Forget location — think appreciation
Second in a series
By Mary Lancaster, Independent Writer

On Nantucket today, you cannot buy a small coffee for under $1 dollar, and you certainly cannot buy a piece of vacant land for less than $100,000.

In fact, current listings of the Nantucket Association of Real Estate Brokers show the cheapest area of undeveloped property not under agreement at $425,000 for a .12-acre lot on Second Way. Measuring approximately 50 by 100 feet, it is an unremarkable spot that is not included in the usual, enticing "location, location, location" advertisements. Yet, it is valuable because the number of open parcels is dwindling.

Few expect the price of real estate on Nantucket to go down in the future. Inventory is shrinking, and customers continue to clamor for a piece of finite, highly desirable Nantucket.

But in tracking the appreciation of island houses and land for a few decades - execpt for a brief recession period - it is clear that costs have escalated beyond all predictions, and unmistakably past the point of reality for nearly all but the high rollers.

The appreciation rate averages approximately 14 percent a year for land and homes, at least since 1988. Brokers who have maintained records of homes which have sold several times are able to document the pattern.

Penny Dey, of AtlanticEast Real Estate, has transaction files from 1984, the year when most realty firms began to store data of sales and trends. As if looking at a fading photograph, Dey recalls that in the mid-1980s buyers could find nice, three or four bedroom homes on a full acre of land for $250,000. That is just a memory now, with the same locations selling for at least $1 million in the current market.

What your dollar got, what it gets now

Dey cited a few examples of changing prices for homes that have sold multiple times, including 37 Union St., a four bedroom, three bath antique on a 3,800 square-foot lot, built circa 1800. It sold in August 1989 for $258,993, then in November 1996 for $650,000, and in September 2003 for $1,443,915.

A four-bedroom, three-and-a-half bath, upside-down house at 50 N. Beach St., built in 1988 on a 5,000 square-foot lot and having distant harbor views from the second floor, sold in November 1992 for $383,000. It went for $947,500 in October 1999, for $1.2 million in January 2001, and is now listed at $2.3 million.

In the mid-1980s, buyers could have a large 1920 home on the Cliff near the beach, with three bedrooms and a roof walk view for $435,000. The same house today would fetch at least $3.8 million.

A 1940 house with five bedrooms and five baths, on two acres on the inner harbor and boasting panoramic views, is listed now for $9 million, said Dey. In the 1980s, the same house was valued at $1 million.

Flint Ranney, owner of Denby Real Estate, spoke recently of a home on Alexandria Drive, an example of a four bedroom, three bath property built in 1986 on a 12,600 square-foot lot in a densely developed area off Hooper Farm Road. In 1994, the house sold for $195,000 and sold again in 1998 for $320,000.

An antique home he cited, built on Fayette Street in 1830 with four bedrooms and three bathrooms on a 7,000 square-foot lot, sold in 1998 for $574,000. It nearly doubled in price over six years, selling again in 2004 for $1,065,000.

Real estate transaction records for 1995 and 1996 from Edward Sanford's office are also illustrative of how prices have changed since the 1970s. Real estate ads in August of 1970 frequently did not list a selling price, or even the address of a property for sale.

Yet a few in that year that did provide information profiled homes such as a seven bedroom, seven bath house on Main Street for $85,000, three acres with a four-room cottage for $23,900 and a parcel just over four acres near town for $20,000.

In 1975, an ad listed 19 acres with an ocean view for $90,000 and other vacant waterfront properties from $78,000.

In comparison, Island Properties' data for 1995 shows that while a two bedroom, one bath house on one acre along Folger Ave. went for $166,500, most three and four bedroom homes sold for more than $300,000, and commonly well above that price. In 1996, it was rare to find an undeveloped acre for less than $100,000.

But whether considering prices of homes or vacant property, Alan Worden of Windwalker Real Estate stresses that there are several factors involved with the overall market.

While he does not argue that Nantucket's 14 percent appreciation rate is low, when trying to compare what $1,000 bought here 15 years ago to what it buys today, loan interest rates must be examined.

In 1990, the interest rate for a 30-year fixed mortgage was about 10 percent. In 1995, it stood in the eight-percent range and now it is five and three-quarters percent. With a lower interest rate, $1,000 actually buys more property value than it did years ago, said Worden.

Further, though annual personal wage adjustments do not keep pace with appreciation, Worden's research indicates that people between 55 and 74 years of age represent the majority of buyers of island real estate. That group is at or approaching peak earning years.

Along with improved income, their children are grown, leaving them with greater spending power. The advent of Internet access, cell phones and flexible work schedules allows them longer visits in vacation homes.

Dueling for

diminishing land

Worden authored an article in late 2003 about the changing prices of particular pieces of land that resold several times within a 15-year period.

The report's projected five-year gross returns on investment, at 12 to 15 percent, were determined using analyses of 3,500 land transactions between January 1988 and September 2003.

Worden chose land rather than houses because it was easier to track values of raw property than residences that increase substantially in price due to owner improvements between selling periods.

Vacant land sales are in direct competition between the open market and island non-profits, who now hold 45 percent of Nantucket in preservation. They hope to buy more property to keep wild before undeveloped spaces are forever gone. While broker Hamilton Heard estimates only 45 vacant parcels remain on Nantucket, Ranney said the number may be higher, but does not exceed 70 parcels.

Open land supporting wildlife and tranquil vistas is one of the reasons people are drawn to the island, and conservation agencies try to convince sellers of the importance of maintaining this feature. The problem is, when those discussions are successful, the agencies must have available funds to buy these disappearing properties.

"There are lots of shades of gray between giving [land] away and selling it for high value," said Nantucket Conservation Foundation Executive Director Jim Lentowski. "There are properties the Foundation and others would like to add to protected areas if we can convince landowners to either gift or enter into price negotiations to protect [their land]."

Taking chances

"Spec," or speculation building, started in earnest on Nantucket in the pre-recession years of the 1980s. That was a time when developers felt confident about risking their own money to buy property and build homes because they were certain they would sell quickly.

As land becomes scarce, spec houses are making a resurgence, according to Country Village Real Estate owner Doug Foregger.

According to Foregger, during the 2001 economic slump there were a number of buildable lots available, whereas his statistics show that now there are just eight lots selling for under $700,000, seven lots for $700,000 to $1 million and 28 parcels for $1 million and up, which are not under contract with a buyer.

"We found in July 2002 the flood gates were opened and the overabundance of inventory was sucked dry," said Foregger. "Now, we have gone from approximately 125 to 150 land listings to 43, and the average price of open land in general has increased by over 40 percent in the last 12 to 18 months.

"And the new money coming here want a finished product - they have more money than time to go and try to tweak a renovation project or try to build from scratch, therefore giving the spec builders the margins to make spec building interesting," Foregger added. "Developing is a risky business, but with such a small amount of land left here it is making it a much safer bet for these developers."

Big changes

Maury People broker Gary Winn is also a land developer. Winn recalls the wide shifts in price structure he has seen over his 26-year real estate career.

Looking back, Winn remembers when antique homes in town formerly occupied by whaling captains were selling for under $150,000 in the late 1970s. By the mid-1980s they were going for about $400,000, and now are valued at more than $2 million.

He said he bought a house on Bank Street in 'Sconset in 1980 for $34,000 and sold it the following year for $70,000. Today, he figures the same house would fetch at least $1 million. Town is "hot" now, he said.

Winn remembers when in the early 1980s, house lots in the Tom Nevers area sold for $12,000 and in Cisco for $18,000.

In 1985, within a four-day period, Winn sold 30, three-acre lots in Tom Nevers with views of Sankaty Lighthouse for between $65,000 and $85,000 each. If those lots were available today, they would be on the market for $600,000 to $700,000 each, he said.

In 1994, Winn purchased 100 acres off Milestone Road to create the Tetawkimmo sub-division. When he bought the land for $1.8 million he was told by colleagues that he paid too much. Winn guesses that same property today would sell for about $20 million.

Deep pockets

Winn said in the 1980s, the weathy able to buy a million-plus house on the island were mainly investment bankers. In the 1990s, those clients were venture capitalists.

In today's market, the buyers manage hedge funds, investing and earning billions on a pool of money contributed by insurance companies, from pension funds and from high-worth individuals. The buyer profile also includes numbers of company chief executive officers and other ranking corporate executives.

According to another of Worden's reports, published this spring, in 2004 there were 122 "typical" luxury range homes sold on Nantucket for between $1.5 and $5 million.

That was the highest number of sales in that price category in a comparison with other resort communities including Hilton Head, Charleston, Aspen, Naples, Jackson Hole, Boca Raton and Palm Beach.

The market for properties selling at more than $7 or $8 million is fairly small, said Winn. Buyers of those homes hail from Connecticut, New York and Boston, the Washington, D.C. area and Europe. And there are plenty of them, he said.

"There is no lack of people able to buy these [million-dollar range of homes]," said Winn. "There are maybe 15 to 20 people in the market looking at [properties] over $8 million within the last three to four years. That is more than enough to take care of that inventory."

Winn currently has the second highest listing on the market, a $19 million home on the Cliff. He sold the present owners the land containing a small house that was demolished and replaced with the existing home. That owner paid $2.5 million for the original parcel. Winn does not know how much the buyer spent to rebuild, but does know he has kept the property until now when he seeks its first turn-over.

Keep the dream alive

What is the down payment on a multi-million property here? Are some of those buyers able to whip out their checkbook and pay cash for, perhaps, the whole transaction? How does the current cost to buy an existing home compare to buying land and building from scratch, or shipping over a modular home that can be slapped together fairly quickly?

And what about the school teachers, waiters, nurses and taxi drivers who would like to own a home on Nantucket, where many have contributed to the community and its economy for many years. What options do they have? If they do not have enough money to buy an existing home, can they compete with the on-going land grab to try to build something modest?

The Independent will address these questions in this series, but Ranney does not paint a very optimistic picture.

"When there isn't anything left, people will pay anything," he said.

Dey explained that the real estate market's greatest pressure has, over time, been on the "low end" properties.

"Meaning that people who lived and worked here could scramble and work two jobs and scrape together a down payment and afford to buy a home," she said. "The last year that was possible in any kind of a general sense was probably 1999, when houses were between $400,00 and $500,000. Now, they are $900,000 to $1 million."

While Dey concurs that the outlook for modest earners seeking to buy on the island is not encouraging, there are new programs that did not exist years ago, such as the introduction of Habitat for Humanity and the Housing Needs Covenant Program.

This series will outline those programs as possible ways for people priced out of the current real estate market to find an affordable way to have their own home.