THE GREAT RECESSION IS JUST A PAINFUL MEMORY
Data analysis confirms that we are certainly past the bottom of the longest lasting downturn since the Great Depression. Vacation homes typically lag major market residential by 12-36 months and with asking prices for Northern Michigan real estate up 10%-20% (based upon 24 month sold price per sq ft averages), the past four years of heavy discounting is now over.
July is the height of our inventory accumulation cycle with most if not all of the well-priced properties selling to a more confident buyer base. With the stock market indices setting all-time record highs, investors have been reluctant to redeploy capital but this will probably change as returns slow down and profit taking occurs due to trading range consolidation. Momentum driven exuberance is bound to fade if top line performance continues to stagnate, paving the way for alternative asset class investments. The good news is that an increased confidence in net worth and employment income have historically driven demand for high end luxury good spending. I n combination with baby boomer demographics, a highly affluent customer base, the stage is set for the return of our long term 5% rate of appreciation, supporting the premise that you can have fun and make money if you know how to go about it.
During the worst of the Great Recession prices dropped by about 20% from high water mark 2006/7 valuations but have since rebounded, cutting that loss gap in half. Looking forward, our most immediate concern is a fading buyer window which is probably already over for reasons too complex to address in an efficient manner. A recovering price structure in combination with unsustainably low interest rates means that the cost of ownership may never be lower; it’s just hard to know how long discounted pricing and the artificially manipulated FED cost of funds will last.
Consumers continue to struggle with the idea of high end luxury good spending, much less an extravagant Northern Michigan property, in these volatile and still uncertain economic times. Why should such an idea even be considered when frugality and de-leveraging are all the rage? Financially savvy consumers intuitively understand timing and the scarcity of unique assets; knowing that prices are down, cost of capital is at record lows and windows of opportunity short lived. The stock market continues to be riddled with insider trading scandals, bonds are poised for massive losses due to Federal Reserve manipulated interest rates, and with cash paying almost nothing why not consider an asset class that can deliver an immediate lifestyle dividend in combination with a history of reliable and likely to continue long term appreciation?
The big story for the next couple of years is going to be the lack of available inventory. Best buy opportunities are still out there but not as plentiful as one might think. Six years of market illiquidity should have produced plenty of supply as sellers waited for market conditions to improve, which they have, but the exact opposite has occurred. Maybe prices aren’t yet high enough or perhaps potential sellers think of their Northern Michigan property as a family legacy asset; but no matter the reason they’re just not selling. Supply vs. demand ratios haven’t been this low since 2006.
CAN A GOOD DEAL STILL BE FOUND?
Absolutely, if you know how to go about it. Finding a good deal requires patience, perseverance and an in depth understanding of relevant valuation metrics, but if you actively engage in the process there will be opportunities.
A typical example would be a buyer interested in a family home:
- With 4+ bedrooms;
- Located within a 5-10 minute drive of the chairlifts or sandy beach;
- Purchase price not to exceed $2 million;
- Short term rental income offsets;
- Upside appreciation profile.
A search produces 40 results from which a short list of best fit properties are selected. Candidates cannot suffer from pricing defects, environmental defects or shell and core/floor plan defects. The top 25% of the results yields 10 possibilities that make the final cut. Past experience suggests that only 2 of the presented homes are likely to be of serious interest which is a small fraction of total inventory. The challenge here has to do with statistical probability: The odds that one of the two short listed properties is owned by one of five price realistic sellers is only 10% (2/10 x 5/10 = 10/100) making the chances of a successful acquisition both frustrating and alarmingly challenging. So much for buyers who think they are going to get the deal of a lifetime, from sellers who are patiently willing to sell, on the one day that buyer happens to be in town looking at real estate.
So how does a buyer go about finding a killer deal with all of the right ingredients? The answer: Clients who know the most, have identified exactly what they want, and are prepared to act when the right property presents itself, get the best deals.
Data research, shows the following to be true:
- The Northern Michigan property market is at the end of a 10 year structural correction cycle which started first quarter 2008.
- Leading Indicators show inventory levels at below long term absorption averages.
- Capital markets are improving as a result of the biggest stock market run-up in modern economic history.
- Demand for high end luxury goods is up.
- Consumer confidence and GNP performance is strengthening and a favorable FED monetary policy is in place for now.
- Well-priced vacation homes have been selling but buyers are still reluctant to commit.
As the fear subsides there will be an increasing appetite for yield and diversification ultimately bringing an end to the current capital preservation mentality. All of these indicators support a “take action now” strategy with the key being to get out in front of the herd while there are still deals to be had, the worst is over, but the stampede towards freer spending has not yet begun.
BECAUSE IT’S NOT ONLY A HOME … IT’S AN INVESTMENT