Year-End Recap 2012

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Year-End Recap 2012 W I N D WA L K E R M A R K E T R E S E A R C H What a difference a year makes. In 2011 Year-End Recap, we reported that the strength witnessed in the first half of the year was followed by a disappointing second half. Worrisome mid-year macroeconomic news rocked what was already a fragile recovery, preventing 2011 from exceeding 2010 results. In 2012, the story had a happier ending, at least for the Nantucket real estate market. Transaction and dollar volume during the last six months of the year were nearly double that of the first, allowing the 2012 real estate market to stage a performance that has not been matched since the 2006/2007 markets. It seems the looming fiscal cliff and the expectation of higher future taxes added more fuel to a fire that had already been gaining strength. For the period ending December 31, 2012, there were 473 transactions representing $814 million in sales. This represents an impressive 42% increase in the number of transactions and a 57% increase in dollar volume from 2011. In December alone there were 67 properties that changed hands for a total of $135 million, the highest number of monthly transactions and dollar volume for 2012, and the best month, as measured by transactions, since October 2005. The chart below illustrates the strength demonstrated by the fourth quarter of 2012 (187 transactions for $334 million) in comparison to the previous three years. To find a stronger quarter, one would have to look all the way back to 4Q04, when 218 transactions closed for $375 million.

Nantucket Real Estate Dollar Historical Quarterly Sales and Transaction Volumes $400,000

187

$350,000

200 175

$300,000

150 127

in $000s

110 90 99

$200,000 77

71

$150,000 56

125

106 97

87

100

88

75

66

58

$100,000

50

33

25

# of Transactions

$250,000

$50,000

25

$0

0 FIRST QUARTER

2009

2010

SECOND QUARTER

2011

THIRD QUARTER

FOUTH QUARTER

2012

What energized the 2012 Nantucket real estate market? Here’s what we’ve identified: . Continued record-low mortgage rates lured buyers and boosted speculative purchases

• Borrowing was, and continues to be, very attractive. Even would-be cash buyers are using leverage to acquire properties. We heard several buyers report “Money is so cheap I can’t afford not to borrow and buy now.” • Improving demand in a low-rate environment bolsters the appeal of speculative building as carrying costs are reduced. In 2012 we witnessed at least 24 speculative acquisitions compared to 2011 when we believe there were closer to 10 speculative trades. . Demand fueled more demand

• People tend to be influenced by their peers. This often results in consumer behavior which creates and perpetuates buying trends. This year, an increasing number of buyers recognized that the stabilization in the nationwide housing market would likely sustain improvement in luxury home markets as they are typically the first to recover during economic downturns. Evermore confident that local prices had reached bottom, more and more buyers bought into the market, boosting overall confidence and driving demand momentum. This is an anecdotal theory, of course, but several conversations with clients and colleagues suggest that peer influence was in full force during 2012. One attorney noted that while a significant portion of his deals seemed to be driven by potential tax increases, just as many seemed to stem from the overall flurry of demand. The surge in transaction activity, whatever the cause, spurred other buyers to act rather than miss out.

. The high-end market was once again active, most notably in the $10+ million segment

• Likely motivated by potential capital gains tax savings, several high-end estates transferred to new owners in 2012. In total, there were 24 transactions which traded for more than $5 million; seven of these were sales greater than $10 million. Aside from 2010, when we saw 8 transactions above $10 million, 2012 saw the greatest sales volume in this price category since 2006. It’s interesting to note that although the 2012 high-end segment of the market was more active than in 2011, transaction volume in this price range is still far from the lofty highs reached in 2007.

High-End Property Sales 40 35

# of Transactions

30 25 20 15 10 5 0

2007

2008

>$5MM

2009

2010

2011

2012

>$10MM

. Foreclosures appeared to peak, bringing more confidence and demand to the low-end

• Though foreclosures represent a relatively small portion of the Nantucket market (8%-10%), they have nonetheless created a drag on values and demand at the lower end of our market. For years, it was rumored that the foreclosure pipeline among local lenders was growing. These rumors, combined with widespread reports of lengthy foreclosure battles with national lending institutions, created little incentive for local buyers to purchase distressed properties believing more would come, perhaps at lower prices. This resulted in increasing inventory of real estate owned (REO’s) property as lenders held foreclosed properties in their portfolios. In 2012, however, it appeared that the tide began to turn and demand in this segment of the market started to improve. The pace of foreclosure deeds, which peaked in May of 2012, began to decline in the latter half of the year. Additionally, the Orders of Notice filed with the Registry of Deeds in 4Q12 were half the number filed in 4Q11, confirming that the number of foreclosures is likely to decrease. A decline in anticipated foreclosures gives buyers a sense of comfort that prices have bottomed. Additionally, lenders have become more incentivized to reduce REO inventory which has led to more attractive pricing and demand in this segment has improved as a result. With this in mind, we believe that foreclosure activity has seen its peak and should begin to revert back toward historical levels.

Nantucket 10-Year Foreclosure Activity # of Foreclosures

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2

1

4

0

2

1

1

7

12

12

39

As we refocus on a New Year, we expect the Nantucket real estate market will continue to be supported by the stabilization of economic fundamentals and strengthening demand in luxury markets. However, it is presently unclear whether the dramatic transaction increase that occurred during the last three months of 2012 will continue its torrid pace in the New Year. Perhaps a significant portion of the fourth quarter’s activity was motivated by impending tax changes, moving what may have been 2013 sales into 2012. Transaction activity may slow in 1Q13, but we anticipate it will be another solid year of recovery. — Jennifer Shalley DIRECTOR OF RESEARCH FOR WINDWALKER REAL ESTATE

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Date Source: LINK Nantucket, Nantucket Listing Service. Photography: tgolcott.com