To Buy or to Rent?
By AMY GUNDERSON
Published: December 29, 2006
THE Napa Valley ranch house, built in the 1970s, wasn’t much of a looker. And with a price tag of nearly $1.4 million, it wasn’t cheap either. But its location on Highway 29, the main drag through wine country, on an acre of land in the undeniably quaint town of St. Helena caught the attention of Jocelyn Singh. She had spent the last 12 years driving north from her home in Modesto, Calif., to stay in rental homes and increasingly expensive hotels during her regular wine country retreats.
For Ms. Singh and her parents, the time was ripe to buy.
Buy? In this market?
“We ended up getting it for $975,000,” said Ms. Singh, noting that the seller’s final price wasn’t too far from her initial offer of $950,000.
With the money saved on the purchase price, she was able to plow $120,000 into renovations, raising the ceilings and ripping down walls, and will soon plant grapes on the land. “By the time we are done with it, it will look very wine country,” Ms. Singh said.
Thirty percent price cuts in asking prices for homes aren’t the norm, but stories like this — with sellers willing to negotiate or even drop their asking prices — are increasingly popping up in suddenly cooling vacation home markets.
Among second-home shoppers these days, to buy or to rent is often the question. Until this year, the answer was pretty straightforward. Why rent when real estate prices in desirable areas — from coastal enclaves in Florida to beach towns in the Northeast to desert hideaways out West — saw a steady annual appreciation of 15 to 20 percent or more?
The surge in prices had buyers lined up at developers’ doorsteps, eager to pick up a condo (or two or three), and even the noninvestor types were patting themselves on the back watching their equity rack up.
But it’s no secret that real estate activity has nearly ground to a halt this year. Sales volumes are down, inventories of homes on the market are up, and it’s simply taking longer, a lot longer in some cases, to move listings.
Now, in many areas where second-home buyers flock, prices are trending downward. Home prices have already taken well-publicized hits in areas like South Florida and the Phoenix area.
Similar areas have witnessed a slowing in sales and an increase in inventory, and price drops may be on the way in those places as well, according to Cynthia A. Kroll, a senior regional economist at the University of California, Berkeley.
Since different factors motivate sellers of second homes (after all, a vacation home seller usually doesn’t have to unload a property immediately to, say, move to a new job), they simply might take their homes off the market or wait longer to reduce prices.
“That’s one of the reasons the price effect can lag,” Dr. Kroll said. “It can take awhile for the sellers to accept the reality of lower prices.”
While second-home buyers aren’t as sensitive to pricing as other buyers, slower appreciation sent investors — who had fueled much of that appreciation — out of the market. The National Association of Realtors predicts that 30 percent of all home sales for 2006 will have been second homes, down from 40 percent last year, and attributes much of that drop to the exit of investors.
And the places that saw the biggest influx of investors and the most heated activity are likely to see the biggest price drops. “Areas that had the highest appreciation and that were the hottest can cool the most,” said Edward E. Leamer, an economist at the University of California, Los Angeles.
Of course, the decision whether to rent or own might require the assistance of a crystal ball. After all, is $250,000 for a summer rental in East Hampton ever a wise financial move? Buyers hoping to swoop in on Hamptons bargains will probably be disappointed.
“The sky is not falling,” said Cee Scott Brown, a senior vice president of the Corcoran Group in Sag Harbor, N.Y. “There really are no good deals.”
He said prices haven’t budged much one way or the other because of “the standoff”: “The seller is saying ‘I’m willing to sit here,’ and the buyer is saying ‘I don’t want to pay what the last person paid,’ ” he said.
A result is that the number of transactions in Hamptons towns like Sag Harbor are off 20 percent from last year, although Mr. Brown said there had been a small surge in recent weeks.
Farther south, the rental decision seems much clearer.
“We are now in a market across the state of Florida of declining prices,” said Jack McCabe, a real estate consultant in Deerfield Beach, Fla., who tracks the rental market. “No one wants to buy into a falling market and risk that their home might be worth less than the amount of their mortgage.”
So there is a larger rental inventory than usual and “right now it does make good sense to rent rather than buy,” he said.
Prices in some Florida communities have the potential to dip more, according to Mr. McCabe, because of continued activity among condominium developers.
“Miami right now has over 22,000 condos that are under construction with tens of thousands more announced,” he said. “It is the poster child for the bubble. The vast majority will reach the market in 2007 and 2008 and that is when it will get bloody.”
ACCORDING to the Florida Association of Realtors, median prices are already falling. In Port St. Lucie and Fort Pierce, median prices for single-family houses dropped around 5 percent in November from a year earlier. The median price for a house in Palm Beach County dropped 6 percent in August from the year before, the first such decline since 1999, and slipped even more the next two months compared to 2005. In Panama City, condo prices were down 28 percent in the third quarter.
The real price pressure is even more pronounced when you consider that many sellers are resorting to incentives, anything from free flat-screen televisions to a few months of homeowners’ association dues, to lure buyers and their agents. Cathleen Flanagan of ZipRealty in Hollywood, Fla., said she received a flier for a house offering the buyer’s agent a commission of 4 percent plus $25,000, if the property sold by the end of the year.
In Provincetown, Mass., there are signs that next summer’s rental business might get a boost from the slow sales market.
“We are getting more calls for rentals for next year over last year at least in the three- to four-bedroom range for single-family homes,” said JD Bower, a sales associate with Provincetown Realty Group, noting that in early December he had already booked homes for July Fourth weekend and for August. “Everyone across the board is holding off because they think prices are dropping. Sellers are hoping to have properties under contract within the next month and a half, and if they don’t, then they will rent it out.”
Home prices in North Carolina have held up better than most places, but the Outer Banks is among the toughest areas hit, with the average sales price dropping 13 percent in October, and volume off some 30 percent. Investors who bought beach homes to rent are facing higher insurance premiums and higher mortgage payments as adjustable-rate loans were reset to higher rates.
“They bought these big homes expecting rental income,” said Scott Leggat, vice president of marketing at Outer Beaches Realty. But he added that competition and higher costs has caused their rental income to erode. “We are even seeing the occasional foreclosure,” he said.
Renters on the Outer Banks should expect a flat market this year, according to Mr. Leggat, with only the most luxurious properties able to command higher rates, a 5 percent jump, over last summer.
In Northern California, “properties under $1 million have reverted back to last year’s prices,” said Mike Silvas, the owner of Morgan Lane, a real estate agency with offices in wine country and in coastal areas of Northern California. “The Carmel market is the one that has really ground to a halt. Prices got to more than $1,000 a square foot and buyers finally balked.”
In Carmel, prices were off 5 percent this year through October, said Mark Wilson, an agent with Morgan Lane in Carmel. Properties in Monterey County, which includes Carmel, are sitting on the market for an average of 113 days, more than twice as long as a year ago, while in Carmel the average home is taking 93 days to sell.
Cape Cod has seen an influx of inventory this year, but that appears to be easing. Sellers, said Jack Cotton, the broker at Sotheby’s International Realty of Cape Cod, are seemingly coming to grips with the realization that big-time appreciation is gone. He told of a house with an asking price of $995,000 that sat untouched until the sellers whittled it down. “It dropped to $750,000 and had five offers,” he said.
Renting, no doubt, isn’t for everyone, and some buyers have already been waiting out the market, anticipating a dip. Cindy Lull bought a one-bedroom co-op in Fort Lauderdale this summer after several years of combing through listings, and paid about $75,000 less than the asking price.
“Just as I was ready to tell my agent that we would meet their price, they came down another $1,000,” Ms. Lull said. “We waited it out and I’m very glad. We paid a lot less than we would have a year ago.”
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