Housing Bust Hits Enclave of Super-Rich

The Nantucket real estate market is headed for its worst year since the crash of 1990.
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Places don't get much richer than Nantucket.

The quaint Massachusetts island is an enclave of the super-rich. This is where John and Teresa Heinz Kerry rub shoulders with the likes of Frank and Kathie Lee Gifford, and countless hedge fund tycoons. The streets of the old whaling town are crowded with chi-chi stores and pretentious restaurants.

Average home price: Nearly $2.3 million.

But even here, in what may be America's most rarefied real estate market, the first signs are emerging that the housing bust is starting to be felt.

It's another sign that the super-rich might not be as insulated as they like to think from the rest of us. And that would have serious implications for the U.S. economy.

On Nantucket, the number of transactions through the end of August has plunged 13% from a year ago, according to local data.

Compared with the same period during the boom year of 2005, it's down by a third.

And the local market may be heading for the worst year since the big real estate crash of 1990.

The figures are tracked by veteran local real estate agent Flint Ranney, who's been running Denby Real Estate on the island for a quarter-century. "The market is in a slow period," he concedes. "Prices are down, too."

It's still early days.

As the rest of America has relearned over the past two years, the first sign of a housing bust is when the volumes fall off. Prices only start coming down later.

On Nantucket, the picture on prices so far this year is mixed. Depending on how you measure them, average prices are either down by about 4% so far this year or slightly up.

Either way, it's a far cry from a few years ago. From 2003 through 2005, prices rose 24% a year, on average.

Why does this matter?

Because Nantucket is a fascinating exemplar of the super-rich economy.

Real estate there is the classic luxury good.

The market is small, insulated and exclusive. Demand is intense: Rich people will always want a home on Nantucket. And supply is desperately scarce: Zoning is tight and you can't build a suburb. And the customers aren't at the mercy of bank loans and next month's paycheck. Many pay cash. "When you get up into the million-dollar homes, you're dealing with special people," says Ranney. There are few, if any, forced sellers.

Yet he's discovered something pretty remarkable.

Ranney sat down and looked at average sales prices on Nantucket going back to the early 1980s. He used the official data from the registry of deeds and the land bank office.

And then he compared them to the

Dow Jones Industrial Average

. You can see the chart below.

They move together. It's still an open question whether Nantucket is a leading indicator or a lagging one.

Leading or Lagging Indicator?

But it does raise the question of how far the economy of the super-rich is insulated from the rest of America. The reality: For the last 25 years, when real estate prices have fallen on Nantucket, stock prices have fallen on Wall Street -- and vice-versa.

There are two arguments doing the rounds about the super-rich and the rest of the economy: The first is that you should invest in companies that sell to the super-rich, because they are going to keep doing well even if the rest of America plunges into recession.

The second is that because the super-rich are so rich these days, their spending alone will keep America out of recession.

Either way, rich is supposed to be the place to be.

Will either of those arguments actually hold water? We may be about to find out.

Another possible indicator is the

Claymore/Robb Report Global Luxury Index

(ROB)

. It's an exchange-traded fund that tracks the share prices of public companies that sell luxury goods to the rich. It was launched only on July 31. In its short life it has, so far, outperformed the consumer discretionary index but it has done slightly worse than the market overall, falling just over 2% through Tuesday.

As for Nantucket? It may be a little too soon for the rest of us to start hunting for bargains. A two-bedroom wooden house on half an acre will still set you back $859,000, according to local listings. A six-bedroom house with distant views of the water? Oh, $5.8 million.

This is an island, after all, where people look down on the neighboring island of Martha's Vineyard. And where "the really low end" of the housing market means homes that cost a mere half-million bucks.

In keeping with TSC's editorial policy, Brett Arends doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Arends takes a critical look inside mutual funds and the personal finance industry in a twice-weekly column that ranges from investment advice for the general reader to the industry's latest scoop. Prior to joining TheStreet.com in 2006, he worked for more than two years at the Boston Herald, where he revived the paper's well-known 'On State Street' finance column and was part of a team that won two SABEW awards in 2005. He had previously written for the Daily Telegraph and Daily Mail newspapers in London, the magazine Private Eye, and for Global Agenda, the official magazine of the World Economic Summit in Davos, Switzerland. Arends has also written a book on sports 'futures' betting.