As someone who has worked in sales in both real estate and the stock market, I can attest to the cardinal rule in each, which is to be unfailingly optimistic. After all, if a buyer thinks that prices are going to fall, they will be extremely hesitant to buy, even though it makes a great deal of sense to buy on the way down (see the last two paragraphs of the previous entry, “How’s the Market?”). So to preserve their livelihood, salespeople have to put a positive spin on things. In light of the 1st quarter real estate statistics for Southold Town, which includes all the hamlets from Laurel east, this take will focus on the fact that there is excellent value in the market for those who can afford to buy in the current malaise. And while I do believe that there is a lot of truth in this perspective, those who are interested in purchasing real estate here should be aware of the stats.

Before discussing the numbers, it is worth pointing out that these are lagging statistics as they relate only to closed transactions. Since there is typically a 2-3 month period between the time a deal goes into contract and the time it closes, the transactions that comprise the 1st quarter statistics are those that actually took place in the approximate period of October-January.

MEDIAN PRICE—The median price of the houses that sold in the first quarter was $485,000. This represents a drop of $25,000, or 5% compared to the 1st quarter of 2007. The median price 2 years ago was $550,000, meaning the drop has been 11.8% over this period.

DOLLAR SALES—On the surface, this number appears to have held up well, as the total in the first quarter was $61 mn vs. $63 million in the same period of 2007. Though it appears flat, this is a drop of over 25% from the salad days of 2005, when the 1st quarter saw $81 mn of sales. However, even this lower number is one of those famous lies that statistics can provide. In the first quarter of this year, there were 2 exceptionally large transactions totaling $26 million. If you strip these out, the numbers drop dramatically, as they should given…

UNIT SALES—To me, this is truly the telling number, the one that says that there are a lot of sellers refusing to adapt to the reality of a lower market. Buyers want and expect to get good value in this market. When houses are priced to reflect the new reality, they actually sell very quickly. But most houses on the market are priced based on the wishful thinking that properties are worth what they once were. As a result, unit sales fell from 90 in the 1st quarter of 2007 to 65 in the same period of this year, a drop of 28%. If one goes back to the peak period of 2005, the numbers are even more telling as unit sales were 135, making the current numbers down 52% from that period. For those of us who rely on volume, the best word to describe this is “Ouch!”

After an inexplicably long delay, North Fork Insider is back. As the goal of this is to provide information on both North Fork real estate and lifestyle, this posting will move away from the property market and focus on one of my favorite pastimes, food. I thought of several directions to go—restaurants (maybe later), farmstands (too early in the season)—before a fascinating tour of the Braun’s Seafood establishment made the choice easy.

If you have spent much time on the North Fork, you may very well have stopped in to Braun’s on the Main Road in Cutchogue to pick up the fixings for dinner. I have done the same a few hundred times now. But until I got to know owner Ken Holman a few months back, I didn’t appreciate the place.

Braun’s is celebrating its 80th year in business in 2008, having been started as a little oyster shack during the oyster boom of the Roaring Twenties. The Holman family purchased the establishment in 1958 and shifted the focus to scallops at a time when Peconic Bay Scallops were becoming exceptionally popular with restaurants in the city. When the scallop industry was nearly wiped out in the 1980’s, Braun’s once again shifted gears and became primarily a seafood wholesaler. This is the main role the company fills today, as 90% of its revenues are from sales that its 25 trucks deliver to over 600 restaurants and fish markets on Long Island.

I was blown away by the amount of seafood that Braun sells. Over 1 million pounds of shrimp a year. Over a ¼ million pounds of squid annually. In summer, when lobster popularity peaks, they move 10,000 per week. And so on as you move through clams, oysters and tons of numerous kinds of fish. No wonder they need 45,000 square feet of freezer space.

I was also intrigued to learn what a complex business the wholesale seafood business is. When I thought about it at all, I thought of a fish market as being pretty basic—buy at wholesale, sell at retail, pocket the difference after costs. But the reality of the wholesale business is something else.

First, you are involved in a host of commodity markets, and you have to play them well to succeed. If you are moving a million pounds of shrimp a year, price movements can make you a lot of money or cost you a bundle. If prices fall, do you buy a lot and store it or wait and hope for further price falls? And since a lot of these products are imported, you have to watch the currency markets closely as you make these decisions. Obviously the weak dollar costs importers lots of profits.

There is also economic risk, as wholesalers have to extend credit to restaurants and risk not getting their money if they fail. There is environmental risk, such as when the local scallop and lobster industries virtually vanished. And there is even political risk, as one ponders what to do about all the different opinions on overfishing, fish farming, etc.

So the next time you go into Braun’s to buy some lobsters and shrimp for dinner, you’ll be able to appreciate how many decisions it took to get that lobster into your pot and that shrimp into your cocktail sauce. And before closing, I’ll put in a plug for Braun’s new sushi bar. After all, what better place to buy raw fish than Long Island's leading seller of seafood?

A veteran real estate agent once told me that under no conditions should we ever describe the market as bad, weak, soft or use any other term that could be construed negatively. Instead, he recommended that regardless of the actual market situation, you could simply refer to the market as "Unbelievable!" If pressed further, simply say that the market is adjusting from unusually high levels. So while the real estate market on the North Fork is not nearly so bad as other parts of Long Island and the greater NY area, let's be honest and say that such an adjustment continues.

Having said that, I got to thinking about markets in general and what I've learned about them in the 2 decades since I began working in finance and then real estate. Here are three theories of markets to consider, enlighten and hopefully amuse.

THE GREATER FOOL THEORY (aka Musical Chairs) -- The Greater Fool Theory holds that no matter what price one pays for an asset, someone will come along and pay a higher price, regardless of its intrinsic value. This theory is most frequently seen in boom times when excess liquidity in the financial system causes asset prices to skyrocket (see NASDAQ 1998-2000, Real Estate markets 2003-2006). Of course, analysts and investors won't actually come out and say that a bigger fool will come along to pay a higher price, so they need to come up with reasons why overvalued assets will become more overvalued, as boom markets are the most lucrative for these players. These rationales typically start with "This time is different because..." When you hear those words, it is usually time to start thinking about taking profits and heading for the hills to wait out the inevitable bust.

THE SUNK COST THEORY (aka It ain't where it's been, it's where it's going) -- Sunk costs are those that have already been sustained. The sunk cost theory as it pertains to markets says that if one is behaving rationally, he or she should not let sunk costs influence their decisions. Rather, each problem should be judged solely on its own merits. For example, assume that while wandering through an airport one day, you see a book that looks interesting and you plunk down $20 for it. Before you start it, 2 friends whose opinions you respect tell you that the book is absolutely terrible. You hate the idea of spending money on a book and not reading it, but you don't want to waste time on a horrible book. In real estate terms, this theory suggests that sellers of real estate should completely ignore what they paid for their house or what they could have sold their house for 2 years ago. Instead, they should only consider the other factors involved; How quickly do they want or need to sell it? If this is necessary, will the proceeds pay off their mortgage? Is waiting 6 months likely to get them a higher or lower price? If higher, will it be high enough to justify the time (see The Cost of Saying No)? The problem here is that this theory assumes that actors behave RATIONALLY. In truth, most people allow emotion to intrude on their investment decisions, usually to their detriment.

THE MEDIA MIND CONTROL THEORY -- The mass media shapes our opinions by barraging us via TV, radio, newspapers, magazines and of course, the Internet. If the media as a whole was a not-for-profit enterprise dedicated to informing us, we would no doubt be better informed. But as we all know, the media is very much a for profit endeavor. And there is little question that booms and busts get more readers and viewers and consequently generate more profits. This theory postulates that so far as markets go, things are rarely as good or as bad as the profit driven media makes them out to be. But as the reach and power of the media has grown, what may have been exaggeration has taken on the air of self-fulfilling prophecy. Does anyone doubt that the booms in recent years in the stock and real estate markets were exacerbated by the hyped media coverage? Or that buyers of real estate are currently being frightened by the media, putting further downward pressure on the markets?

So what to do? Hard as it may be, one should try to behave rationally. When you have to make a decision, make it based on its merits. Make yourself as informed as you possibly can be. Sometimes the best investments are made by doing the opposite of what everyone else appears to be doing. It is much easier to buy something that represents good value than to try to pick the bottom of the market. Look back at past periods when the real estate market was doing poorly (1988-1993, 2000-2001, for example) and see if you think that would have been a good time to buy. Then think ahead to, say, 2014. When we look back, what will be said about 2008?

If you are considering purchasing a house on the North Fork, you should be aware of the initiation fee known as the Peconic Bay Region Community Preservation Fund. The fund receives from the buyer a fee of 2% on each real esate transaction that takes place in the five East End towns--Southold, Riverhead, Southampton, East Hampton and Shelter Island (the first $150,000 is exempt in Southold and Riverhead and the first $250,000 elsewhere). The town where the transaction takes place gets the money to use for preservation.

All buyers mutter complaints about the program. After all, it is painful to come up with 2% on top of all the other fees associated with purchasing a home. However, once the admission fee to the East End has been paid, everyone is immediately in favor of the fund. And for good reason. Since its inception in 1998, it has preserved over 6000 acres of land. This is crucial on a number of levels.

First, the ability of the towns to purchase land or development rights has preserved scenic vistas, environmentally sensitive land, and farms. Without this, it is hard to imagine that the character and beauty of the East End would be able to withstand the powerful forces of development.

Second, by limiting development, the fund acts as a buffer against the higher taxes that always accompany the increased demand for goods and services that comes with it.

Finally, the fund ultimately increases property values for all. Since the fund acts to limit the supply of new land for development, it stands to reason that existing land becomes more valuable.

So when shopping for a house, you should be aware that you'll need to account for the 2% tax. And you should feel free to gripe about it--we all did. But know too that the price of admission to life on the beautiful North Fork is a fair one.

The real estate market on the North Fork is at a bit of a standstill. The offers being thrown out by buyers are most definitely on the low side. Those making these offers generally fall into two categories. There are the bottom fishers, those hoping to take advantage of troubled times to get a good piece of property at a relatively cheap price.

Then there are those who want to avoid looking stupid. When they mention to family or friends that they are considering buying a second home, they are met with a response along the lines of “Are you crazy? Haven’t you been following the news? With the subprime mess and all these foreclosures, the market is definitely going to collapse. And have you seen what’s been going on with Wall Street? Why on earth would you want to buy something now?” Never mind the fact that this same speaker was probably saying just 2-3 years ago that the real estate market was going to go up forever. It takes a brave soul to stand against this type of media driven negative sentiment and reap the advantages of buying in a weak market (See previous posting, “How’s the Market?”). So most would rather err on the side of caution and try to steal a house at a really low price, just in case the Chicken Littles prove correct.

But what about the sellers? Why are they intransigent? If the herd mentality is that the market is going to go way down, shouldn’t they be caving to the pressure to sell now? On the North Fork, the vast majority of the sellers don’t feel compelled to sell. There are very few subprime loans or 100% mortgages that have gone underwater. Most people have a great deal of equity in their properties and can often find renters in the summer months to offset some of the expenses. So many opt to wait out the down part of the cycle.

However, some sellers are being particularly obstinate about getting their price, and it is these folks that inspired the title of this posting. In a recent negotiation, a buyer and seller ended up $10,000 apart, which represented 2% of the price. Both refused to move. The buyer figured in a bad market that he shouldn’t go up anymore. And the seller believed he had come down enough. What this seller, and many more for that matter, failed to take into consideration is the cost of waiting.

The biggest component of the cost of saying no is also the least understood: the cost of capital. This seller claimed that since he had no mortgage, he didn’t have to rush to sell. Now it is entirely plausible that it could take him six more months to sell given the price he wants. If one assumes a very low rate of return, say 5% per annum, six more months would cost him $12,500 if he had sold and safely invested the money. So he would already be behind, not even taking into consideration taxes, insurance, utilities and maintenance. In addition, he is assuming maintenance risk (what if the boiler blows out this winter?) and market risk. While the market out here is unlikely to collapse, sellers should ask if the probability is that the next move is up or down or if it just goes sideways. So even in one of the better case scenarios, assume in 6 months, a buyer emerges who wants to be in for the summer and our man gets his price. He pats himself on the back, when in fact he has lost a great deal of money. And that is the cost of saying no.