It's Changing Tastes and Demographics, Not Just the Recession

I've been following the comments on the "Chapin $550K Lakefront Sale" thread closely. Without fail, anytime I post anything on here related to sale prices, it brings out the battle of the bears and the bulls. Ahhh ... "Was it a good deal at $550K, or will be buyers end up in despair and find out they can't unload it in 3 years for half of what they paid? Find out a 11."

Regardless of how bearish you are — a bear cub who sees the top to bottom at, say, 20% to 25%, or a scary old grizzlie who sees nothing but a chasm of downward prices until we hit 60% or 70% off of the top — there isn't a single number that can be applied across the board. One thing I've learned selling primarily in the second home market here for the past 9 years is that fashions change and tastes are remarkably fickle. Four or five years ago, grand houses were in high demand — big "Love, Valour, Compassion" farmhouses with wrap porches, or ever larger Adirondack style lakefront manses ala Chapin. Little charmers could be tough sells.

Now the little affordable charmers are the fast movers, while the bigger trophy houses are languishing on the market. Of course that's a function of the economy. Money is more precious and credit is tougher to come by. Hummers are out, Priuses are in. Because demand has slumped for bigger, more expensive houses, they're likely to see bigger top to trough drops in price than more modest houses that hit a buyer sweet spot.

But size and price aren't the only changes. Up until 2 or 3 years ago, the majority of lakefront shoppers wanted motorboat lakes. It was all motorboat, motorboat, motorboat. Lately, I've been getting far more requests for non-motorboat lakes than motorboat lakes. Of the 25 lakefront home sales over the past 12 months, only 5 have been on motorboat lakes. There seems to be a shift in preference away from motorboat lakes. I'm sure that a good statistician could have a field day with that, looking at economic and demographic correlates. But there seems to be less demand for houses on motorboat lakes, and as a result, those houses may be taking a bigger price hit.

Finally, there areas within the county go in and out of fashion.When I first started working here, there was pretty robust demand for nice second homes around Hurleyville and in the corridor up along Hasbrouck Road into Neversink. Much of that demand could be attributed to the large ashram in that area. The ashram essentially pulled out, demand from city hipsters dried up and property values fell. It wasn't directly related to the recession.

7 or 8 years ago, the "it" place was Jeffersonville, with Narrowsburg, Callicoon and Livingston Manor running close seconds. I seldom showed much around Barryville and Eldred. It was an afterthought backwater, out of sight and out of mind. Then all of a sudden, with the River Market, the Spring House and Ecce B&B leading the charge, Barryville became hot. Then Catskill Farms moved their operations there, and those hip little CF cottages started sprouting like dandelions on the roads around Barryville and Eldred. A house on Mapes Road is even up for a Dwell award. 6 years ago, who wudda thunk? Barryville has arguably surpassed Jeffersonville as the cool place to be.

I'm not saying that anyplace has escaped the recession, or that some type of house magically escaped the real estate downturn. But the second home market is fickle, and taste and fashion play a part in buyer demand and resulting prices. Catskill Farms can't keep up with demand for those little cottages. But tastes and demographics change. When those 30-somethings have kids and their kids have friends and the economy has improved and they feel wealthier, they'll probably want bigger houses or lakefront houses. And the demand profile will shift again.

Comments

[MV]

David, Those 30-something generation are paying off college loans, paying a home mortgage and car loans and trying to save for college for their kids.

WHO IS GOING TO BUY THE ASSETS FOR SALE BY THE BABY-BOOMERS OVER THE COMING DECADES?????

[Blue Skies... Nothing But Blue Skies]

The 30 something generation (is it GenX or GenY)?

Anyway - they are scared sh*tless from the economic turmoil as is the rest of us.

They have less in the way of disposalable income and assets and as MV makes the observation:

1. Pay off debt - like college loans
2. Pay the rent - or a mortgage on their co-op or primary home
3. Save for their kid's education
4. Pay for their kid's expenses - like medical, dentist, camp
5. pay for their family's expenses - like food, utilities and taxes

Euro is falling and the 2008 debt contagion is still fresh in people's minds. So, it's no wonder that equities are tanking with a possible round of credit freezing up - but this time unemployment is almost 10% and TARP money has been spent.

As Mohamed El-Erian {http://bit.ly/9AUgHP}of PIMCO said the United States has been running on a spare tire since late 2008 / early 2009 {http://www.pbs.org/nbr/}

WHAT HAPPENS WHEN THE SPARE TIRES BLOWS?

Hey...and it we are going to look for a second home in the country - what about the bogeyman of Gas Drilling and the increased truck traffic, noise, lights, possible water contamination and other non compatiable uses that accompany it?

Take a look:

http://bit.ly/cPS6NC

Simply put - why look here?

Dave?

[henry]

Changes in tastes and demographics, while potentially real, feel like second order of magnitude effects at this point.

Your website lists 44 lake houses above $500k in sullivan county. Without a massive increase in the sales rate, it will take many, many years for this inventory to clear.

http://search.catskill4sale.com/i/5776/lakefront_homes_over_500K

[don_o_lac]

David mentioned the Barryville area becoming popular... I'm from the Philadelphia and have loved that part of the Delaware River for years. I had to build a house there because either I couldn't afford a home with privacy or one wasn't available. This year alone, I see several new houses being built in Barryville and York Lake.

Could it be that all the new construction is offering what people really want?

[charles petersheim - catskill farms.]

Thanks for the shout out DK - I think some readers find it impossible to accept/believe that most young professionals didn't lose any money in the stock market, didn't lose any apartment value (since they didn't own one) and didn't lose their job. Nothing changed in their financial portfolio except a loss of confidence. If some inspires that confidence, then the money is there.

In terms of new construction, it's not a sales pitch to say if you are planning to build in the next 4 years, do it now. Money is free and the entire real estate pipeline - from surveyors to lawyers, to title companies to banks have more capacity than is being used - just opposite of 3 years ago where your business was not needed, or in fact, even wanted - people were so busy.

The same is true for the construction - good vendors and construction companies are available and frankly, really appreciate your business at the moment. James and me at the office are constantly rueing the day when we aren't the only ones calling our vendors each day.

[Nick]

Gawd... the baby boom trope I have heard so many freakin' times (not just here, it's a common stock market bashing technique too) that it's getting so tiresome.

Basic argument goes like this:

1. Baby Boomers are the largest generation ever.

2. They are getting old and will soon be retiring (and subsequently dying) in large numbers.

3. Therefore stuff they tend to buy or hold as assets (real estate/stocks/bonds/companies/vacations/cars) will crash and burn as they stop buying and flood the market getting rid of what they have.

...um, OK, it's not a crazy idea. There's obviously something to this, when a large and well-off group stops earning and spending and starts dying and/or selling that affects markets.

But has it occurred to any of you guys that there are other things besides a baby boom in the 50's/60's that affect population and demographics?

Pop quiz, what year had the highest number of births in US history?

Hint, it wasn't during the Baby Boom. There was a record set in 1962 that held for years and years. Until it was beat again in 1990. Our current number of births is at Baby Boom levels right now after a long lull, with the low points in the mid-1970's.

Here's some good visualizations from the WSJ: http://www.karlhartig.com/chart/demographic.pdf

The reality is the population is always growing, everywhere in the world. Every generation has a little head start on being larger then previous ones as the trendline is universally upwards.

But the fact that gets people harping is my generation (born mid 70's) as that's really a the thin one. And people about my age (30-40) are the ones who should be really turning on the spending and asset accumulation right about now, this is the prime wealth building decade for most people, and yeah, there are a lot fewer of us than the boomers had. Yes this has economic effects, point has some merit as I said.

But it will not always be so. The "echo" from the baby boom was larger than the boom itself. The people coming onto the job market now will be in accumulation mode themselves in a decade or so. Yeah job market sucks for them compared to the boomers, etc, etc... save it, we all know that.

But there's more of them. And they will work and accumulate assets. Period, that's like the law of gravity, it's pretty damm constant.

Who's going to buy all the boomer assets? Their kids, among others.

Duh. And if you're hanging out in the dip between the TWO big baby booms ya might think about going long on a few things... just sayin'

[MadHedgeFundTrader]

Anyone who believes that housing is on the rebound, and that now is the time to buy, should take a very hard look at the numbers.

There are 140 million personal residences in the US. Today, there are 26 million homes either directly or indirectly for sale. According to a survey by Zillow.com, a real estate appraisal website, 20 million homeowners plan to sell on any improvement in prices. Add to that 4 million existing homes now on the market, 1 million new homes flogged by companies like Lennar (LEN) and Pulte Homes (PHM), and 1 million bank owned properties. Another 8 million mortgage owners are late on their payments and are on the verge of foreclosure, bringing the total overhang to 34 million homes.

Now, let’s look at the buy side. There are 35 million who are underwater on their mortgages and aren’t buying homes anytime soon, nor are the 35 million unemployed and underemployed. That knocks out 50% of the potential buyers.

Here is where it gets really interesting. There are 80 million baby boomers retiring at the rate of 10,000 a day. Assuming that they downsize over time from an average 2,500 sq ft. home to a 1,000 sq. ft. condo, and eventually to a 100 sq. ft. assisted living facility, the total shrinkage in demand is 4.3 billion sq.ft. per year, or 1.7 million average sized homes PER YEAR. That amounts to a shrinkage of aggregate demand for a city the size of San Francisco, every year. You can argue that the following Gen-Xer’s are going to take up the slack, but there are only 65 million of them with a much lower standard of living than their parents.

Throw in the disappearance of state and federal first time buyer tax credit. You can count on a jump in long term capital gains taxes and state and local property taxes, further diminishing property’s appeal. If you are looking for a final stick to break the camel’s back, how about eliminating, or substantially reducing the home mortgage interest deduction?

Add it all up, and there is a massive structural imbalance in residential real estate that will take at least a decade or more to unwind. We could be looking at a replay of the same 26 year period from 1929 to 1955 when prices remained flat, and we are only 3 years into it! A second down leg in the real estate market seems a no brainer to me, as is the secondary banking crisis that follows. Perhaps that’s why hedge funds have been big sellers of the homebuilder’s ETF (XHB).

[SullivanGary]

Firstly, I would disagree that all hedge funds are shorting XHB. The run up in IYR I feel is a leading indicator of the housing market getting better. The worries about the end of the tax credit that would lead to vastly lower housing sales are just plain untrue. We had a very big number in existing house sales, a 7.6% increase to 5.77 million units, 22% above last year. So many people are fretting about an increase in housing inventory, up 11.5%, but wait a second -- single-family home prices rose in 18 out of 20 metro stat areas, so if inventory is such a big issue, prices should be going down, not up. I think there is healthy demand, which is bringing out supply, as you would expect to be the case. Also, with the printing presses turned on here, and most likely quantitative easing in Europe about to occur, inflation could very easily be a factor down the road. If the Fed lives up to past performance they will be very late to the party on raising rates, and we could have hyper inflation. See the price of gold, and all the hedge funds that are offering gold denominated returns as an example of this. In that environment it is easy to make a case for home prices to increase.

[Nick]

I hate when people cook the numbers. Classic fallacies of argument above.

1. "Assuming that they downsize from..." line is also known as making s**t up. You assume that people now in 2500sf homes will live in a 10 by 10 foot box? On what timeline? On what basis? You are assuming a square footage drop of over 96% for a specific demographic.

Um... dunno how to break this to you but you have to back that kind of thing up, that's not an "Assuming..." type statement.

2. Count the hits and not the misses. There are 80 million boomers retiring at 10k a day you say. Seems plausible. How many young people are entering the labor market per day? How many people are getting married per day?

You can't count the outflows unless you address the inflows. That 10k a day number is meaningless. Unless you compare it to the converse. It's the delta, the change in demand that matters.

Obviously....

[ar]

I hate it when people attack a post by cherry-picking the salient points. Nick complains: "You can't count the outflows unless you address the inflows." But the poster did just that, here: "You can argue that the following Gen-Xer’s are going to take up the slack, but there are only 65 million of them with a much lower standard of living than their parents." Since Nick doesn't object to that point, he must agree with it. Obviously.

[ar]

Off topic but this report from today's NYTimes seems important for SC and vicinity --

http://dealbook.blogs.nytimes.com/2010/05/28/shell-to-buy-u-s-gas-assets-for-4-7-billion/?ref=business

According to the article, the company purchased by Shell has significant holdings in the Marcellus shale including "southern New York" and Pennsylvania -- sounds like us. Hard to believe that Shell would spend $4.7 BILLION on this acquisition without a pretty strong intent to exploit those resources and a pretty strong belief that it will be able to do so.

[MV]

Inlation does NOT make a home more valuable.

Inflation is a wealth destroyer. It decreased demand.

only DEMAND makes real estate more valuable.

Some poeple on this blog need to learn simple econimics.

[henry]

"Inflation does not make a home more valuable." True but... it does help increase equity value for those with leverage. Assume $20 down on a $100 home. Then assume a $1 inflates to $10. Now home is worth $1000 in new dollars. Home equity is then $920. In old dollars, $20 in equity has grown to $92.

Also, inflation does not ensure appreciation. The depreciation in price from supply/demand dynamics in a given market could be greater than the inflation in the currency.

[nick]

Get bent AR, I linked to census data. As I point out, clearly, the current generation in their 30s, mine, is quite small. The one after is even larger than the boomers.

But I already said that. Clearly.

As for the comment about economics... I have a degree in it, how about you? And explain to me how inflation destroys wealth for those undewater in a mortgage with a long term fixed interest rate... oh right you can't, for those people inflation is like hitting the lottery.

As any economist knows, inflation is redistributive from net lenders TO net debtors. Which category describes recent home buyers? Right....

[samy]

Hey David, Are the yuppies still overbidding?

[Baysider]

Inflation = wealth destruction.

You don't need an economist who survived the 1970's to explain that to you.

But we will not have Inflation.
Our scenario will play out similir to that of Japan.....ohh Yes... DEFLATION.
Much more painful.

All the printing presses full speed ahead will not be able to fight this 2-decade deflation
Helicopter Ben is trying hard to reinflate but the treasury vigilantes won't let it happen!!

Hence the harsh rhetoric against the 'speculators' by elected officials and presidents.

[Helen]

nick et al are obviously heavily indebted individuals.

[Nick]

Inflation makes people who are heavily indebted more well off as a general rule (absent things like a corresponding recession) which is hardly a secret.

And yes, I have a mortgage, that makes me pretty heavily indebted. Like everyone else that has a mortgage in excess of 50% or so of their equity.

[catskill lover]

Nick, I think we're in deflation and will be in deflation for a decade or two. Japan has been using quatitative easing and their citizens have been buying their treasuries for 20 years. In spite of this, deflation has dominated a generation and a half. We will probably see more packages in the size of 3-5 Trillion in the coming years. Many folks think this will be inflationary but in fact it will only be fighting deflation. Until demand for retail, products, real estate, etc... grows, the USA will be caught in a deflation spiral. When 70% of GDP is consumer based and the consumer is tired of debt slavery, prices will not rise no matter how much you print. Only debt proliferation into consumers' hands is inflationary.