, or highly leveraging themselves with interest-only mortgages in hopes of future returns.
That started to change in 2004 and accelerated in 2005. Real estate was the hot asset category. Everyone wanted in. There seemed to be rivers of cash, either from Wall Streeters with bonuses, or homeowners tapping their appreciated equity. That cash enabled some buyers to pay above appraised value for the best properties. 2005 through 2007 was a buying frenzy with sharply rising prices, a combination of wealth effect and leverage. I remember commenting a number of times that buying a country place now involved "real money". When you rephrase $500,000 as a half a million, or $250,000 as a quarter of a million, it seems even more "real."
And here's where I come back to Steve Ballmer's comment about resetting. Real estate prices here are clearly resetting. The issue right now for everyone — buyers, sellers, brokers and lenders — is that it's difficult to know where prices are resetting to, particularly in market segments with few or no sales. It may be a while before sales volume picks up and those price points begin to redfine themselves.
In the meantime, it may be helpful to look at perceptions and attitudes related to prices. What's the price where buyers again have the perception that Sullivan County is a good value, a place where they can comfortably afford a getaway without a lot of stretching or financial maneuvering. The price where the annual costs are palatable, without relying on dangerous leverage or betting on future appreciation to make the numbers add up.
In terms of kick starting the market, most sellers and brokers are looking at pricing from the wrong end — working down in mostly baby steps from the pre-recession, high leverage, high "wealth perception" era that has disappeared. But we need to look at pricing from the other end, from the buyer's perspective about what they see as affordable. It's easy to write off buyers with low price expectations as unrealistic, and they may well be, at this moment in time. If someone calls and asks about finding a 3 bedroom lakefront house under $300,000, or a farmhouse on 5 acres under $175,000, I probably can't make it happen at this point in time in the market. But those buyers are providing valuable information that we need to pay attention to. They're telling us that a $300,000 lake house or a $175,000 farmhouse fits their vision of what's affordable and achieveable.
Can you say paranoia? Reg do you honestly believe people on a small blog would actually create different personae? There really are only 2 opinions on this blog no different than what one sees on stock boards-those who profit from further price declines and nervous longs. People eager to buy are going to plug info that supports their desire to purchase at lower prices. Those who get upset by this info are most probably homeowners concerned about their shrinking equity. When the later group throws in the towel we have reached the bottom.
Posted by: cfranch | January 29, 2009 at 12:03 AM