A recent figure out of the Southampton Town shows a 55 percent decrease over the last year in mortgage tax revenue. Based on this percentage, it would appear that the town’s real estate market is in dire straits.
But as the old saying goes, numbers can be deceiving. Jim Malone, chief fiscal director with the county clerk, argues that looking at this one slice of the local real estate pie glosses over a recent flurry of activity which rivals numbers from last summer. Comparing this data, Malone believes a more interesting trend is at play.
He contends that buyers’ appetite for property hasn’t waned, but their borrowing practices have adapted to the recession and changing economy. Instead of taking out a hefty mortgage, it appears that a large number of buyers are opting to pay with cash. And others, theorizes Malone, are choosing not to refinance their homes, which seems to have been a common practice in the last few years.
The ripple effect of the recession is felt throughout town hall, but has especially pinched the coffers of the Community Preservation Fund (CPF), the two percent East End real estate transfer tax that goes toward land preservation. However, in the last few months the CPF showed a dramatic upswing revealing an increase in local property deals. As Malone points out, there is a slight difference between the CPF revenues from June and July in 2008 compared to these months in 2009. In 2008, the CPF received $2.9 million in June and $2.4 million in July. Whereas in 2009, the CPF collected $2.5 million in June and $2.3 million in July.
But Southampton Town’s revenue from mortgage taxes experienced one of the sharpest declines in the county. As town comptroller Tamara Wright pointed out at a recent board meeting, neighboring towns, including Brookhaven and Southold, have been able to keep these revenues level from 2008 to 2009, but Southampton’s gains have been halved over the course of this year. Revenues from June 2008 to 2009 slid from $900,000 to just $425,000, while July figures went from $836,000 in 2008 to $374,000 this year.
These decreases signify a bust in the mortgage market not the real estate market, says Malone based on his analysis of the information. Malone references the ratio of the value of actual transactions to the value of mortgages from 2008 to 2009. In June of 2008, there was almost $147 million in real estate transfers, as shown in the CPF revenues. The revenues garnered from mortgage taxes that month painted a different picture, and showed almost $180 million worth of mortgages. However, Malone attributes many of these mortgages to refinancing.
“Just because you are taking out a mortgage doesn’t mean that you are buying a home,” explained Malone. “Maybe you refinance to get the kids through school, or to buy a boat or a pool or simply to get a better rate … [but] If you look at the $374,000 [in mortgage tax revenue for July 2009] that represents only $75 million worth of mortgages. Only $75 million was borrowed, but we know there was $126 million worth of transactions [for July 2009].”
These recent figures hint that buyers are using more cash on hand to make real estate purchases and perhaps show a new mindset of prudent borrowing practices. Some local real estate agents point to the fact that it has become increasingly difficult to obtain a mortgage and a potential buyer must put more money down than in the recent past.
Sag Harbor real estate agent Gioia DiPaolo with Prudential Douglas Elliman has noticed a fair share of cash transfers taking place, but added that homeowner financing is also on the rise. While some agents say they haven’t noticed more cash transactions, others say cash transfers are a normal facet of the local real estate market.
“It has always been a big part of my business,” noted real estate agent Simon Harrison of cash only transactions. “The amount of cash deals hasn’t decreased anywhere near the level of finance deals. In 2006, I heard a story about a guy who got a million dollar mortgage with just a library card … I think that is indicative of the complete disarray of the mortgage business.”
Harrison also points out the inherent appeal of an all cash buyer — “The cash represents more value because it is not only immediate, but it involves a hard money deposit.”
He recently made a sale on a $1.6 million waterfront property where a mortgage contingent offer was pushed to second place after another person offered the same amount in cash.
The recent numbers showing substantial decreases in borrowing is the silver lining to the current recession for Malone.
“While it [the loss of mortgage tax revenue] is discouraging for the Town of Southampton, the reality is that people in our town are being more prudent rather than eating their equity,” remarked Malone. “It is encouraging to see the economy move and see folks being more responsible.”