(Bloomberg) -- The Hamptons real estate market has been on a dazzling hot streak and shows no signs of slowing down.

From $1 million cabins (actually) to multimillion-dollar megamansions, “we’ve seen a massive year-over-year surge” for the first quarter of 2021, says Jonathan Miller, president and chief executive officer of appraiser Miller Samuel Inc., which compiled a quarterly report for Douglas Elliman. Total available inventory, the report found, has plunged nearly 41% compared to last year. “All segments of the market are strong,” Miller says. 

As with other vacation destinations and affluent suburbs, including Palm Beach, Fla., and Greenwich, Conn., much of the past year’s sales bonanza can be attributed to wealthy people who were desperate to get out of New York and other urban areas during Covid.

But unlike those neighborhoods, where the supply in the luxury sector (defined as the top 10% of the market) has plummeted, the Hamptons market somehow is still throwing up more high-end listings to meet demand.

“Hamptons listing inventory in the luxury sector is up 49.9%” year over year, Miller says, “while overall inventory for the Greenwich luxury market is down 36.8%.”

And that’s a modest decline compared with Palm Beach, where first-quarter inventory for single-family homes plunged a staggering 79.7% from a year earlier. Its luxury inventory, which represents the top 10% of the market, is down 59.4%, according to a Douglas Elliman report. 

The Root Causes

Top Hamptons brokers diverge on the source of this apparently boundless luxury housing supply, where the starting price is $3.85 million.

Some attribute it, in part, to older homeowners looking to cash in on a bull market.

“It’s a generational change,” says Michaela Keszler, a broker at Douglas Elliman. “They’ve had their houses for a long time, and they want to downsize or move somewhere else.”

Others say a significant chunk of the material is coming from developers who, even before the pandemic began, were ramping up spec homes that are only now coming to market. At the beginning of 2020, even before the pandemic, “developers started coming in saying, ‘We’re running out of inventory, let’s start getting building permits,’” says Compass’s Lori Schiaffino. “We’re [now] seeing more inventory and lots more redevelopment.”

Existing homebuyers are also trading up, “where people decided they need bigger homes and more space now,” says Deborah Srb, a broker with Sotheby’s International Realty. “Now they’re including extended family, and they just have a different perspective of what makes a home comfortable.”

Everyone agrees that inventory might be coming into the market, but high-quality homes, particularly those priced from $3 million to $10 million, are still in painfully short supply.

“I can tell you on a personal level, there’s nothing over $4 million that’s good,” says Christopher Covert, a broker at Compass. “We just can’t find the inventory. If you know someone bringing it on, let me know. I’m down to two listings, and this time of year, normally I’d have 12 to 15.”

Pity the Developer

Developers are a factor in the Hamptons real estate market, but rising land costs, increasing cost of material, and fiercer competition for available parcels mean that however much new construction has hit the market in the last quarter, it isn’t enough.

“I think developers have run out of material,” says Keszler. “There’s not so much land around, or tear-downs they can buy, and the pricing is difficult for them because, of course, prices went up.”

The fact that many buyers over the past year wanted a house they could move into immediately is making it even more difficult. “I’m seeing a scarcity of newer construction at all price points,” says Frank Bodenchak, a Sotheby’s International Realty broker. 

Retirees Cash In

Instead, much of the volume is coming from people who saw the white-hot market and “said, ‘If we’re ever going to sell, now would be the time,’” says Schiaffino.

Many of these properties “are somewhat at the end of their life span in that they haven’t been renovated,” she continues. “These families are saying, ‘You know, I can sell this, and now is as good a time as any to get a healthy price for my family’s home,’ and finance and tech wealth is coming in and buying these properties up.”

A good chunk of people making this decision “have decided to size down,” says Srb. “The reality was that they wanted something smaller and more manageable. Those are empty nesters that maybe had adult children who are buying their own [vacation] homes.”

Some brokers have taken to actively courting this demographic in an effort to add inventory to the market.

“We’re pleading and prodding for people to bring houses onto the market,” says Mala Sander, a broker at Corcoran. “And there’s a lot of people that do say, ‘Hey, I’m hearing the real estate market is super hot, I got your letter or mailer or whatever, and I want to talk to you about putting my house on the market,’” she continues. “There are people who were going to retire in a couple of years who are saying, ‘Let me take advantage of it right now.’”

More Supply, More Demand

In the meantime, prospective buyers need to be prepared to spend serious money on a serious property. “Anything under $7.5 million has gone immediately,” says Bodenchak. “The market above $10 million is just starting to get more active, too,” Keszler says, “but it’s really demand up to $10 million” that’s the sweet spot, she continues.

Brokers say houses that are overpriced will still languish on the market, but those that are priced to sell consistently ignite bidding wars.

“I tell you, it’s brutal,” says Keszler. “You decide you like the house, and you see your family there, and you have your offer accepted, and then someone comes in with more money. It’s a tense time, and there’s no deal done until it’s signed.”

Generally speaking, “when a new home comes on the market and it seems like it’s priced really well, it doesn’t last more than a week,” Srb says. “I’ve been doing this for 28 years, and I’m stunned by the breadth [of demand] from young to old. It’s almost like they’re discovering the Hamptons for the first time.”

Covert speculates that most of the inventory that would traditionally be for sale has been occupied by renters or homeowners who have nowhere else to go. “I think that come August, homes that have been occupied since March of 2020 by renters or owners” will start to come onto the market, he concludes. “Something’s gotta give.” 

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