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who what where when how why

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Q u ar t e r

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6›1 Our Aha Moment!

answering six critical questions provides uncommon insights

My Aha Moment I think it’s normal to feel a mix of emotions when you have one of those “aha” moments. A moment of sudden insight and comprehension. For me it was a sense of a true breakthrough about how Nantucket real estate research should be undertaken, along with disappointment that I had missed it all these years. We need to tell people more than what happened last year. I realized that simply looking backward through this data is like driving by the rear-view mirror. So here’s what we won’t do: we won’t simply drown our readers with MLS data dressed up with colorful charts. To tell a complete story, you need to ask more questions. Get more data. Different data. Think more deeply. It led to our icon 6>1. Asking and answering 6 key questions will lead us to sharing with you a more complete, more insightful view of the island real estate market. So going forward, this will be our approach to research.

1

We know What is selling. That’s what we previously (and all others currently)

focus on exclusively. It’s certainly helpful, but while others will stop here, we’ll ask five more questions.

2

We’ve hired two demographers to analyze Who owns island real estate.

Turns out there are at least four different profiles of Nantucket buyers.

3

We’ve commissioned analyses of Where buyers come from. Turns out

it’s probably not where you think.

4

We’ve looked hard at When sales

5

We drilled down into the structure of

transact. Apparently old adages about

hot and cold seasons aren’t entirely true.

Alan Worden is Man­aging

Broker for Windwalker William Raveis and a recognized leader in real estate research. He is also co-founder of Nantucket’s Westmoor Club.

PJ Kaizer conducts market

research for Windwalker. He is a Commercial Loan Portfolio Officer with Cape Cod Five Cents Savings Bank and a member of the Nantucket Capital Committee.

hundreds of purchases to learn How

the financing of house purchases change across price ranges.

6

The Answers Team

We believe we know Why the Nantucket market has remained strong. And

Alison Baumann focuses on commercial-real-estate market research and economic development in New York City. She holds a Master’s in City Planning from the University of Pennsylvania.

despite our focus on quantitative analyses, we actually think a qualitative analysis is key to understanding why.

We couldn’t be more excited about this new approach to research. We’ve got a bigger, more diverse, and more experienced research team. We hope our breakthrough about 6>1 provides you a truly

Anna Tapp is a mapping

and demographics expert asking “Who?” and “Where?” questions to help clients find practical connections between customers and the world.

insightful look into our powerful, complex real estate market. And we’ll use that framework throughout the year to provide ongoing insights. Let us know how we can be of value to you!

—Alan J. Worden

Manas Mallik has an ex­

pertise in title, open-mortgage, and assessor’s searches. For 6>1, he scrubbed home-sale data to discern the relationship between second-home and off-island home values.

what

Looking back and surging ahead

What Sort of Year Was 2015? Part of our goal is to “Revel in Insight” and not “Drown You in Data.” Want to know what sort of year 2015 was? Simply put, it was a Silver Medal to 2014’s Gold. 2015 came up slightly short versus 2014, but can you blame it? Looking all the way back to the beginning of 2014, it seemed like everything was in place to push the Nantucket real estate market to levels not seen since the last boom in 2005-2006. US equity markets in 2013 wrapped up their second straight year of well-above-average returns, interest rates were being held at historically low levels, and the local real estate market was coming off its finest two-year stretch since before the “Great Recession.” It is no surprise then that 2014 started with a bang—and never looked back. The 102 transactions and $170 million in volume in the first quarter were highs not seen since 2006. Fast forward 9 months and 2014’s results were staggering, with 524 transactions and nearly $1 billion in volume. Mission accomplished. As we flipped the calendar to 2015, opinions varied as to whether or not the market could maintain this torrid pace. Equity markets enjoyed yet another solid year of returns, national real estate markets continued to boom, and, all-in-all, many expected the good times to keep on rolling. Others, however, were of the opinion that things can’t go up in a straight line forever. As it turns out, based on transaction and dollar volume (the “King” and “Kong” of our market data), the latter argument held true: 2014 experienced year-over-year declines of -�% and -��% respectively. But that’s not the whole story. Other, equally important metrics illuminate 2015 as an excellent year overall. A Silver Medal winner for certain. Here are our top four insights:

Sales Volume ($)

$1,400,000

700

# of Transactions

600

$1,000,000

500

$800,000

400 $600,000 300 $400,000 200 $200,000

100

$0

0 1996

1997

1998

1999 2000 2001

2002 2003 2004 2005 2006 2007 2008 2009

2010

2011

2012

2013

2014

2015

on the podium 2015 takes the Silver Medal for market performance, behind 2014’s Gold Medal.

Number of Transactions

Dollar Volume in $000s

$1,200,000

800

1

On average, sales prices relative to original listing prices, last asking price, and assessed value as well as the average marketing time per property (measured by the number of months that a property was listed on the market) all strengthened year-over-year to their best levels

since 2005. What it means? More realistic pricing by sellers and increased demand by buyers resulted in stronger prices being paid for properties over

shorter marketing periods.

2

The median single-family home price increased year-over-year by approximately 7% despite decreasing transaction volume.

3

Vacant lot sales rose from 89 in 2014 to 105 in 2015, a level not reached since 117 vacant lots traded hands in 2005.

What it means? The spectrum of sale prices from the lowest low to the highest high increased such that the exact mid-point price for a

single-family home increased year-over-year. What it means? This illustrates the preference of end-user buyers and spec builders for new product and their willingness to undertake

sometimes difficult permitting during a time of limited supply.

4

Only 5 properties were taken by lenders via foreclosure, the fewest since the start of the housing crisis

What it means? The lingering effects of the “Great Recession” continue to fade into

the rear-view mirror. These developments paint a picture that suggests that even though we didn’t test 2014’s $1-billion milestone, there is a lot of continuing, positive momentum.

So How Is 2016 Doing? In a word, the 2016 market could easily be described as “stunning.” Through the first half of 2016, markets stand strongly ahead of 2015 in terms of both transactions and dollar volume—up 29% and 30%, respectively. Even when compared to 2014’s near-$1-billion market, year-to-date 2016 leads 2014 by 4% in terms of transaction volume and by 8% in terms of dollar volume. One interesting trend that we identified since the beginning of this impressive market run in 2012 is that within each year, quarterly-transaction and dollar-volume totals increase successively from the first quarter (1Q) through the fourth quarter (4Q). This has held true for both metrics in every instance but one, when dollar volume fell slightly from 1Q15 to 2Q15. With this in mind, 2Q16 needed to post some strong results to keep the trend alive. Lo-and-behold, after scrubbing preliminary sales data through the end of June, that challenge has been met. 2Q16 saw 124 transactions (112 in 1Q16) representing $213 million in sales ($197 million in 1Q16). Comparing these lofty totals to the gold standard that is 2014, we also see that 2016 is the new pace-setter with higher transaction and dollar-volume totals in each of the first two quarters than in 2014. Other metrics also support the “stunning” characterization of the market so far this year. Compared to 2014, the average transaction price of all sales through the first half of the year is 6% higher, the average transaction price relative to last asking price has increased by 2%, and the average marketing time required to sell a house, measured by a property’s months on market, has decreased by approximately two months. The single-family home (SFH) segment of the market continues to drive current market strength, outpacing every total from 2014. Through the first half of the year, SFH transaction volume is up 10%, average SFH transaction price is up 15%, and the median SFH transaction price is up 18% as compared to the same totals through the first half of 2014.

Through June 30

All Transactions (excludes foreclosures)

good half 2016 beats the same period in 2014, the best year since the “Great Recession.”

2016

2014

%Change

Transaction Volume....................................................................................236................................................ 226................................................. 4% Dollar Volume ($000s)............................................................................$410,031..................................... $380,051.................................... 8% Average Sale Price ($000s)....................................................................$1,737............................................ $1,641............................................ 6% Median Sale Price ($000s).....................................................................$1,213............................................ $1,095........................................... 11% Average Months on Market.....................................................................9...................................................... 11..................................................... -18% Sale $ as a % of Original Price................................................................88%.............................................. 88%............................................... 0% Sale $ as a % of Last Ask Price...............................................................95%............................................... 93%............................................... 2% Sale $ as a % of Assessed Value............................................................114%.............................................. 123%.............................................. -7%

Sales Volume ($)

$600,000

Dollar Volume in $000s

350

# of Transactions

300 $400,000

250

$300,000

200

$200,000

150 100

$100,000

50 0

$0 1996

1997

1998

1999 2000 2001

2002 2003 2004 2005 2006 2007 2008 2009

2010

2011

2012

2013

2014

2015

2016

way out front 2016 (January to June) sales performance to date has been “stunning.” One interesting market anomaly thus far this year is that while SFH metrics are showing strength, the vacant-land segment has shown weakness. Average and median transaction prices for vacant land are ahead of where they were

Sachem’s Path

at this time last year, but they all trail totals established through the first half of 2014, with transaction volume down 13%, average transaction price down 16%, and median transaction price down 19%. One possible explanation for the poor performance of the vacant-land seg-

One market anomaly

ment in 2016 relative to 2014 is the limited supply that is available. Since 2014,

Some worry that the average sales price for

the year-round housing crisis directly contributed to the surge in newly built

the first half of 2016 has fallen 10% versus

residential and mixed commercial/residential rental properties that required vacant land. We have also witnessed, and will continue to witness, the marketing and sale of newly constructed, high-end speculative investment properties that were built on land purchased in 2014 and early 2015. As the supply of attractive, well-priced developable residential lots diminishes, its impact on the fundamentals of the vacant-lot segment will continue to be noticeable.

2015. That’s where insight helps and raw data hurts. There’s a “one time” event that has skewed average sales prices lower. Starting March 1, properties in the Sachem’s Path affordable-housing development began to transfer to the winners of the affordable-housing lottery. Since then, 15 of these deed-restricted, affordable SFHs have transferred at an average price of $362,800. That’s a huge win for affordability on Nantucket, but it does impact average prices of sold properties. Removing this unique group of price-controlled properties from the analysis, the $2,262,977 average SFH price is nearly unchanged through June 2016 versus the same period last year. A better metric is to look at the median value—or middle value—of SFHs. Year-to-date in 2016 the median value of SFHs is up 9% year-over-year, and 18% when excluding the price-restricted properties.

Number of Transactions

$500,000

400

why

The art of quality time /

By Alan J. Worden

Growing up on the water near Cape Cod, I was the kid whose bedroom walls were plastered with pictures and drawings of sailboats. The first time I sailed away from the beach alone—at age 6—left an indelible memory. Even today, I can still feel the unexpected strength of the breeze and the uneasy heeling of the sailboat. Given this lifelong passion, my friends weren’t surprised when, over a decade ago, I decided to take a year and set sail double-handed on a voyage covering half the globe—14,000 miles from Nantucket to New Zealand. But most of those friends had three common misconceptions about what it would be like to go on a voyage like that. Ease vs. Effort First, they imagined day after day of ease, picturing us lounging on deck as the boat effortlessly glided over a glass-like sea. Nothing could be further from the truth. A double-handed ocean crossing requires constant, strenuous effort, the kind of bone-tiring work that makes you feel like you’ve truly earned your sleep. Frivolity vs. Reflection Second, many saw a year sailing halfway around the world as an indulgence. For me, it was actually an awakening; an opportunity to begin to order my adult, inner life. This voyage wasn’t a frivolous escape from the world but a

These remarks are excerpted from Alan Worden’s September 2014 speech that he delivered at The Nantucket Project, a prestigious annual conference that attracts the biggest thinkers with the best ideas on the planet.

purposeful examination of how I hoped to live in the world. Lonely vs. Connected Finally, people often wondered about the loneliness of an ocean crossing. Yet as I think of my time at sea, I don’t recall it as a time of isolation but rather as a time of connectedness. My experience was in fact a set of deep relationships—with the environment, with those we met along the way, and with the tiny, Pacific islands that provided unrelenting hospitality after weeks at sea. Most of all, my boat Windwalker served as a constant source of connection. It embodied the essence of home—a familiar place whose comfort let me be the person I was and whose challenges let me consider the person I wanted to become. When I decided to spend a year at sea, I was a Managing Director at a real estate investment bank in New York, and I went back to that world when I returned. Over the next few years, I worked hard to understand real estate cycles in markets across the country. Some days I felt that picking my way through a reef strewn anchorage was so much easier! But then I shifted my focus from markets to consumers. And slowly I began to discern how the motivations I had for going to sea were actually part of a broader trend that was driving certain real estate markets. Let me explain. With our personal time in scarce supply, there is a strong desire for our moments away from work to be more purposeful and more connected. Clearly, time is our most valuable commodity. And we increasingly want our choices to reflect the ancient conception of what constitutes “leisure.” For the Greeks of antiquity, “leisure” wasn’t the absence of activity but, rather, a specific type of activity—the strenuous pursuit of insight and meaning within a supportive community of like-minded individuals.

This changing conception of leisure has become a force in real estate because it’s linked to powerful demographic trends. The massive growth of pre-retirement baby boomers looking for memorable moments of leisure is driving markets. Of course, these forces aren’t in play in every real estate market, but I’m convinced they’re hard at work in special, family-focused locations like Nantucket. A friend recently noted: “People in Manhattan showcase framed pictures of their Nantucket homes in the their townhouse living rooms. But no one showcases their townhouse in their Nantucket home.” This visceral connection helps explain the enduring interest and growing value of real estate assets in places of genuine leisure, and Nantucket provides a tangible example of these forces at play. I have become a year-round resident of Nantucket, where I founded and now run Windwalker Real Estate— named after the boat I sailed half way around the world—a business that, now teamed up with William Raveis, responds to the growing demand for memorable moments of leisure. So my business and personal choices have been driven by the tenet that “places matter.” Just like there’s an economic return on investment, there is also an economic return—and an emotional return—on “place.” In my opinion, these returns will only gain strength in the years ahead. There are certain places that are special to each of us, places we are drawn to because they allow us to reflect, to share moments with people that matter, and to create memories that are meaningful. For me, for one year, it was my boat. Perhaps for you, it is Nantucket. Wherever that place is, we need to make these, all-too-precious moments of leisure, count.

Clearly, time is our most valuable commodity.

Windwalker, the boat that sailed halfway around the world and inspired our firm’s name.

where

Finding Nantucket owners’ primary homes

“ME-search” (as opposed to research) is defined as the dangerous propensity for some to believe their own desires and experiences translate to actual research. If a Nantucket real estate agent happened to sell 3 houses to people from Cincinnati, it might lead that agent to believe that Cincinnati represented a significant feeder market for Nantucket. So rather than conduct “Me-search,” Windwalker William Raveis hired demog­raphers to dig through the data to determine where Nantucket Second Homeowners (NSHs) owned primary residences. We started with 6,087 Nantucket addresses where tax bills were being sent to an off-island address. We cleaned the data for proper geocoding using a Google geocoding API feed. The result was 5,860 distinct street addresses. The latitude and long­i­­tude of each address was overlaid onto U.S. Census Tract data. A Census Tract is a small, statistical neighborhood within a county. There are 73,000 Census Tracts in the U.S. so it is almost two times more precise than the country’s 43,000 zip codes. The results:

The Northeast Dominates Our demographers used a Heat Map (opposite page) to illustrate the concentrations of NSHs. Four states in the Northeast (Massachusetts, New York, Connecticut, and New Jersey) comprise 63% of NSHs. Massachusetts has 31%, New York 15%, Connecticut 11%, and New Jersey 7%. At 6%, Florida ranks 5th, perhaps because of a concentration of Northeasterners relocating there.

Not So International A surprisingly small number of Nantucket second homeowners are international. Just 1.7%. Canada, the UK, Switz­ erland, and Germany are the most notable countries.

More Massachusetts Than Manhattan There’s a sense that New York generally and Manhattan (Wall Street) specifically drives the Nantucket market. But the data suggests Nantucket is at least slightly more dependent on Boston and its suburbs. Qualitatively, a lower-than-expected correlation between Wall Street and Nantucket is playing out as we look at real-estate data on Hamptons and Nantucket markets. During the first quarter, the Hamptons experienced a near-20% decline in the number of single-family sales compared to the previous year. Against a backdrop of global uncertainty, finance-sector employment fears, and a 12% decline in the Dow, Wall Streeters seemed cautious about second-home acquisitions. On Nantucket, the situation was markedly different. First-quarter sales were downright booming. The number of single-family sales rose 33%. Correcting for the “one time” sale of affordable units in Sachem’s Path (see page 3), single-family sales were still up 20%. We’ll be working with our demographic team to explore correlations between the Nantucket real estate market and the Boston and New York Metro economies. But our preliminary conclusion is that the Boston economy and Massachusetts buyers has more impact than Wall Street.

Who

Digging deep into Nantucket homebuyers

In thinking through Who owns on Nantucket we wanted to get beyond the basic assumptions of “July is for Bostonians and August is for New Yorkers.” Who actually owns Nantucket’s 6,000 second homes? To find out we posed the question to two professional demographers. First, they mapped the off-island address for nearly 6,000 homeowners. They mapped by Census Tract, a demographic neighborhood nearly twice as precise as zip codes (73,000 census tracts versus 43,000 zip codes). Next, it involved the use of a k-means statistic to create four profiles of Nantucket second homeowners.

“Upwardly Mobile” 43% of the owners live in very high-value areas outside of city centers. These census tracts are in the 99.8th percentile for income and 98.0th percentile for housing values. We can call this group “Upwardly Mobile” or even “One Percenters.” This group is in their mid-forties on average and are the most likely to have children, with an average household size of 2.8. They are only half as likely to have graduate degrees as the urbanites (described below), but more likely than either of the suburbanite categories.

“Young Suburbanites” 26% of Nantucket second homeowners might be characterized as “Young Suburbanites.” They are the youngest profile, at a median age of 35. They are much more likely than their urban counterparts to have children, and they live in areas with a much more modest median income of $66,000. Similarly, the average house is worth $300,000, which is not ostentatious for their locations.

“Established Suburbanites” At 23% of owners, this group is the oldest. They live in suburban neighborhoods with a median age of 50, and have fewer children at home than Young Suburbanites. Their education profiles are very similar to the younger suburban group, with not an over-abundance of graduate education; median income is higher, at $78,000; and their primary houses are worth about $20,000 more than the Young Suburbanites.

“Urban Young Families & Singles” 7% of the owners live in densely urban areas with 100,000 people per square mile. They are congregated inside Boston, New York City, Washington, DC (Capitol Hill area), Chicago, and San Francisco. Their median age is a young 38. An average of $472,000 median housing value has them on the higher end of a national scale—in the 96th percentile. They have the smallest household size, at an average of 1.8, and twice the number of graduate degrees as any other profile.

Nantional Percentile of Income

Upwardly Mobile

Young Established Suburbanites Suburbanites

Urban Young Families & Singles

% of Nantucket Owners

43

26

23

7

Median Age

45

35

50

38

Household Size

2.8

2.3

2.3

1.8

Nantional Percentile of House Value

98th

74th

77th

95th

Nantional Percentile of Income

99th

64th

77th

96th

heat is on We combed through the data on Nantucket homes whose owners have an off-island resi­dence. To see locations of those off-island homes, we employed Hot Maps and found the major concentraion of those homes is the Northeast; the Boston area in particular.

When

Nearly a third of sales occur “off-season”

It’s a common question. When is the best time for Nantucket real estate? There are all sorts of assumptions. “It must be summer. That’s when everyone’s here.” But that leads to, “People are too busy in summer. Maybe it’s fall, when it’s nice weather but quieter.” Then it’s, “For the buyer who delays in the fall, spring is the busy time.” Lots of questions. And we’ve got the answers. We started with a monthly analysis and charted every single-family closing from 2013 through 2015. Not surprising, the execution of Purchase and Sale (P&S) agreements mostly happen between June and September. But there are other ways to think about grouping the data. For any James Taylor and Carole King fan, a key line shows the way: “Winter, spring, summer, or fall. All you have to do is call.” Thinking seasonally is a valid way to organize the data. Often, sellers will not list their house from November through March, and sellers who haven’t found a buyer by early fall will often de-list their property until the spring. They inaccurately believe it’s the “slow” period and that their listed property will get “stale.” We believe that’s a mistake. Three key realities support this insight: ›› According to a joint study undertaken by Google and the National Association of Realtors, 90% of buyers searched online for real estate. They don’t need a site visit to engage in the buying process, so not undertaking robust, online marketing for the property you want to sell is a huge mistake. ›› The analysis of single-family home transactions on Nantucket in 2015 shows that 30%—almost a third—of all sales go under agreement from November through March. Properties need to be listed during times when a third of buyers are actively negotiating transactions. Not marketing in the off-season is equivalent to pulling your property off the market for the month of July, when 30% of sales also occur. ›› It’s impossible to predict when a buyer will buy. We have tracked P&S agreements for years by month. And we can determine averages. But the reality is agreements are reached every month on Nantucket. It’s simply impossible to predict when and what motivates a buyer to act during a certain period, so marketing continuously from the initial listing to putting the property under agreement is the smartest strategy.

Fall 23%

Spring 26%

november surprise Most Nantucket sales occur in summer. But not all sales.

Winter 16%

Summer 35%

how

Exploring homebuyer financing of purchases

In many mainland markets it’s typical to include a financing contingency as part of an offer to purchase. But in Nantucket, especially with sales above $1 million, financing contingencies are uncommon. Consequently, it’s difficult to know how properties are purchased—with all cash or with financing. And if the purchase is financed, how much debt is typically used? To gain insight we analyzed every Single Family Home (SFH) acquisition in 2015. We analyzed more than 300 public records representing $660 million in sales value, searching each transaction to understand whether debt was used, and how much. We searched through the Nantucket Assessor’s data, the Massachusetts Land Records website, and the Nantucket Land Bank records. Let’s start with the basics. 38% of all 2015 SFH buyers purchased with no financing. Totaling $329 million, that represented roughly 50% of total dollar volume. Not surprisingly, these all-cash buyers generally purchased the more expensive properties of 2015, averaging $2.9 million. So that leaves $331 million in acquisitions financed—62% of all dollar volume. These sales averaged $1.7 million. And, not surprisingly, and as illustrated below, we found that lower-priced properties were purchased were the highest amounts of leverage.

follow the money

80%

This chart shows the percentage of leverage across price ranges. The higher the house price, the less leverage involved. 38% of sales are all cash, representing 50% of all Nantucket sales dollars.

75% 70% 65% 60% 55% 50% <$1MM

$1MM$-2MM

$2MM-$5MM

$5MM-$10MM

>$10MM