Wrap Up of 2005 and Early Look at 2006

Wellesley, November 30, 2005

Introduction

This report addresses vacation rental pricing trends for the summers of 2005 and 2006 on Cape Cod, Martha’s Vineyard, and Nantucket. It is based on information provided by the homeowners who use WeNeedaVacation.com to advertise their homes. In looking back on the 2005 summer season, we first report a baseline of where prices began as of February 2005 and then trace what happened to prices as the summer approached. We first look at the Cape & Islands pricing in aggregate. An additional section will discuss rental prices for properties ‘on the beach,’ ‘on water but not on a beach,’ within ‘walking distance to the beach,’ and ‘not near the beach.’ For the purposes of this review, ‘beach’ in all cases includes both salt water and fresh water beaches.

We then look ahead to see what early returns might predict about pricing for the summer of 2006 based on end November 2005 data. This data is preliminary because only half of the homes that we eventually expect to list have established their 2006 summer pricing. Many wait for last year’s tenants to make their plans and others simply wait until after the December holidays. Nevertheless, the sample certainly has clear indications of how homeowners feel about the upcoming summer season.

In this analysis, we look at two kinds of populations. First, we look at homes that have been advertising with us for 3 or more years to ascertain the most accurate predictor of homeowner sentiment and expectations. Second, we look at all the homes on our website to get the most accurate view of the overall market’s pricing trends. The first population presages the expectations that the regions might have for overall success; that is, if homeowners collectively are very optimistic or very pessimistic about the pricing of their homes, we have a valuable glimpse into what economists call “consumer confidence.” Conversely, the second population better addresses the issues of the size/cost of homes on the market, and what potential vacationers can expect to pay.

Pricing – wrap up of 2005

Initial pricing

The information in this section is a year to year analysis based on new information ofthe initial pricesi for the summer seasons of 702 properties that have been listed on our site for at least the last three summer seasons, and that use our availability calendar. That availability calendar enables them to set prices by the week and control availability on a day-to-day basis. The analysis of “Initial pricing” was done in February 2005.

Table 1: Price increases 2003 – 2004 -- 2005

The data reflects a difference between properties on the Cape and properties on the Islands. Prices increased more on the Cape in 2004 than in 2005. From 2003 to 2004, Martha’s Vineyard properties reflected only a 1.4 percent increase, but rebounded this year for a 3.4% increase over last year. Nantucket has remained consistent from 2003 to 2004, and 2004 to 2005, with 3.0% and 3.1% increases respectively. Demand was soft in the summer of 2004 and many owners found themselves with unexpected availability as that season started. Thus, many dropped their prices, some considerably, to attract demand. In light of this, they were obviously cautious about 2005. On the Vineyard, 2003 was especially bad and an abundance of supply and weakened demand left many owners with unbooked summer weeks. Thus in 2004, they dared raise prices only by 1.4%. The summer of 2004, while soft, was not as bad as 2003, so they felt more emboldened for 2005. Nantucket held steady, more impervious to yearly whims.

Rental prices of properties near either a salt water or fresh water beach:

We compared price increases from 2004 to 2005 for all 1,875 properties listed on our site for the Cape and the Islands that have weekly pricing in their calendars. This analysis compared price increases from 2004 to 2005 for properties in four mutually exclusive groups:

‘on the beach’

‘on the water, not beach’ (homes on water but without a beach)

‘walk to beach’ (1/2 mile or less)

‘not near beach’

Once again, these prices reflect the homeowners’ initial prices entered at the beginning of the season. Assuming that these price changes reflect movement in the demand for vacation housing, they provide an interesting glimpse into the three markets. All information is in Table 3 below, and was compiled in February 2005.

The most interesting numbers were totals for each of the three areas. They showed much higher year to year increases than in Table 1.

Table 2: Comparison of long-term clients vs. all clients

This remarkable difference is due to the nature of the two data sets. The properties in Table 1 are 702 homes that have advertised with us for at least three years. They have lived through some trying years and are cautious. The 1,875 properties in Table 3 are all our clients, regardless of time with us. Why would the latter’s prices and price increases be so much higher? We know anecdotally that many of them have recently purchased their homes, and they had to pay preciously, especially for homes anywhere near the water. Thus they are being more aggressive to cover new, high mortgage payments. As explained in the introduction, these two populations tell us different stories.

Looking ahead to Table 3, on Cape Cod, properties ‘on the water, not beach’ had a price increase three times that of properties either ‘on the beach’ or not within ‘walking distance to the beach’ (11.5%). Properties within ‘walking distance to the beach’ have rate increases twice that of those ‘on the beach’ or ‘not near the beach.’ This year’s rental rates for properties ‘on the beach’ are still almost twice those ‘not near the beach,’ but properties within ‘walking distance to the beach’ are only 17.7% higher than those not near the beach. It appears, therefore, that the demand for properties within ‘walking distance to the beach’ are becoming more reasonable alternatives, allowing for a greater increase in price. Rental rates for properties ‘on the water not beach,’ fall approximately halfway in between properties ‘on the beach’ and within ‘walking distance to the beach.’

Martha’s Vineyard had the greatest price increases for the past year overall (9%), with properties ‘NOT near the beach’ increasing the most (10%). On Martha’s Vineyard, the major price difference is determined by whether the property is on the water or not. ‘Walking distance to the beach’ is not a major influence in the rental rate. Rental prices on the beach are more than double the prices of properties not near the beach (104.2%), with properties ‘on the water not beach’ not far behind (86.4%). These properties are also priced 78% and 63% higher respectively than those properties within ‘walking distance to the beach.’ Properties within ‘walking distance to the beach’ have rental rates only 14.3% above those ‘not near the beach.’

Nantucket continues to sustain the highest rental rates over the Cape and Martha’s Vineyard, but our sample size is too small for homes on the water or on the beach to be meaningful. Nantucket continues to be an entirely different animal. Vacation rental prices for properties within walking distance to the beach increased a robust 9.7%. Properties not near the beach had a decrease in rental rates of -2.9%.

Table 3: Impact of water proximity on all properties in 2005

Final pricing

This section addresses changes made during the 2005 season after the initial February analysis and shows how pricing changed. The sample size is 738, which is slightly larger than that of the February study because more homeowners rejoined the site in the interim.

Table 4: Final 2005 pricing compared to Initial Price

These declines are modest by historical standards: an overall 1.5% drop gave back over half the 2.5% increase in Initial Price from 2004 to 2005. Despite increased inventory of available homes, owners held their prices. Four of the six locations dropped between 1.2% and 1.8%. Nantucket prices held best with a 0.5% decrease as their 3.1% increase in Initial Prices seemed justified. On the other hand, the Upper Cape prices dropped the most in both amount ($51) and percent (-2.3%). Upper Cape Initial Prices had grown 3.1% over 2004 and owners clearly decided that it would be prudent to give up much of that gain as 2005 unfolded.

Overall, 18% of our homeowners lowered their prices at some point in the season, whereas only 6% raised their prices. Interestingly, the Upper, Mid and Lower Cape had very similar numbers, but the Outer Cape is remarkable in that only 14% made any changes, a substantial variance from the others. More Vineyard owners lowered their prices percentage-wise, continuing the price pressure that we’ve seen in past years. Nantucket, on the other hand, had almost as many owners raise their prices (an area-high 10%) as lower prices (15%).

Two-thirds of the price increases were before May 1, and two-thirds of the decreases were after May 1 and half after June 1. A few increases were still occurring as late as July. Late decreases on Cape Cod averaged $277 in May, $376 in June and $283 in July per home. On the Islands for those three months, the averages were higher at $258, $266 and $666. For homeowners, the messages are to price your home correctly and be active early in the season before vacationers might expect discounting to begin.

Final prices and water proximity

So, how does water proximity play into pricing? Our February 2005 analysis showed the dramatic impact of water proximity: homes near water had increased their Initial Price more than other homes. Did expensive homes near the water drop their prices more or less than others? Let’s look at this same sample of 738 homes. As above, we’ll use four mutually exclusive groups:

‘on the beach’

‘on the water, not beach’ (homes on water but without a beach)

‘walk to beach’ (1/2 mile or less)

‘not near beach’

Sample size

Table 5: All properties and their water proximity

As expected, beachfront homes, despite their soaring prices, held their prices the best, whereas homes not within walking distance of the beach dropped the most.

It would then stand to reason that water proximate homes should increase in rent overall. Let’s look at our entire inventory’s price change from 2002 to 2005. 2006 prices set up so far using this data set are unrealistically high, and would produce overstated numbers; we’ll look at this again at the peak of the season when we could have 1,000 more listings on the website, if history is any guide. We are not including “on the beach” here because we added that amenity for the summer of 2004; “on water” here applies to both on the water (not beach) and beachfront.

Table 6: Impact of water proximity on prices from 2002 to 2005

Surprisingly, water proximity has had less than expected influence on rental prices since 2002 on Cape Cod. The impact on the Islands is more in line with expectations. On Cape Cod, waterfront homes (with or without beachfront) have risen a mere $56, or only one-half of all homes and even homes with no water proximity. What might explain this? One main factor is in 2002, the average home size was had slightly larger, and thus more expensive, homes: 43% were 4 bedrooms or larger, versus only 37% of the 2005 sample. The would lead to higher pricing.

Looking ahead to 2006

Initial Prices- homeowner sentiment

So, what do early returns indicate for the upcoming summer of 2006? Again, we use homes that have been on our website for 3 summers to give us the best idea of homeowner sentiment. We are looking at Initial Prices, not the ending prices, which we’ve seen above tend to be a bit lower due to price reductions during every season. In contrast to the analysis done in February, where we looked at homes with us during 2003, 2004 and 2005, this look-ahead looks at 2004, 2005 and 2006. Thus, the sample size and 2004-2005 percentages vary slightly. That is, we had 702 in our February 2005 sample, and have 713 in this one. Note that the 2004 to 2005 price increase percentages in the 2 analyses differ slightly: In February, the average for Cape Cod was 2.5%; now it is 2.8%. The .3% difference on an average price of $2,293 is a mere $7.

Table 7: Price changes 2004 – 2005 -- 2006

Table 5 indicates that owners are a bit more optimistic about 2006 than they were about 2005. The Outer Cape again stands out as the area with the highest increases of 4.5%. Combined with the fact that so relatively few homeowners decreased pricing in 2005, it’s clear this area is the strongest on the Cape, with average pricing nearing that of the Vineyard.

We will look again in February 2006, or a full year after our February 2005 analysis, when time of year as a variable can be removed. Early birds who have set up their pricing may prove to be more aggressive than those who are yet to join this sample. By then, our sample size will have grown by a few hundred homes. This growth will come from two sources: returnees and those who have not yet entered their pricing. Last year during December and January, 200 homes returned to the site; their listings had expired earlier in 2004 and they were dormant for a few months. Also, over 500 homes currently on our site have not yet set up their 2006 pricing.

What about homes with water proximity? Cape homes on the beach increase a robust 6.0%, whereas the Islands beachfront homes increased less than 2%. Homes on water, but not a beach, are up less than 1% on both Cape Cod and both islands. Walk to beach homes are up overall between 2 and 3%.

Initial Prices- market shifts

When we compare all of our listings for 2006 with prior years, without caring how long homes have been listed, we see a clearer picture of the overall market. Changes in prices in this analysis do not express homeowner sentiment at all, but rather indicate what is on the market in general.

The data shows that average prices for homes for 2006 are up over 10% from 2005. But this jump is due in major measure by two facts: only about one-half of our eventual homes for rent are currently active on our site and those that are active tend to be the larger and therefore more expensive homes. Larger homes rent earliest in the seasonal cycle because they require more coordination of vacation schedules, flight plans, etc. Thus, we always see a huge surge right after the December holidays of large homes. When our inventory fills out in mid-winter, we’ll see the return of the smaller homes, many of which let their listings lapse in the latter half of 2005.

Conclusions:

Prices stayed quite strong during the final stages of 2005.

Prices for 2006 look strong so far and in fact increased slightly more than from 2004 to 2005.

i A word about methodology and terminology: This release uses the terms “initial price” and “current price.” The initial weekly price for a property is the price the homeowner first enters at the beginning of the season. The current weekly price reflects any changes in price for a particular summer week. Initial price is a good reflection of the homeowners’ expectations of the coming season. As the rental season approaches, homeowners can modify these current weekly prices based on vacationer responses thus far. In recent years, owners have dropped their prices 1-2 % as the season neared in response to soft demand. The notion of initial price is new for 2005. Our press releases in past years had compared the new year’s initial price with the previous year’s then current price. Since those prior years’ current price had dropped, this comparison made the reported increase a bit higher than it should have been. Any summary findings are strictly assumptions based on the actual data.