What's Happened to the Upper End?

I'm haven't seen many upper end buyers in the past few months, and looking at the sales data, not many other Realtors here have either. In 2009, there were 17 closed single family sales above $400,000 reported in the Sullivan MLS Compare that to 29 sales above $400,000 in 2008 and 51 in 2007. For the latest 3 month period (11/09 through 01/10), there were just 4 closed sales in the MLS above $400,000 — 3 of those were lakefront and 1 was a 6500 sq. ft. executive home in Monticello. (That one, selling for $570,000, came in at about $87 a square foot!) Keep in mind that I'm not talking about the top upper end here, those trophy properties in the million and up range, but rather houses above $400,000, a pretty low threshold for 'upper end'.

Then look at the inventory of houses with asking prices above $400,000. There are currently 140 single family listings in that range in the Sullivan MLS (128 of those actually in Sullivan County.) That translates into about 8 years of inventory at the current 17/year sales rate! That is a mind boggling number. The total inventory of single family homes in the Sullivan MLS at all price ranges is 958, or about a 2 year supply given that there were 439 sales in 2009.

It's almost if buyers in this upper end have evaporated. Which makes it all the more surprising when sellers in this thin market range hold stubbornly to their prices. We've tried to put together a few deals in the past month in the $400,000 to $500,000 range where the sellers have just said 'no, we'll wait.' The question is, "Wait for what?" I'm just not seeing a lot of buyers in this range coming down the pike.

Comments

[Michael]

The Upper End is dead Fred.

Pity those folks that purchased "Upper End" properties from 2005 through 2008.

We'll just wait...(and wait they will).

Mike in Barryville

[anonymous]

I think there are a lot of reasons for the decline:

* Income and assets for most potential purchasers of upper end property are down given recession.
* Multiple years of inventory, and prices in many cases do not reflect this fact. Sellers sticking (for now) to peak prices, ignoring that prices far outpaced income in the runup of the past decade. A correction in prices back five+ years would not be extraordinary... except for the fact that prices rose so much in those years.
* Older buyers took a hit on retirement assets, causing a second home purchase to drop down the priority list. Younger buyers generally have less assets/income.
* An increase in risk aversion with the decline in the market. This is normal as, for example, hurricane premiums often rise after a bad hurricane season.
* There is less willingness to lever up, and loans are less available. Plus, comps can be more difficult as there are less upper end sales, and prices on those sales are likely lower.
* The decline in the market increased focus on the risks, and consequently, on the numbers. Given the inventory of upper end homes, it is reasonable to assume little price appreciation in the near term. The carrying costs of a 400k home are significant. In rough numbers, assume an after tax cost of capital of 5%. 20K in capital costs per year + 4K in taxes + 1K in insurance + heating + maintenance + ... Limited pool of buyers able and willing to pay this amount for a place that many are only going to use in the summer (maybe 4 months) and possibly only for summer weekends and the odd vacation week. Much easier to make the decision to purchase in a world where prices were always rising.
* Worry of a double dip recession (with less ability in the developed world to combat this downturn given the already stretched govt balance sheets) and about the potential for an increase in interest rates (as the fed's massive purchases of mortgages must be phased out and given the deficits this country is now running).
* Prices for summer homes in other areas have declined more.
* Finance industry (important for upper end) is much smaller. While bonuses (accounting for significant amount of compensation) should be good for those still employed, less is being paid in cash.

I recently closed on a lake house in sullivan county for just under 400K. I probably spent half of what I expected to pay when I started my search three years ago (didn't purchase sooner as I could not make the numbers work for "bubble" prices), and consequently, acquired a much more modest place. Also, while the place was at a significant discount to where it would have traded several years ago, I think that I overpaid by 10-20% (and I expect prices to continue to fall). I was willing to take this financial hit as the property was an exceptional fit for me, and in absolute dollar terms (given the lower purchase), the overpayment was acceptable. Given the price disconnect and inventory I see in the market, I think it takes a pretty exceptional set of circumstances to get to a sale. I expect time (along with carrying costs) and lower comps to eventually work their magic on seller expectations.

[ar]

Shortly before I bought several years ago, I started to have second thoughts for a number of reasons. Everybody I consulted said the same thing: "Look, if you decide after couple of years that you don't like it, you can always sell it." Yeah, right.

[Mr Hamilton]

anonymous....you sum it all up very well.

The only thing I can add is that buyers should make offers.
Make the low ball offer. It helps the market find itself.
It helps speed the process of seller grief (Denial, Anger, Bargain, Acceptance). It also makes the case for what something is worth.
If a seller is asking 359k and multiple offers are coming in at 200-240k, then the sellers will capitulate. If they get no offers, they actually stick to their unrealistic asking price.

Someone said that this price discovery is causing a lack of sales (and inventory). It makes perfect sense! The more low-ball offers, the sooner sellers will understand. I always tell a seller I want to pay 2014 prices, not 2010 prices! They just don't understand.

[Crumley]

I hope you'll read the article at:

http://www.nytimes.com/2010/02/07/business/economy/07gret.html?ref=business

"As for housing prices, Mr. Rosenberg expects further declines of 10 to 15 percent over the next few years. He pointed to the roughly nine million residential housing units available for sale across the country, a very high vacancy rate when judged against a total housing stock of 130 million units.

If his forecast is accurate, the numbers of borrowers who owe more than their homes are worth will rise significantly. Mr. Rosenberg estimates that fully half of the mortgage-holding population in the country could be underwater by 2011."

Crumley Van Vactor

[Michael]

well said anonymous!!

[Bix]

I'd guess also that buyers in the upper range are also looking elsewhere: Ulster County, Woodstock, perhaps Dutchess, or the Berkshires. Prices there have no doubt fallen substantially as well, and perhaps buyers in that range are more likely to go there.

[Michael]

275-325 is upper end in today's market

[pa]

The financing has dried up, David. Also New Yorkers will wait and then the kids will wait after the property is passed on. New Yorkers simply have a different mindset which is why I predicted that you would be moving witin five years.
McKean was exceedingly lucky to have done what he did when he did it. Smart money doesn't buy into Sullivan County anymore. At best it stays at the Lake Joseph Inn with nervous Ivan.

For all intensive purposes you have no economy to support or service those that trek up from the city.

The Black Lake bailout is two years away. An implosion in county finances is coming.

[pa]

One of my comments may be misunderstood. I meant to say that those in BlackLake Estates would soon be seeking to sell their property. The county has no other choice but to feed upon those at the upper end of the tax base. The number of municipalities that have financial shortfalls is stunning.

[Thinking Ahead]

Honest question: is anywhere a good place to invest "smart money" these days in terms of real estate? What makes Sullivan County any worse of a housing/property market than a thousand other locations within and outside New York State? This area isn't the only place that's suffering from difficult & worrying infrastructure, governmental and financial issues. And it's got just as much natural charm as the Berkshires, Ulster County, Dutchess, etc.

I'm just genuinely curious as to how buyers might judge this area to be more of a risk than elsewhere, especially in light of the referenced NY Times article. After all, "anonymous" above still bought here, despite all the reasons he/she listed for NOT doing so.

[ANM]

May I add to many good comments made:

The mortgage reset time bomb which will further impact NY primary and secondary home markets. The Credit Suisse Chart in the following link says it all.

http://bp2.blogger.com/_nSTO-vZpSgc/R_HlCECrufI/AAAAAAAACZE/E1WPLRuaWmY/s1600-h/Mortgage-Rate-Resets-1.png

[Nick]

I think Mr. Anonymous makes some very good points. As a buyer squarely in the range he's discussing I read this kind of news trying to decide if it's terrifying or just a blip in a long life, since I'm not looking to sell. I can't help but thinking I might have bought something much more impressive had I waited. Then again when my NYC friends see what I got and how much it cost all-in they think it's insanely cheap. Then again they aren't themselves rushing to buy one for themselves. The only practical effect is that I'm not even halfheartedly trying to refinance, though I should really try harder... the total lack of comps, even vaguely relevant comps, makes me not feel like expending the effort.

It will be interesting to find out when this semi-upper end market will return. Let's face it, when compared to NYC real estate 400-600k is just not much. Compared to the Hamptons it's hilarious. You can't get 1-2 bedroom co-ops in slightly run down motel style properties out there for much under half a million, STILL. And I made it from 20+ private wooded acres in Bethel to a birthday party on the Lower East Side this weekend in 75 minutes (granted, some laws may have been broken in that effort), which I figure has to matter, it matters to me.

Who's to say? I'd love to have a crystal ball, or hear what other people think, not like this week, but 5-10 years out.

I think the real threat to the high end is overdevelopment. Say what you want about the Hamptons, but they sure as hell got that figured out. There are NO high rises, and aside from right along Rt. 27 ("the highway") there's a seriously impressive absence of stripmalls and other things snobby NYC'ers consider "blight." Monticello isn't going to become Milford, I think there's a bit too much section 8 housing for that. And I would not consider losing the racetrack or Wyde Lumber (or hell even the Rt. 42/NY-17 big box extravaganza) to be an improvement. All it would take I think is preserving just enough open space and nature to not kill the "we're in the country" feeling, and the sheer proximity to NYC will continue to be the #1 value proposition. I find it interesting to actually see some signs of life during a brutal winter and a nasty economic downturn. The new mid-sized market in Mongaup Valley, with what appears to be a thriving River's Edge cafe across the street, and things like downtown Monticello's big-dig showing signs of progress finally, all give me some sense that not everything's pointed in the wrong direction.

$.02

[Grammar Cop]

Pa, it's "all intents and purposes." You're post makes sense, but is diminished in value by the misuse of the term.

[Nick]

Come on genius, it's "intensive porpoises" as any lucid sea world employee knows.

[pa]

Thank you grammar cop. Alas, at least I didn't confuse prostrate with prostate even though, at critical moments, both may share the same position.

[anonymous]

Nick,

You should not worry about my post for many reasons (you clearly love your place, you are not selling any time soon, your happiness in this area seems greater than your all-in carrying costs, any unrealized loss is sunk and not changeable, your long-term view, etc.).

As for me, I bought in SC due to family/friends down the street and fond childhood memories. Would have bought elsewhere otherwise. It is not that I do I do not value what SC offers. It is that asking prices in this segment have not adjusted as much as elsewhere and as much as I think they must given current market conditions. While I think there are bargains to be found in any market, I suspect most will do better in areas where prices have adjusted more.

[pa]

Thinking Ahead,

---Is anywhere a good place to invest "smart money" these days in terms of real estate?

Nothing has escaped being hit.

---What makes Sullivan County any worse of a housing/property market than a thousand other locations within and outside New York State?

The tax base here is in trouble and there is no other way to meet its needs other than to enlist the aid (See:prey upon) the weekender and outsider.

---This area isn't the only place that's suffering from difficult & worrying infrastructure, governmental and financial issues. And it's got just as much natural charm as the Berkshires, Ulster County, Dutchess, etc.

If you work in the city or surrounding areas this is it. Telling you about Tenn. or North Carolina may be a moot issue. Then and again, if you are using it for less than forty days a year... It's like owning a boat. My advice: do the math.

---I'm just genuinely curious as to how buyers might judge this area to be more of a risk than elsewhere

The local economy is non-existent. The locals are generational so with each generation the "job" and "plot of land" has to be subdivided again and again. It's called diminishing allocations.

Five years ago a number of dams were cited for repairs: Lake Josph and Lake Superior. Strangely enough, Swan Lake was left off the list. Who will pay for these repairs? To rid Swan Lake of it vegetation problem it will cost in excess of $1.3 million. That's simply NOT a doable number.

The list is long.

[Bix]

I Can relate to what Nick is saying. Look, it's impossible to time any market, and personally I bought for the long haul, not to flip. So fluctuations in real estate prices are of really no immediate concern to me -- except that, indeed, refinancing seems pretty hard, if not impossible, for those of us who bought within the past few years.

As for Monticello: look, even the South Bronx has come back. What's needed is a nucleus of committed people. Artists looking for cheap space, maybe. Right now it's a hellhole, of course, but I've seen worse. The smartest real estate people I know bought during times like this.

[Michael]

"south bronx has come back"

That is one for the history books!!

[ar]

If you paid $300,000 less than two years ago for a house that you'd be lucky to be able to sell today for $220,000, you've set a match to an $80,000 pile of cash -- no amount of "psychic" reward changes that math. More power to those for whom that's no big deal. But you pass into the realm of delusional when you start believing that over the "long haul" the Sullivan County second home market will ever again approach the boom levels of 2004-2006. That brief period was a freakish moment in a 45-year period of steady decline. The money's gone, and it ain't coming back, so enjoy the house, and try not to look at real estate listings that offer twice as much house for less than you paid for yours.

[Thinking Ahead]

pa, thanks for an illuminating reply. Your logic seems sound, though I confess I have not done "the math" on neighboring counties and states within a reasonable distance from NYC. However, I've heard that the DEC is getting ready to hand down dam repair/replacement requirements statewide that may not be doable for anybody. If that's a contributing factor to property decisions in Sullivan County, then it's definitely going to be one across New York.

And thanks again, David, for providing a space where we can actually TALK about issues that may not always show the area in the best light. It's a sign there's real info to be gained here.

[Mr. Answer Man]

"...even the South Bronx has come back" writes Bix when comapring it to Monticello where its' mayor has been busted {i.e.; arrested} as of late last week.

Read on:

http://www.dailyrecord.com/article/20100212/UPDATES01/100212014/1005/NEWS01/Mayor+of+NY+town+charged+with+selling+knockoffs+

or

http://www.vosizneias.com/49165/2010/02/11/monticello-ny-mayor-arrested-for-suspicion-of-trademark-counterfeiting

or

http://www.recordonline.com/apps/pbcs.dll/article?AID=/20100213/NEWS/2130329

or

http://www.recordonline.com/apps/pbcs.dll/article?AID=/20100212/NEWS/2120370

Incredible.

You're welcome to it Bix.

Mr. Answer Man

--------

http://thesaurus.reference.com/browse/bust

[Nick]

Sorry AR, I get your logic -- trust me, I've espoused it to people who don't grasp it -- but long term asset purchasing doesn't work so simply. I had friends who lost huge sums in their retirement accounts in 2008 as well freaking out. The answer to them was the same, you're in your 30's and it's a retirement account. If you have a reasonable diversified strategy just freakin' stick to it and shut up. Read your statements every quarter and rebalance every year (note rebalancing means putting MORE money into the asset categories that LOST the most).

I lost almost 40% of my retirement account value in 2008. I just kept doing the same thing. As of today the account is back in positive territory (ie it holds more money than I've put in). I have friends that sold it all and bought bonds after losing too much. They got creamed for that decision. I don't claim to time the market or know *anything* other people don't know. I just know diversification and patience matter. Do your best to make long term strategic decisions and think long term and in the aggregate as well.

Your argument is that if you paid $300k for a house that could sell for $220k than it's exactly the same as if you've just LOST $80k IN CASH by lighting it on fire. Right? You just said it.

So what would/did you say to someone in 2005 who bought a house for $220k that could sell for $300k that day? Did you tell him he'd just MADE $80k IN CASH out of thin air? Since he made $80k just like that, he can easily afford a $55k BMW right? Should he buy one if he wants to?

Serious question. If the first statement is true so is the second. But people acting on that way of looking at an asset drove many to foreclosure and bankruptcy. Neither way of looking at long term assets like real estate is a particularly good idea. Like any asset you need to look at the carrying cost, opportunity cost, value-of-use, time horizon, risk aversion, and plenty of other things.

There's no "psychic" powers to this theory. If you believe that in the long haul (ie 10+ year time horizon) there will be consistent decline in the value of SC real estate, well then don't buy it. If you think US stocks will fall over the next 10 years don't buy those either. I don't agree with you, I think SC real estate will move around a bit, but in general will rise at a rate roughly consistent with inflation and general housing values over the long term. Not exactly a wild radical theory. And as for my house I think the value of it for recreation is great compared to alternatives. I'm happy with it. If I make money some day in decades when I sell it all the better. Hell, if I break even over 20 years i will still have banked hundreds of thousands of dollars in savings rather than spending it. As an investment that scenario would be terrible. But it's not proper to evaluate something purchased for use/pleasure exclusively as an investment.

And it's INSANE to consider non-liquid short term gains on real estate as the equivalent of cash. It's literally ruinous to your life, if we've learned one thing in this bubble you should be able to figure that out. If you buy a house for $200k and it's worth $400k now you did NOT just make $200k in cash until the day you ACTUALLY sell it. Acting in any other way is stupid.

We agree on that point right?

Of course we must, it's obvious. So why are you basically saying the same thing? Sort term non-liquid and unknown/non-transparent changes in real estate value are not the same as cash, and living your life as if they are makes no sense. If it's true in one direction it's true in the other.

Patience, young Jedi. I has it.

[Holywooooood Swinging]

Nick,
How about factoring in:

1. Debt Service (like, Man, a mortgage...)

2. Annual taxes to both your town and school district. And, Nick, they're only going up in Sullivan. Plus, second home buyers will be taxed to the FULLEST extent of the law. No STAR programs for them.

3. Fuel charges (like, Nick, Man, it's only 20 degrees out while I type this post)

4. Home Insurance

The tab begins to add up month after month, year after year...Nock, you catch my drift or am I being too obtuse.*

Hollywooooooooooooooood Swinging

==============================
* Shawshank Redemption

[ar]

I suspect I'm going to regret getting further in to this, but, yes, Nick, it is the equivalent of burning that amount of cash. Your view relies on the assumption that at some unknown future time over some unspecified "long haul," the loss will be made up by market events and so it needn't be recognized now. There is, of course, no assurance of that happy outcome. In fact, the loss may increase if you hang onto the house. (As for the comeback of your own retirement account, don't confuse being lucky with being smart.) So, because it is impossible to know what the future holds, the only "sane" -- translation: prudent -- approach is to mark to market, as financial institutions are required to do in many different contexts. Indeed, those institutions were complaining recently about being required to mark to market, and their arguments were essentially the same as yours -- that they should treat so-called "long term" assets differently (and, implicitly, optimistically). Fortunately, the relevant accounting rules don't permit that -- for good reason. Marked to market, that $300,000 purchase prices means, today, you are out $80,000 cash in my example. Just like you set that cash afire -- it's gone, with absolutely no assurance it will ever come back. If you want to rely on the sheerly theoretical possibility of a turnaround at some unknown time in the future, that's your choice, but economic reality lies in the fact that you can't borrow a dime against that possibility.

On a completely separate note, of course it could be ruinous to spend cash that you haven't realized, but that has nothing to do with what I was talking about.

[Bix]

Answer Man, Monticello isn't quite in the Bronx's class if you're looking for analogous corruption. If he got arrested for looting the treasury--now, that's more like it.

[Nick]

Yes I'm familiar with mark to market. But your assumption is just that, an assumption. It assumes you know with a fairly high degree of accuracy what your property is worth. Sure if you live in a cookie cutter SoCal subdivision and identical houses are selling for X then that's a market. But even that aside, there's a difference between cash and long term assets. Period.

Yes, I get it, a loss is a loss. I'm not stupid. But long term is long term. And as for my retirement account I wasn't really lucky or smart. Just prudent. Over time a diversified portfolio approach is the right way of saving for retirement. So that's what I do. If I was retiring in <5 years I would have been really stupid, as you get older you shift into assets with less downside risk. When you are 20+ years away from retirement you have a different mix. Stupid would be freaking out about short term market swings on a long term asset.

Sure, mark to market. I have a spreadsheet of assets and liabilities and I certainly marked down my IRA when figuring my net worth. That's different from freaking out about it.

So yeah I'll assume I've probably lost some degree of equity in my SC house. I've also done a ton of renovation with my own labor, which has added some kind of value. Is it worth more or less now than what I paid into it, including interest and taxes and absolutely everything? Dunno, I suspect probably not, I've probably taken some kind of hit.

Is it worth more than what I owe? Not sure but given that I put quite a bit in I am fairly confident it's well over that line, even if I was forced to sell when I don't want to. Who knows, it's an educated guess based on what I see on this site and elsewhere.

No matter how many times you say it though, it's still not cash. In some ways it's *worse* since it's not liquid. I can't be confident I could sell it to *anyone* in say 90 days in this market at any price. It's a thin market. That would be bad. I also could see it selling for a solid price if necessary, it's a nice place. But I don't know. If it was cash, I'd know. And if it was cash, and liquid, I could buy a replacement now for less. I'm not sure that's true, again it's a thin market, and the whole point of this post is that there are almost no sales in this price range. If you assume I actually do want a nice place up here, why do you assume this rule doesn't apply still. The market is a bit frozen for a reason presumably, there's no guarantee I could find a better place with a seller willing to sell regardless. I've checked the listings.

And for now, I don't care much. For two reasons - one, as anyone with sophisticated economics knowledge (that's you right?) is well aware, sunk costs for the most part are not relevant for future economic decision making. And two, like I said, I still have it and it still costs the same as I expected it to per month, and after well over a year I have found myself up here almost every weekend (and counting the days during the week) so I'm pretty confident by now that it's actually something I want, which you never know until you try.

I'm happy with the decision, still. It may seem like rationalization but do consider the possibility that not everyone thinks like you do. You can't get hung up in analysis paralysis forever, nor can you count on timing the market. My investment account example is in fact instructive. I wasn't in a position to invest much until about 3-4 years ago, so I got killed by starting at the top of a bubble. Then it rallied back. My strategy hasn't changed, and won't, I'll keep putting in the IRS maximums for as long as I have the ability to do so, and revisit and rebalance once a year. Because that's the right way to save for the long term.

And the right way to buy real estate for the long term as a owner/occupant (not a professional/investor) is to buy something you can afford, with some cushion even if you hit some bumps in the process. And make sure you like it and will still want it years in the future. I don't know if it'll ever "come back" but I suspect over many years, as mentioned, the value of a lot of private acres (ie no trailer parks in sight period, no matter what happens) with a nice place on them 88 miles from NYC will have some interest, NYC's kind of a big important city. And after 20 years roughly I'll own the place outright, my equity will be what it's worth. I can live with that.

Whatever, same old argument. Instead of trying to tell me things I already know, why don't you tell me your brilliant strategy. Do you own real estate in SC? Are you somehow short this market? Do you have some grand master plan I should be sure to follow? I'm all ears.

[Bix]

Speaking of higher end properties, I was just driving through Jeffersonville when I saw a "for sale" sign on one of my favorite B&Bs, the Griffin House! I picked up a flyer, which indicates that they're asking 869K, down from $1.2 million. I think both prices are unrealistic.

Then I went to the website and found that they've been involved in some lengthy and protracted dispute with some people in Brooklyn. Sad.

[Goldfarber]

maybe their foundation is made of Gold!