As everywhere, 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 lists for $1.5 million. Dozens of houses are 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 real-estate agents who will say and believe anything to retain clients until the clients finally get real the market finally recovers.
In other words, on Nantucket, as elsewhere, the current mantra of most sellers 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.
What do we mean, “relatively cheap”?
For, say, $4,000 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 10 weeks, the homeowner would gross $40,000 for the summer (or about $30,000 net, after costs and agents fees). 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 10 weeks on the island instead of buying and save yourself at least $80,000 a year. What might the same house be worth in a rational market, if rents hold at $4,000 a week? Say, $750,000. At that price, the annual carrying and financing cost might be $50,000, which would be close enough to the rental price that owning would become more attractive. But that assumes that the rental prices will hold…