The Decline of the Upstate NY Luxury Market

Since the peak of the single family residential detached market in Q3 2006, the median sales price has declined a total of 22.2%, from $360,000 to $280,000. As the housing bubble began to burst through 2007, the effects in Dutchess County were delayed in comparison to other regions of the nation. However, median housing prices nonetheless began to decrease in Q3 2007 and from Q3 2006 to Q1 2008 decreased 11.6%, a decline of approximately 0.55% per month. Beginning in March 2008, the housing market began to steeply decline, dropping another 12% from $318,275 to $280,000, a decline of approximately 1.2% per month. The following graph illustrates:

While the national housing market has been in decline since 2007, the Dutchess County market did not truly enter into decline until about Q2 2007. Beginning in Q2 2008, the rate of decline has increased and begun to spread across all housing markets, not just the typical single family housing market.

Dutchess County contains three areas of luxury second home estate markets, similar to the Hamptons market of Long Island, NY, the Historic Hudson Riverfront Estates, Quaker Hill, and the Millbrook Hunt.

The Historic Hudson Riverfront Estates, in the Towns of Hyde Park, Rhinebeck, and Red Hook, houses most of the historic "turn of the century" large river front mansions constructed by late 19th century industrialists as one of a number of second homes. These mansions are characterized by large land holdings, frontage or access to the Hudson River and connected by a series of former carriage roads running along the river bluff.

In the southeast corner of the county, in the Town of Pawling, is Quaker Hill, a historic community cherished for its rolling countryside, magnificent estates and famous residents, past and present. Quaker Hill is a region of the County where large land holdings predominate and are mostly composed of equine estates, gentleman farms and estate quality homesteads. Splendid views and protection from cookie-cutter development give added value to even the most modest properties. Zoning there requires a minimum lot size of five acres and 350-foot road frontage. Gracefully divided by old cemeteries and stone walls, the Hill still has its share of white clapboard farmhouses interspersed with much more ostentatious properties. Originally settled by Quakers in 1728, the Hill's panoramic views began to attract affluent summer visitors after the railroad opened up Pawling in the mid-19th century. Gov. Thomas E. Dewey was a Quaker Hill resident when he ran for President in 1944 and 1948. In 1968, The New York Times noted the Hill was a low-key ''community of reticent celebrities,'' a tone set by the resident who made the most lasting contributions to the area, Lowell Thomas, the radio news commentator and world traveler. Intent on preserving the place he called ''Paradise on Earth,'' Thomas purchased Quaker Lake, donated more than 1,000 acres of land to the Nature Conservancy and founded the Quaker Hill Country Club. Other well-known residents of the Hill were Edward R. Murrow, the radio-TV journalist, and Dr. Norman Vincent Peale.

The Millbrook Hunt is also a region of Dutchess County where large land holdings predominate mostly composed of equine estates, gentleman farms and estate quality homesteads. The Millbrook Hunt is a formal organization that sponsors English style horse events with fox hounds. Other horse events held outside of the Hunt includes Olympic style equine events (jumping, cross country and dressage) and polo matches at the Mashomack Club. The Hunt kennel, housing the fox hounds, is located on Kennels Road in the Town of Washington and is the official headquarters. Events are in scattered locations within the "Hunt" neighborhood, at sites called coverts where the hunts begin. The boundaries of the "Hunt" are generally NYS Route 82 on the west, NYS Route 343 to the southern, NYS Route 7 on the north with eastern boundary generally located westerly of NYS Route 22 along the western ridge line of the Oblong Valley, north/south valley along extreme eastern New York State bordering the States of Connecticut and Massachusetts.

The typical buyer is drawn by the open rolling nature of the general topography, an attractive mix of meadows, woodlands and open wetland areas; wildlife activity and presence on the wetlands is considered a positive as it provides nature watching, water fowl hunting opportunities and buffering of the home site from negative encroachments such as other housing and intensive agricultural activity. Soils conditions vary widely on many of the properties ranging from those with no limitations on residential use (buildings with basements and septic leach fields) to severely limited or a mix thereof. This isn't a deciding factor in the purchase of these types of properties as the typical buyer isn't interested in the developing the property as a subdivision under the "as of right" under zoning, but in maintaining the open nature of the property with conservation amenities intact.

Of the three estate communities, the most active is the Millbrook Hunt, which is a much larger geographic area than the Hudson Riverfront and Quaker Hill. Generally speaking, properties within the Hudson Riverfront and Quaker Hill markets come up for sale once a generation. The Millbrook Hunt, however, is a much more active market, similar to the Hamptons market on the east end of Long Island, enabling one to observe changes in the market due to economic conditions that would not necessarily be observable in smaller markets like Quaker Hill.

As mentioned previously, housing prices began to steeply decline beginning in Q2 2008. In past recessions, the Dutchess County Luxury Market did not typically follow the patterns of the greater housing market. Luxury market participants are not generally affected by adverse economic conditions which are heavy factors in the greater housing market. However, due to the unique nature of the current national recession, where industries which employ many luxury market participants – particularly the investment banking industry – are encountering unprecedented declines, there is evidence of a decline within luxury market prices.

From 1999 through 2006, the Dutchess County luxury market mirrored the greater housing market. Within the Millbrook Hunt, median sales price of improved estates increased 140% from $749,000 in 1999 to $1,800,000 in 2006. Median sales price of vacant estate lots increased 261% over that same time period, from $4,730/acre to $17,065/acre. Quaker Hill improved estates also saw an increase in median sales price from $565,000 in 1999 to $744,000 in 2006, an increase of 32%. Vacant lot sales also increased from $10,489/acre to $39,225/acre, an increase of 274%. Since 2006, the Millbrook Hunt has declined steadily, with the improved estate market losing 20.8% in 2007 and 21.4% in 2008 and vacant estate lots losing 16.6% in 2007 and then gaining 11.1% in 2008. Quaker Hill also saw a decline in the improved estate market, losing 14% in 2007 and then gaining 60% in 2008 (the 2008 number is skewed due to a once in a generation sale of the Lowell Thomas Estate for $11.3MM). There have been no vacant land sales in Quaker Hill since 2006. The following graphs illustrate:

In both graphs, trend lines show a decrease in the market, except for the Quaker Hill improved estate market, which is skewed by the Lowell Thomas estate sale in March 2008. Going back to 1999, total sales of vacant and improved land were analyzed in the Millbrook Hunt, which as a more active market than Quaker Hill, better reflects the current market conditions. Both graphs show a decline in sales price since 2007, with the Improved graph showing a decline of about 20% from August 2007 to January 2009, a decline of about 1.2% per month.

Looking at the most active segment of the Millbrook Hunt market, 20-50 acre vacant estate lots, the peak of that market segment occurred in Q1 2008, with two lots sales at approximately $43,000/acre and $32,000/acre respectively, far higher than sales before or since. As a way to further reflect the decline in the market, there have been no sales of 20-50 acre lots since July 2008, which is out of character for this market segment. The Quaker Hill improved estate market has behaved similarly since its apparent peak in 2007, as illustrated below:

Active listings of vacant land in the Millbrook Hunt and Quaker Hill show an average Days on Market at 370 days with some listings having decreased listing prices approximately 12%.
An analysis of the Hamptons/North Fork market in Long Island further substantiates this decline. According to a January 2009 study by Prudential Douglas Elliman, the Hamptons Market, which is similarly priced but much more active than the Millbrook Hunt and Quaker Hill, has experienced a 12.5% decline over 2008 from a median sales price of $975,000 in 2007 to $850,000 in 2008. As well, listing discounts in the Hamptons were 11.1% in 2008, similar to those in the Millbrook Hunt. While the exact date of the peakof the Dutchess County Luxury estate market cannot be ascertained, it is evident that the market peaked sometime in Q3 or Q4 2007. Since its peak, listing days on the market has increased to more than 12 months, while prices paid have decreased in the range of 12-20%.

Housing in the New York Metropolitan Area

Appraisal and Valuation Issues has a great post on the state of housing in Nassau and Suffolk counties on Long Island. James R. MacCrate, MAI, CRE, ASA approaches housing prices from the standpoint of affordability based on median family income. A few statements in that post that I find very interesting:

1. In the New York Metropolitan area, prices have been falling at an accelerating rate that is expected to continue into 2010 and maybe beyond. Unemployment has been increasing, with major layoffs starting at the end of 2008. As a result, the impact on housing in Manhattan and the surrounding suburban areas will escalate throughout 2010.
2. As the Federal Reserve lowered interest rates after 9-11 and underwriting rules relaxed, as witnessed by the re-introduction of low doc, no doc loans and the proliferation of adjustable rate mortgages, prices began escalating quite rapidly until peaking in 2006.
3. The median cost of housing on Long Island escalated to more than 37% as homeowners took on more debt, real property taxes increased, and utility costs escalated. In fact, some reports indicate that cost of homeownership on Long Island is in excess of 40%....If we excluded the wealthier communities, especially along the North Shore of Long Island, the cost of home ownership far exceeds the standards recommended by Fannie Mae and other government agencies.
4. Prices are not expected to stabilize until they fall to a point where the cost of homeownership is in line with the long-term average housing cost.
5. Median home prices in 2007 are more than 20% higher than they would have been had banks relied on normal lending standards.

Mid-Hudson in review, 1991 to 2008

Needless to say, 2008 was a pretty rough year all the way around. We've all heard countless talking heads describe the cause of our current economic crisis and do their best to forecast when we'll get out of this thing. As much as I care about the rest of the nation, I realize that what is most important to me - and my clients - is what has happened and what is going to happen in our local economy - the Mid-Hudson region of New York State.

Over the past few days, I compiled some relevant numbers on the Mid-Hudson region that could have played a role in the 20% decrease in home values we've seen since the peak of the market in 3Q 2006. If you're like me, I get the monthly reports from NYSAR and NYS Dept. of Labor, but I had yet to actually sit down and see what the market has been doing the last few years. What I found was pretty interesting.

As we all know, single family housing prices began to rise in 1996 after about 5 years of decline due to the late '80s/early '90s recession, in which we saw IBM lay off more than 17,000 employees. As the recession was coming to a close, building activity began to pick up in the Mid-Hudson Valley in 1995. This activity continued to grow until it peaked in 2000 and subsequently declined modestly during the 2001-03 recession following 9/11. Coming out of the '01-'03 recession, building activity ballooned in the first half of 2005, creating a mega-bubble of building activity from 1999 through 2Q 2005.

As building activity was increasing, net domestic migration, which measures the total move-ins and move-outs per year of an area, began to turn positive. Following the massive lay-offs by IBM in the early '90s, the Mid-Hudson region lost more than 13,000 people due to moving to other regions of the nation. In fact, in 1994, the Mid-Hudson had a net loss of almost 5,000 people. Yet, in 1998, one year before building activity really took off, net domestic migration turned positive, peaking in 2003 at 6,412 people. This bubble of move-ins created a surplus of demand for housing, fueling the building bubble and sailing the Mid-Hudson through the '01-'03 recession with barely a scratch.

Interestingly, building activity slowed considerably toward the end of 2004 and beginning of 2005, in step with a dramatic drop-off of move-ins to the area. By 2006, net domestic migration was negative and demand for housing was quickly decreasing. Sales volume peaked 9 months later in third quarter 2005 and steadily declined through 2006 - 08. Housing prices peaked one year later in 3Q 2006 and have been in decline since. Obviously, this is a classic case of over-supply. The following graphs illustrate:


Meanwhile, as all this is happening, we have the sub-prime crisis begin in 2007, the banking crisis in 2008, and now the beginning of the fall of the commercial real estate market in 2009. There are multiple theories about how these crises happened, which I will leave to people far smarter than me. What I want to comment on is what it has done to unemployment in the Mid-Hudson. Below is a graph of unemployment vs. median SFR sale price and net domestic migration vs. median SFR sale price. Both graphs show that as unemployment increased in the early '90s, migration and sale price both declined. As unemployment decreased through the late 90's into 2001, net domestic migration increased and so did sale price. As long as unemployment was low, sale price remained high, even though net migration was decreasing. However, once net migration went negative and unemployment rose, median sale price began to fall quickly (12% since June 2008).



So the big question: what does this all mean? We've been down this path before. It took the Mid-Hudson Valley about 5 or 6 years before median SFR sales prices really started to turn around back in the 1990s. As well, what we discovered was much of that turn-around was fueled by a migration bubble, with most of those move-ins coming from the NYC metro area. So here are a few take aways:

1. The Mid-Hudson economy is absolutely tied to the NYC economy. With the amount of people who moved from NYC to the Mid-Hudson over the last 10+ years, you cannot separate the economic engines of the two. As a long-distance bedroom community of NYC, where many of our residents work in the City, the Mid-Hudson goes the direction NYC goes.
2. Until unemployment goes down, housing will not go up. Unemployment and net migration are strongly linked. People will not live in a metro area that does not have jobs. As a bedroom community of NYC, our region has been massively injured by the loss of 65,000 finance jobs in 2008 alone. With such a dependence on NYC and the decline of NYC as the financial capital of the world, our region, as well as NYC, must re-calibrate their economic engines. Until we find a way to increase jobs, people will find more competitive regions to live and work in. In other words, we're somewhat back to where we were after IBM's massive downsizing. As a way to validate this, the Capital Region, 60 miles north of the Mid-Hudson, just saw median sales prices decline in the last two months (1% drop). The reason is due to the Capital Region's strong local economy, which was built over the last 15 years on typically recession proof industries - government, healthcare, and education - and a growing green-tech and nano-tech manufacturing industry (more on local economies in a later post).
3. This recession is going to take a while to get out of. Our initial forecasts show that sales volume will probably bottom out sometime during Q1 or Q2 2009 and will begin to pick up slightly in Q3 2009. However, we expect sales prices to continue to decline as much as 10% more through 2009 and possibly begin to level out in Q2 or Q3 2010.

I wouldn't put money on that last prediction, but the numbers are none-the-less interesting and certainly gives us some perspective moving forward.