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Aug 7, 2008 4:32 PMPublication: The East Hampton Press & The Southampton Press

Construction of spec houses hits a downturn

Aug 7, 2008 4:32 PM

As the economy sours and those who work on Wall Street continue to fear layoffs and bad news from the market, fewer new homes are being built in the Hamptons than at any time in the last four years. According to realtors here, entry level spec houses that cost in the low millions have been hit hardest by the money crunch.

According to the Southampton Town Building Department, 62 permits for new homes were issued through August 7 of this year, down from 88 in that time period in 2007, 130 in 2006 and 175 in 2005.

“There are not a lot of shovels going into the ground,” said Andrew Saunders, a former Sotheby’s realtor who is in the process of opening his own agency in Bridgehampton. Mr. Saunders was a developer before he became a realtor seven years ago.

“There’s a lot north of the highway in Bridgehampton and Water Mill that’s gone unsold,” he said of the current speculative market. “There’s clearly more inventory today than last year. That has to do with the macro economy.”

Though there are no statistics on the number of spec homes currently on the market, Re/Max realtor Michael Daly recently told The Real Deal that there are approximately 135 homes billed “new construction” on the market in the Hamptons,

one third of the number that have been for sale in previous years. He estimated that 60 percent of the homes on the market above $10 million are spec homes and 42 percent of the houses between $2 and $5 million are spec homes.

If the number of new spec houses on the market has declined, some realtors believe that is a heartening sign that a dearth of inventory could help strengthen the market in the long-term.

Realtor Enzo Morabito, a specialist in high-end properties at Prudential Douglas Elliman in Bridgehampton, says there’s no comparison here to the kind of building boom in places like Miami and Las Vegas that has driven the downturn in the real estate market nationwide.

“We don’t have the inventory they have there,” said Mr. Morabito. “Building has stopped. That’s good. We have X amount of supplies, once they’re cleared off, things will start again. If we’re adding to it, it’s like you’re a drug addict that keeps taking drugs.”

Mr. Morabito estimated that it will take until next spring before the supply and demand for houses reaches a state of equilibrium again.

“Everything finds a level,” said Mr. Saunders. “The only market where that doesn’t exist is Miami, where they keep building these buildings in the backdrop of a tanking economy. There’s just not tons of supply. In Bridgehampton and Water Mill, north of the highway, there are a number to chose from, but there are not many, many homes for sale.”

Mr. Saunders added that many potential buyers of these homes, many of which are in the $3 to $7 million range, need financing in order to complete their purchases, while potential buyers of more high-end homes are not reliant on banks that have tightened their purse strings in recent months.

Builder Joe Farrell said that he, however, is having good luck with new construction in the $2.5 million range, though most people he speaks with in the industry say that this is a range to avoid right now.

“In new construction, quality and location is still selling,” said Mr. Farrell, who sold eight houses in the past year. He sold one on Daniels Lane in Sagaponack for $17 million two months ago, another in Water Mill for $5.5 million, four in Sag Harbor and two others in Sagaponack. He shared Mr. Saunders’ skepticism, however, about the glut of houses north of the highway in Bridgehampton and Water Mill.

“I’m not building $20 million houses right now,” said Mr. Farrell. “I’m being more cautious. I’m not buying a property until I sell a house.”

Mr. Farrell, who began a partnership with the venture capital firm The Carlyle Group last year, is currently building two spec houses south of the highway in Water Mill with funding from that company. They’re priced at $8.9 and $9.5 million.

Though Mr. Farrell said that one of his homes on Parsonage Lane in Sagaponack has still not sold, he said that he rented it for $600,000 for the summer after a renter came to him inquiring.

“Now it’s a good investment,” he said, laughing.

Mr. Saunders said that part of the slowdown in the spec market has been due to Sagaponack Village’s strict Floor Area Ratio building codes, which were just implemented last year. Prior to the village’s incorporation, Sagaponack’s vast farmland acreage was seen as an ideal area for builders looking to construct extravagant speculative homes.

“Sagaponack was traditionally quite expensive for land. Now you can’t build a house large enough,” said Mr. Saunders.

Michael Davis, a Sagaponack-based custom builder, had gotten wind of the new codes and acquired his permits and put in foundations for new large homes in Sagaponack before they went into effect.

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