Barrons is now reporting on the bursting housing bubble in the U.S. and has some shocking numbers on the price reductions in effect. Where is the National Association of Realtors to assure us that we are looking at a 'soft landing'? Oh wait...there's David Lereah to assure us that everything will be just fine.
The Big Glut
Trouble in Paradise
By ROBIN GOLDWYN BLUMENTHAL
IT WOULD SEEM TO HAVE IT ALL: four bedrooms, a guest house, a pool and a rock waterfall. But the vacation home in Naples, Fla., hasn't been drawing much interest from buyers, so the seller recently threw in that most modern of amenities: the $1 million price cut. That's brought the asking price down a full 25%. "If you want to sell, you've got to go back to '04 prices," says Chip Harris of Coldwell Banker Previews International, which is handling the property.
The market for second homes could use a second wind. After a long string of double-digit annual price increases, a number of second-home meccas across the country are suddenly suffering from plunging sales volume and burgeoning inventories of unsold homes. Result: Naples-style discounting is starting to spread. It hit the town of Pocasset, on Massachusetts' Cape Cod, just as retired executive Jack Reen was trying to sell his four-acre, six-bedroom beachfront home. He cut the price several times, for a total of 42% off the listing price, before striking a deal at $3.95 million. Reen takes a philosophical view of the experience, noting that the original price was set at the top of the market. "Calling the tops and bottoms is impossible," he says.
Barnstable, Massachusetts: One of the first meccas with a drop in prices.
Though the official figures on sales prices have yet to reflect the current round of cuts, interviews with real- estate pros and others strongly suggest that the averages are deteriorating in a number of key markets. Just look at green and hilly Litchfield, Conn., about a two-hour drive from New York City. It was a magnet for Wall Streeters during the past five years, and prices climbed accordingly. But in the past 10 months, prices in the lower end of Litchfield's market -- homes of $300,000 to $600,000 -- are down 12%-14%, and volume is falling at the next level up, says Stephen Drezen of the local Portfolio Properties Group.
IT'S ALL A BIG CHANGE from the seemingly endless rises in prices. For more than a decade, baby boomers have been flocking to the second-homes market and lifting prices, just as they'd earlier lifted the market for primary residences (See Barron's "Eden for Sale," July 3, 1995). The market barreled ahead during the past few years ("Paradise Found," May 31, 2004), and the demographics -- 75 million boomers -- still bode well for long-term growth. But first, the market has some correcting to tend to.
While pundits debate when the bubble might burst in the primary-housing market, the air already is whooshing out of parts of the second-homes market. Naples, on the sun-drenched edge of the Gulf of Mexico in Southwest Florida, is perhaps the most striking example.
Vacationers long have been attracted to Naples' proximity to water, the Everglades and shopping at the likes of Saks Fifth Avenue. Last year alone, buyers bid up the area's median price by 30%, to $482,400. Charles Ashby, president of Naples' VIP Realtors, recalls that one of his sales associates was able to go down to a local bar and sell 26 units in a nearby Fort Myers high-rise the first night contracts were being accepted.
Today, about the most visible activity in that area is the 400 or so daily additions on the multiple listing service -- and price reductions by the dozens. In the 35 years that Ashby has been in the business, this is the first downturn he's seen, even counting recessions. "The mule died," he says.
With mortgage rates rising and home-price appreciation slowing or vanishing, buyers in Naples have pulled back in a big way. The area's sales of homes costing less than $1 million declined 45% in unit volume in the first four months of this year. More expensive homes fared somewhat better, falling 34%. But pressures at the higher end clearly are mounting. All along the pricey Gulf shore, builders still are tearing down old ranch houses and replacing them with two-story mansions, pushing the market toward a classic glut.
The Naples experience is being repeated, to one degree or another, in a variety of other vacation hot spots -- from Palm Desert, Calif., to Phoenix, Ariz., to Ocean City, N.J. Phoenix in recent years has been overrun by property flippers from California, says Mike Messenger, president of Russ Lyon Realty in Scottsdale. But unit sales now are down by 40%-42%, and the city's inventory of unsold homes has shot up more than five-fold, to 39,000.
Likewise, the number of homes for sale on the Multiple Listings Service for the Falmouth area of Cape Cod is up about 65% from a year ago, says Lynette Helms of the local Real Estate Associates. With numbers like that, more price cuts can't be far behind. In fact, the Cape Cod town of Barnstable is among the first of the second-home meccas to show a decline in median prices in the figures tallied by the National Association of Realtors. The price was down 1% in the first quarter, to $385,000.
It's true that the total second-homes market nationwide has managed to keep posting gains over the past two years. Some 3.34 million second homes were sold in 2005, up 16% from 2004, according to the realty trade group. The median price of a vacation home was up 7.4%, to $204,100, and prices have continued to rise in many markets.
But the Realtors' chief economist, David Lereah, expects the volume of second-home sales to decline at least somewhat this year. And there's every reason to think that some markets could be hit hard.
For starters, many second homes have been sold not to serious vacationers but to speculative investors hoping to cash on the national real-estate craze. How else to explain why six out of 10 second-home owners surveyed by the Realtors group own two or more homes in addition to their main residences?
The danger is that if enough of those investors decide the market has peaked, they could trigger a selling frenzy throughout the second-homes market. That, in turn, could add to the pressures in the main housing market. After all, second homes now account for a full 40% of all homes sold in America.
Statistics compiled for Barron's by The Local Market Monitor, a Wellesley, Mass.-based consulting firm, show just how big a role can be played by investors. In Myrtle Beach, S.C., long a favorite vacation and retirement destination, investors owned a full 58% of properties in 2004, the last year with available data. Though Florida communities accounted for eight of the top 10 investor-owned hot spots, Wilmington, N.C., clocked in at 38%, Las Vegas at 26%, and Honolulu at 23%. The normal level is closer to 14%. (See table nearby.)
Says Ingo Winzer, president of The Local Market Monitor: "This makes me very worried because it implies that the price increases have been driven more by speculators than by people who are going to hold onto these properties, and indicates to me that there's a speculative boom."
The price runups of the past several years are reason enough for concern. A report from Cleveland-based National City, a top banking and mortgage concern, points to serious overvaluation in a number of second-home hot spots in Florida, California and elsewhere.
Tucson, Prescott and Phoenix in Arizona are estimated to be as much as 52% overvalued based on income levels, population densities and historical prices. Also high on the list: Bend, Ore., and New Jersey's Ocean City and Atlantic City, where homes are deemed overvalued by 50% and 60%, respectively. (See table.)
Behind all this is a fervor eerily reminiscent of the late 1990s on Wall Street. Some 65% of second-home owners surveyed by the National Association of Realtors said they considered their second homes better investments than stocks, and 29% said they planned to buy additional properties within two years. An eye-popping 64% of investors with four or more properties planned to buy another property within two years.
