Nantucket Report: Wealthy Homeowners Primed to Suffer Major Pain

I recently had the chance to do some first-hand investigative reporting on the crash of the Nantucket real-estate market.  Here's what I found.

In case you don't give a damn about Nantucket--most people don't--think of Nantucket as a microcosm of the next segment of the real-estate market that's poised to collapse: The super-expensive fabulously wealthy communities at the high end who heard for years that they were immune.

Some analysts think the high-end will be the next segment of the real-estate market to crash.  And the situation on Nantucket certainly supports this view.

As everywhere else, real-estate prices in Nantucket went vertical about five years ago.  In the early 1990s, the average house on the island sold for about $200,000.  Two years ago, the average house sold for well over $1 million (and you still have to work hard to find houses listed below that).  Your basic 3-bedroom, 2-bath with a tiny lawn in the middle of town costs $1.5 million.  Dozens of houses listed at more than $10 million.  The ex-president of Goldman Sachs recently listed his for $55 million.

But, of course, that's all fantasy, because right now houses just aren't selling at all.

Why not?

Because sellers are still engaged in a mass-hallucination, helped along by encouraging noises from desperate real-estate agents who will say and believe anything to retain clients until the market finally recovers.

In other words, on Nantucket, as elsewhere, the current mantra of most owners is: "We'll just rent for a year until the market comes back."

In fact, the general feeling on the island is that the 5X+ price appreciation in the dozen years from the early 1990s was just the normal rate of wealth-creation that a Nantucket homeowner can expect and that prices will surely soon bounce back to the peak levels they hit a couple of years ago and then rocket higher.

Meanwhile, would-be buyers feel differently.  They look at the prices Nantucket sellers are asking, and they wonder what on earth has been dumped into the island's water supply.  They also look at all the rental vacancies this summer, and the willingness of many homeowners to negotiate on rent, and observe that they would be nuts to buy now when renting is so relatively cheap.

(For a still-steep $2,500 a week, you can get a house that would list for $2 million right now.  Assuming the homeowner rented the house at that rate for 12 weeks, the homeowner would gross $30,000 for the summer.  If a renter were to buy the house, meanwhile, the renter would pay about $100,000 a year in financing cost--assuming a 100% mortgage at 5%--plus taxes, insurance, etc.  So you could rent for 12 weeks on the island instead of buying and save yourself at least $80,000 a year.)

The rare bear on Nantucket real-estate, meanwhile, observes that many of the folks who bought in in the boom years from 2003-2006 need to rent their houses for a chunk of the summer at huge prices.  And some of those folks have since been fired.

So, the rare bear predicts, this fall will finally mark the sellers' capitulation, as Nantucket sellers  cut their losses and dump their houses for what the market will bear.  That level is likely at least 50% below peak prices, or another 30% below most asking prices today.

And how about the Nantucket economy?

It has been clobbered.  Thanks to the building boom of recent years, the economy became highly dependent on construction.  One resident says unemployment hit 16% this winter and that more than a thousand families had given up and left the island.

This resident also reports that the low end of the Nantucket real-estate market has already crashed: Some teachers in the local school system had listed their modest house for the island-average selling price of about $1.2 million... and ended up selling it for about $600,000.  So that's a 50% decline.  And there's likely a lot more where that came from.

TAKE A QUICK, FUN TOUR OF NANTUCKET REAL ESTATE

See Also: Real Estate Market Update: Plenty Of Downside