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Erin Sykes, Nest Seekers International chief economist. JONATHAN GRASSI
In the face of economic uncertainty, inflation and rising interest rates, real estate prices in the Hamptons market have only fallen about 5 percent, and signs point to home prices staying strong but with opportunities for negotiation, according to Erin Sykes, Nest Seekers International’s chief economist.
Sykes, who is also an associate broker who sells real estate in Florida and New York, shared this week her assessment of the state of the Hamptons real estate market and her economic outlook for 2023. She believes that the stock market hit bottom over spring and the beginning of summer — before sharp rate hikes took effect — and that the economic challenges expected next year have already been priced into the market. That would mean Wall Street is poised for a rebound, which in turn would bolster luxury real estate and improve buyer confidence across the board.
Sykes noted that most of the time an economic bottom trails a stock market bottom by six months, but when it comes to the ultra-luxury real estate market recently, a slowdown happened much closer to when the stock market hit bottom.
“For the most part, the investors and the huge companies that are managing the massive trades, they have a more forward-looking perspective,” Sykes said. “So they priced these things in earlier than Main Street does.”
Meanwhile, the homebuyers most affected by interest rate fluctuations are those buying houses for $2 million or less, she said.
When the Federal Reserve pumped up the M2 money supply — the number of dollars in circulation — during the pandemic to shore up the economy, it “set in line a series of dominoes that caused this persistent inflation,” according to Sykes.
The Fed began hiking interest rates to tamp down inflation, but those higher rates are bad news for homebuyers who are dependent on credit and for homesellers who want top dollar for their houses.
“We saw 75-basis-point hikes four times consecutively,” Sykes said of 2022, adding that Fed Chair Jerome Powell has forecast smaller hikes ahead.
“As long as things are 50 [basis points] or below — say they do 25 — the stock market will likely react positively, which will reignite the ultra luxury market,” Sykes predicted.
Meanwhile, the under $2 million market, which got nervous and super quiet, she said, may also be reinvigorated.
“It’s like the brakes were immediately put on,” she said of this past fall. “There’s still a ton of interest there, but the actual number of transactions has pulled back a lot.”
In the Hamptons, Palm Beach, Miami, Beverly Hills and the Jersey Shore, the buyers are there and looking, according to Sykes, but not acting.
“They’re continuing to shop,” she said. “They’re just not pulling the trigger on actually offering a contract.”
If they are waiting for prices to drop significantly, they will likely be disappointed. Sykes said inflation is not going away soon. “By nature, it’s sticky and it’s persistent,” she said. “So we might see these prices for another year or so.”
She pointed out that the 30-year mortgage rate recently topped 7 percent before coming back down. “We’re back below 7, which is actually below the 50-year average by about a half a percentage point,” she said.
Typically, the trade-off for buyers is to buy at a lower rate and pay more for the home, or buy at a higher rate but pay less for the home, with monthly payments remaining within shooting distance of each other, she noted.
“The piece of advice that you’ll hear a lot of agents say is ‘marry your home and date your rate,’” she said.
Her advice is to buy the home at a fair price while acknowledging the likelihood that within the next two years the rate will drop, creating the opportunity to refinance with a smaller payment.
“It’s a strong possibility, but it’s not a home run,” she said. “… It’s one of those things where you have to have a little bit of tolerance for risk. … Don’t bet the farm that rates are going to drop, but if they do, that’s gravy to the situation.”
She emphasized that mortgage rates — while they look high now in light of the rock bottom rates seen recently — are below the historic average.
“You’ve got to transplant yourself back to 2018, 2019, where you’re willing to pay a reasonable interest rate in exchange for somebody loaning you a million dollars over the course of 30 years,” She said. “… People have just been spoiled with 2.5 percent interest rates, and it’s not reality. But we have this constancy bias and a recency bias, where people’s memories are very short. And they only remember like the last two years. They forget, you know, the 30 years of their life before that.”
She also warned against assuming national trends apply everywhere.
“Macro charts, to me, mislead people,” she said. “When you see, nationally, prices have pulled back 25 percent, that doesn’t apply to the Hamptons. You have to really isolate and look locally.”
And even within the Hamptons, the markets vary.
“You’ve got to look at the different hamlets,” she said. “You got to look at Southampton, which tends to stay very stable, versus Montauk, which tends to be a little bit trendier and it goes up and down.”
In nonprimary housing markets, prices have pulled back by up to 20 percent, but locally, in the Hamptons, there has been only a 5 percent pullback, in Sykes’s assessment, and this is not confined to any specific price points, but found across the board wherever sellers were overly ambitious.
“It’s where the overpriced homes are,” she said of price reductions. “It’s not necessarily at the high end or the low end. It was the people that were going for home runs that kind of had the unrealistic expectation, and that happens across the board.”
She said that now is the time to take advantage and put in offers, even offers that are a little bit low.
“Even when you’re not seeing those price adjustments necessarily online, you are seeing a lot of negotiability,” she said. “So this is where it really goes into agent hands and buyer hands. Because you’re shopping at one price point and you want to end up at another one.”
Buyers have trepidation about negotiating because they are used to only being able to purchase a home at the price that is listed, she said. “You’re not seeing people actually actively negotiate yet, which is a big misstep.”
However, considering the cost of building materials and labor, the price of existing homes won’t come down an excessive amount, as Sykes explained.
“The persistent inflation in terms of raw materials and in terms of labor is also helping to create buoyancy to the resale market,” she said.
A home built a year and a half ago for $250 a square foot would cost $450 a square foot to rebuild today, she said, and that buttresses the price of resale. And she said with inflation at 7 or 8 percent, housing prices could stabilize or go up even higher as replacement costs go up.
Sykes subscribes to the Warren Buffet methodology of housing: “As long as you’re in it long term, if you have a quality product, it’s going to be worth more,” she said.
Whether it’s the right time to buy a home comes down to individual situations and one’s geography, work status, stability and cost of rent, according to Sykes.
“It is, most of the time, a good time to buy a home if you’re getting in at a fair price,” she said. “I’m hesitant to say all of the time. I’m hesitant to say there’s never a bad time. I think there’s always a gap in the market and you have to proactively look for it. You have to not be afraid to negotiate.
“You might have to spend significantly more time shopping than either you or your agent wants to,” she continued. “You’re not going to go look at three properties and necessarily find ‘the one’ right now. You’re going to spend a few months, and when you feel comfortable, you’ll make the decision. It’s what we did before the pandemic. It’s like it is the normal way of doing things, more or less. We just have to reset our expectations of how quickly you find a home, how quickly offers go in.”
She summed it up: The market is just going back to normal.
“Rather than trying to time the market,” she said, “get in at a fair price for a long-term investment, and you’re going to be fine.”
