Hamptons Real Estate: Inside the Spec Housing Market

One would never know that the economy is “in a shambles” by looking at the speculative housing market out on the East End. In front of these houses you will commonly see the signs of the major construction companies, Michael Davis, Rich Perello, TS Construction, and last but certainly not least – Joe Farrell. With so many newly-constructed houses for sale it can feel like walking down the aisles of a supermarket. This supermarket sells multi-million dollar homes.

Let’s try to understand what the ubiquity of these spec houses means in the context of the Hamptons real estate market. Because let’s face it, the Hamptons is not a “normal” place and it does not do us any good to think of it in terms of a “normal” real estate market. In many other high-end beach areas in the northeast, like Cape Cod, Nantucket and Martha’s Vineyard, the speculative market is but a fraction of what it is on the East End. The Hamptons are special, but this should come as no surprise.

Building houses worth up to $50 million without a potential buyer in mind should be an extremely risky business, especially considering that the country is just now recovering from the subprime mortgage crisis. The Hamptons, as well as other fabulously rich areas of the country like Aspen, CO, Palm Beach, FL and Beverly Hills, CA, are an exception to the rule. The wealthy community out here is notably secure. If you have the means to shop for a $20 million home, then finding loans from the bank is not difficult, or even necessary in many cases. It is for this reason that even though the speculative market on the East End slowed during the financial downturn, constructors kept buying land and building spec houses. It is a long-term game, and the most successful builders think in the long-term.

The rising price of land, as well as new codes which make it increasingly difficult to obtain permits, creates the necessity for builders to buy and build early, trusting, with good reason, that demand will come. This has been the philosophy of Michael Davis, one of the leading developers of super-high-end houses in Sagaponack. As long as there are wealthy people in New York, high-quality houses will always be in demand on the East End, and the earlier a developer obtains a permit and builds a house, the more profit he will make in the long term because he mitigated his costs early on.

An interesting feature of the speculative market in the Hamptons is that it has expanded to include the lower end of the market. This has mainly been a result of the efforts of Joe Farrell, whose name has become synonymous with Hamptons luxury. According to Susan Breitenbach, the senior vice president of Corcoran and one of the leading real estate agents in the Hamptons, Farrell has had success building spec houses north of the highway while most construction companies continue to focus on the chic south. This means properties in the $3-$7 million range, a range that many other speculative builders have stayed away from.

Everyone wants a piece of the Hamptons pie and speculative houses a way of getting a slice. Custom projects can take years to finish and require thousands of specific decisions that many homebuyers do not want to make – or do not have the time to make. It is easier to buy luxury prepackaged than to create it yourself. Also with a more generic luxury house, it is easier to sell or rent if times get tough. One person’s idea of luxury might be a whole lot different than another’s. The speculative market creates a platform from which the entire real estate market can grow.

For those who want things to stay the same and hate the idea of a generic Hamptons architecture, this speculative market poses a threat. Unfortunately for these critics, keeping things the way they are is not really what America does. That is more of a European thing. The speculative market has grown, with certain interruptions, for the past 20 years and experts like Breitenbach don’t see that changing.

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