Quarterly Report Roundup – 1Q 2011

Quarterly Report Roundup – 1^st Quarter 2011

Reprinted from East Hampton and Southampton Press

May 11, 2011

by Phelan Wolf

Bullet Points on the quarterly data:

-          Volume dropped due to weather and tax concerns

-          Low-end sales predominated after a rush of high-end buying in the fall

-        Land sales continue to increase as good inventory is depleted and builders gain confidence

Brokerages in the Hamptons are reporting that sales volume dropped precipitously in the first quarter of 2011.  The quarterly reports attribute the reduction in volume to weather and uncertainty regarding capital gains taxes.

The reports also indicate that average and median prices dropped.  But a close reading of the reports over the last year, as well as anecdotal evidence, suggests that while the average and median price statistics fell in the first quarter, the Hamptons real estate market is actually relatively stable and showing some signs of improvement.

The reports summarize the state of the market based upon closings that took place between January 1 and March 31 of 2011.  As always, the major brokerages define the geography of the Hamptons differently which accounts for some of the variation in reported data, which has been average for this analysis.

There were approximately 295 deed transfers (sales) on the East End of Long Island in the winter of 2011.  The first quarter is traditionally the slowest of the year for real estate sales in the Hamptons, which is a seasonal business.

These approximately 295 closings represent a dramatic 22% reduction in volume compared to the winter of 2010.  This plunge in volume occurred across the board in almost all Hamptons sub-markets with the exceptions being Montauk and Bridgehampton/Sagaponack which showed nominal volume increases which were not large enough to be statistically meaningful.

Roads were difficult and driveways often impassable in the Hamptons this winter making it difficult, and in some cases impossible, to show houses.

In addition to the weather, the reports also blame uncertainty surrounding whether the capital gains tax rate would be raised beginning on January 1, 2011 (ultimately it was not).

Looking back at the reports for the fall of 2010, they show a significant rise in the average price statistic, up 13% from the previous fall, driven by an increase in luxury closings.  In the fall there was a 50% increase in sales over $5 Million compared to the prior year quarter and the highest level of sales above the $5 Million mark in four years.  It is entirely plausible that many of these closings were rushed in December of 2010 out of fear of increased gains taxes in January 2011.

Left unsaid in the reports is the possibility that some of the volume drop in the first quarter of 2011 resulted from generally declining market conditions.

After the market bottomed in the first quarter of 2009, volume increased steadily each quarter for 18 months.  In the fall of 2010, for the first time since the market bottom, volume stopped increasing and stabilized.  The first quarter of 2011 represents the first drop in volume in the last 7 quarters.

PRICES

The average and median price statistics each dropped by double digits in the first quarter.

The average price was $1,520,000, a 13% decline when compared to the prior winter (22% if one brokerage’s anomalous statistic is disregarded) and a 19% decline compared to the fall of 2010 when luxury buying was exceptionally strong.

The median price fell by 22% compared to last winter, to $779,000, meaning that 50% of properties sold for less than $779,000.

These statistics always tell us as much or more about the mix of buying activity as they do about the general direction of real prices in the market.  Sales under $1 Million accounted for 62% of all sales this quarter, a big increase over the approximately 50% levels during the prior quarter and the prior-year quarter.

A sifting of the pricing data lends support to the notion that the poor results this quarter were strongly influenced by weather and tax concerns.

Entry level buyers are more likely to be local people who already live in the Hamptons and are less affected by the icy roads between New York and the East End.  Regardless of their location, one of the enduring ironies of the Hamptons housing market is that entry-level buyers are much more likely to need financing than luxury buyers.  These entry-level buyers may have felt some urgency to continue their search for a home this winter, notwithstanding the weather, while rates remained low.

Some entry-level sellers, having been hit hard by the drop in prices north of the highway as well as the effects of the recession on the local economy, have little or no equity in their homes.   These sellers would have been much less concerned about possible changes in the capital gains tax rates than the luxury sellers who drove the market in the fall.

FUTURE TRENDS

Looking past sales volume and pricing, there are additional data points that show the general health and stability indicated by the 2010 reports did not dissolve in the winter of 2011.

The listing discount – the difference between last asking price and sales price – is relatively unchanged and has been hovering around 10% for the last calendar year.  We still see some homes that are priced unrealistically and sell for much less than the asking price, and some buyers that are making “low-ball” offers.  But many buyers and sellers have set aside their unrealistic expectations and understand the market well enough to agree on a price.

Perhaps most importantly, in terms of forecasting the “bullish” vs. “bearish” sentiment among buyers and sellers, land sales actually increased 13% versus the prior-year quarter.  This is an important sign of strength in the market, indicating that builders remain confident, and end-users, facing a depleted supply of the best houses in the best markets, are beginning to build again.

No one quarter makes a trend, and we won’t know for some time if weather and taxes were entirely responsible for the volume drop in the winter of 2011.

Anecdotally, sales have been rapid once again this spring and it appears that once the snow and ice melted the market quickly regained its footing.  Serious buyers came out as soon as the weather began to break in February.  By the end of March the best rentals were gone – and for the entire season -- which is a dramatic change over all of the previous post-crash rental seasons which were dominated by tenants with smaller budgets looking for last-minute short-term rentals at bargain prices.

I concluded last quarter’s report by predicting that all of 2011 would look much like the end of 2010: a generally healthy and balanced market, lots of low-end inventory (and perhaps declining low-end prices), increased high-end activity (and perhaps increasing high-end prices in select markets) and a “gold-rush” mentality among those seeking lots and tear-downs south of the highway.  I’m going to declare “winter-rules”, take a mulligan, and renew these predictions for the remainder of the year so long as Mother Nature and Congress cooperate by staying out of the way.