Page 2 of ETCETERA
An Economic Primer on Martha's Vineyard Real Estate
The following analysis is a hypothetical opinion of the Real Estate Market on the Vineyard.
MICRO ECONOMIC PRICE THEORY ON THE VINEYARD: We will attempt to discuss it in easy financial terms. There are several statistics that you must be aware of before we proceed. It is our opinion, based on a very small statistical analysis, that Martha's Vineyard real estate has appreciated approximately 26% per year since 1972 as a straight linear equation. That is three decades. Is it a hard statistic? No. Is it pretty close? Yes! Beginning with the year of 2007, the previous 9 years on Martha’s Vineyard had averaged an inflationary rate of 20% per year as a quadratic compounded equation. The national average had been about 9% per year on this compounded basis for the same prior nine years. The Vineyard can expect somewhere around 26 percent per year on the linear basis. We do slow down, but historically it is usually a very short period of time. Effectively, we have a statistical inelastic increasing demand, based on a consistent expanding population of world wealth.
Regarding stock market investments in juxtaposition to real estate on the Vineyard, please remember that many stocks do not pay a dividend. They simply appreciate in their stock capitalization value, i.e. Microsoft. It is truly a well managed good long term investment. When examining the concept of Martha's Vineyard real estate, consider the juxtaposition and view the following concept. Many professional ball clubs are purchased at one figure, i.e. $20,000,000 and sold for $120,000,000 five years later; yet they failed to make exceptional earnings. It is because there are a finite number of ball teams within a league that limits the supply. Somebody wants them, and they have potential inflationary capitol value because they are DESIRABLE, even though they presently may produce poor earnings, i.e. - the Red Sox which sold for $770,000,000 a few years ago. The real estate league in the Northeast is limited and Martha's Vineyard is one of the top teams.
If you are going to indicate to any lending institution that you are renting to others, they are going to be looking at earnings after taxes less depreciation & interest to be 1.2 times your principal and interest payments. Bed and breakfast facilities effectively don't pay taxes because the revenue stream is absorbed by the owners, usually. Your interests may or may not be a bed and breakfast, but it would be considered income- producing property and the banks would consider it as such. Otherwise, your current financial income situation would have to cover the mortgage, which should probably not exceed 25%.
It is important to discuss the equity investment on the asset value of your down payment. We have already mentioned that real estate on Martha's Vineyard over the past 30 years has appreciated on a linear basis at 26% and on a quadratic basis of 14% per year on average for the past 30 years. The stock market has appreciated on a compounded basis at 10% per year annually for the past 30 years as indicated by Peter Lynch. This means that even the down payment would earn on a quadratic basis somewhere around 4% per year in excess for opportunity revenue loss. Consequently, we may calculate the following as the annual net appreciation on your down payment.
Annual quadratic appreciation 14% Effected revenue credit Less alternate investment 10% Effected compounded revenue debit opportunity lost
Annual quadratic appreciation + 4% long term gain on your down payment
We are effectively saying that it is our opinion that the value of the property will at least double in 6.6 years assuming normal circumstances. This is a rough statistic but it is our humble opinion that a 30-year historical trend is backing it up. We also feel that the average weekly rental for a median priced Home will rent for $2,000 to $2,500 per week for 10 to 12 weeks. Of course, these are ballpark figures. You will pay a little more to maintain your home than on the mainland, but not of a material amount. This is more than offset by the fact that you will have a much higher potential of renting your property on the Vineyard than other areas.
Also consider - if you decide to retire on the island someday, you can convert your home into a permanent residence, and then sell the property with no capital gain up to $500,000 if you are married. We consider that a pretty good 401K with the additional benefit of not paying the capital gains tax as you will be required to pay when dealing with stocks, eventually. Presently the IRS requires you to live in the property for 5 years if you have used the property as a rental income property, which is very reasonable conversion period from business to residential. If you used it for only summer activity then they require you to live in the home for any 2 of the last 5 years to treat the $500,000 exemption from capital gain taxes. This allows you the flexibility if and when you were to sell the Vineyard home which may not fit your needs at that point in your life.
The asking price is one thing and the selling price is totally different. The 2001 recession technically ended December of 2001. It was a business recession, if you will, where-by the unemployment rate hovered around 5.7%. That was the best recession we remember. The hardest hit, of course, had been the Hi-Tec sector. However that sector had previously been driving the prices up tremendously causing a demand-pull situation. We then simply settled down a little on the island. We prepared for some kind of recovery with manufacturing in military production, biotech, and our infrastructure - such as bridges, sewers, and water. We got it.
Regardless, we don't seem to be turning over homes that were bought for $11 million and sold the next year for $22 million. We never really did a lot of that anyway. That market is still there but has virtually ceased, where the buyer is waiting to make an offer at the lowest ebb tide. The low-end and mid-range market is presently slow for the seller that is expecting to unload the home for the asking price value of 2004/2005 era. When the price seems to equal the actual comparatives of 2004/2005 as opposed to the asking price, the house sells. The statistics indicate that the latest downturn in 2006 & 2007 had only affected a 3% decrease in price on the island. We simply have sold fewer homes. Sellers have not been willing to budge from their asking price because there really has been no sense of urgency, until recently. The subprime scare has intimidated a few to lower their asking price to the actual selling price of the 2004/2005 era; but not many.
MACRO ECONOMICS AFFECTING THE VINEYARD: It is important to remember that the US population in 1940 was 127 million and today it is over 314 million. We never caught up in primary or second home markets. It will take us years to catch up regardless as to the temporary peaks and troughs. The results are long-term appreciation in values of homes. The time to BUY SAFELY is now, and the financial window of opportunity will close in the next 6 to 12 months. These peaks and troughs occur within the long-range cycle. We may have a period of uncertainty as to how long the trough will last, but pigs do not make money, but neither do skeptics. The prior existence of the negative yield curve between 3 year and 10 year bonds was forewarning us of the dangers of poor lending practices and ill informed mortgagors and mortgagees.
This statistic had never happened before, and predetermined the existing slow period. This slow down in the number of sales in real estate is arguably confusing but surely short term, especially when one understands that the housing market is only 5% of the total economy. We are not and never were in a recession during this era. We didn’t move into a mathematical recession until the latter part of 2008. We then proceeded out and we’ll be on our way shortly to a moderate recovery as soon as the Federal Reserve advises the banking community to drop the down payment from 20% to a reasonable 7%. I would attempt to explain the Federal Reserve’s Policy and the mathematics behind this statement with regard to low interest rates and high down payments, as well as disruptions in international economic growth, but it would take too long. My opinion is that we are within 10 months away. High-Tec, health-care, mid-sophisticated manufacturing, and other commodities will achieve different supply and demand curves, but it will be the same old up-tick in real estate, only at a moderate rate. Think population growth statistics with an ageing population that lives longer and view some of the statistics in “Simply Incredible Data,” and remember history repeats. Ninety five percent of the economy and its economic indicators are strong which will change the fear factor in the months to come. We have had an emotional slow down which has not affected a material change on the island.
There will never be a better time to buy than now. That goes for selling as well. If you have a property on the island and want to move on; sell it and buy a good stock or property, elsewhere. The slowdown is virtually universal, so you will catch an opportune time to execute your financial movement.
Do not hoard the cash. You have made money on the Vineyard property and you can move on to buy elsewhere without the debt on another property at a similar reduced price or a stock at a similar reduced value. The underpinning of the American economy is extremely strong, and the dollar is going to come roaring back, affecting higher interest rates. We manufacture more than any other country in the world. We simply manufacture high profit items that are extremely sophisticated like heat-seeking- missiles. We don't make sweaters. It is called the "law of comparative advantage" and the gross dollars are more than any other country. This fortunately or unfortunately allows us to buy all kinds of foreign toys because of the high profit made on guns as opposed to the old familiar metaphor of butter. This hurts our trade balance, but provides foreigners with a plethora of American dollars to buy stocks, bonds, and houses on Martha's Vineyard. The Vineyard is a safe hedge-haven just like U.S. Bonds and U.S. corporate stocks. We have more coal and oil in the ground that any other entity. Politically we have chosen not to use it and we have politically chosen to keep the dollar extremely undervalued just as the Chinese. With the flip of the coin shortly, these two factors will change and you will be saying why didn't I listen to Hughes and J.C. Murphy - the wise old sage of Real Estate on the Vineyard.
We consider the second home market as the best 401K, metaphorically speaking. Retirement would provide the opportunity to establish residence for a period of time to catch the previously mentioned $500,000 tax exemption from both Federal and State if and when you decide to sell your Vineyard Home. It offers you the opportunity to take or not take the tax credits where the home would have substantially appreciated as previously discussed.
There is a tremendous amount of discretionary liquidity sitting and expanding exponentially on the sidelines, waiting for the right moment to invest in safe assets with good appreciation and or dividend income. As previously mentioned, we feel Martha's Vineyard is such a haven.
The above analysis is simply our opinion and should be completely analyzed by yourself and your own financial specialists. We are simply real estate sales people.
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