Kelleher Real Estate Services

Is Now a Good Time to Buy On MVY?

        

The vacation rental business on Martha’s Vineyard has changed dramatically over the past two decades. If you decide that you want to own and manage a rental property on the island understand that you are starting a small business. When my wife started our side gig in the mid-’90s the business had a small-town feel to it. She used a lot of local rental brokers, some word of mouth, and the precursor to VRBO, Home Away. Renters were far less demanding, (do you have a television?) labor was readily available on the island and the ferries had open reservations for the summer well into April and May. Renters expected to bring their own towels and sheets and you almost never heard any complaints, unless it rained all week! You would have several conversations with potential renters before a lease was signed and had a good idea about who you were doing business with. It was a decidedly more relaxed environment.

With the emergence of the OTA’s in the 10’s (online travel agencies), everything changed. The business is now very transactional. VRBO (owned by Expedia) and Airbnb have huge marketing budgets and set the renters' expectations to a 5-star hotel level. (We do not have an infinity pool next to an outdoor dance floor overlooking the ocean!) The booking sites use fairly transparent algorithms that will lower your search score if you decline a rental request or don’t respond within 24 hours. Many of the properties on the OTA sites are managed by professional property managers with a full-time staff that amortize the cost of marketing and turning properties between rentals across scores of owners. People want amenities; well-stocked kitchens, clean and modern bathrooms, Bluetooth speakers, multiple flat screens, linens, towels, etc… Labor on the island is very tight and services are expensive if you can find someone.

You can turn your property over to rental management companies that will charge 30 – 40% of gross rents, but that will impact your total return over time. The one thing that has not changed over the years is demand. Martha’s Vineyard has become a bucket list location. We are usually fully booked by January, and vehicle reservations for summer weekends book up by February. Demand has remained strong through boom-and-bust cycles.

The run-up in housing prices on the Vineyard over the past 6 years has been dramatic. The median sale price on the island has gone from $825,000 in 2017 to $1,363,000 in May 2022. That should be a little concerning for a new buyer to the market as we enter what will undoubtedly be a period of recession. However, I do believe that this market is very different from the Great Recession of 2008/09. That was a banking crisis that led to a deep, long-lasting recession. But today, U.S. banks’ balance sheets remain strong, which makes it “unlikely” that the U.S. will experience the type of recession it did then. In fact, unlike in 2008 when the Fed had to aggressively reduce rates to spur economic activity today the opposite is true, the Fed is raising rates to quell demand.

Looking at the credit scores of homebuyers in 2022, Bank of America Research analysts led by Thomas Thornton found that the portion of buyers with so-called “superprime” FICO scores of 720 or above is at 75%. During the years preceding the 2008 housing bust, just 25% of buyers boasted similarly strong credit.

“The quality of outstanding mortgage debt is pristine,” the Bank of America team wrote in a June 4, 2022 note. “Today's buyers are less vulnerable in case of an economic slowdown, and the riskiest buyers aren't in the market.”

Household debt compared to disposable income has also fallen roughly 30 % from the highs of the Great Recession the investment bank says, as overall leverage in the housing market remains far below what was seen in 2007 and 2008.

During the housing bubble, household mortgage debt exploded higher from 70% to 100% of disposable income, fueled in part by predatory lending,” the analysts wrote. “Fast-forward to today, and household leverage has moved roughly sideways during the pandemic at 65% of disposable income.”

Risky adjustable-rate mortgages (ARM) are also less common now than they were during the pre-GFC era, representing only around 2% of the market compared to 21% in 2006, leaving far fewer households exposed to rising interest rates.

I think these data points indicate far less panic selling than occurred during the Great Recession. Price appreciation will moderate or stop, but I don’t think we will see the 35 – 40% retrenchment in prices that we saw in the Great Recession, at least that’s the bet I have made! The market will become far more Buyer friendly and potential Buyers will have more inventory to consider and more room for price negotiation. You need to do your homework, know the rental rates in the neighborhoods you are looking in (easily discoverable on VRBO, Airbnb, WeNeedaVacation.com), and try to find a property with a strong rental history and a rolodex of service providers like cleaning services, pool cleaners, lawn services, etc… (unless you are willing to do it yourself, I have found it pays approx. $100/hour!) Repeat tenants and reliable vendors are your best asset in the vacation rental business. Monitor inventory levels and days on market numbers, I think this will turn into a Buyer’s market quickly. We have never bought in a Seller’s market but will be actively looking for properties in the coming months.

When I started investing for our retirement in my early 30’s I approached building a portfolio very traditionally, 60/40 stocks and bonds. Over the years as I have gained more knowledge about the rental market, I have reallocated to overweight real estate with very little exposure to the bond market. Bonds just don’t make sense to me when you can own real estate (although a bond never needs a new roof!) Equities have their place. When markets turn positive, they will pick up growth much quicker than real estate, and they don’t require maintenance.

If you would like to read the full article including detailed graphs, projections and secondary resources please download the following file - Is Now A Good Time to Buy On MV?

 

Good hunting!

 

Bill Santo and his wife Jan have been investing on the Vineyard for over 20 years. Bill is a lawyer who spent the majority of his career as a tech entrepreneur and tech operations and finance advisor. His wife Jan Brogan is an award-winning journalist, published novelist and teacher. Bill can be reached at 22mesh@comcast.net.

Let's Talk

Do not fill in this field:
Kelleher Real Estate Services