Real Estate and Business

Hatteras Island Real Estate: State of the market report

By TOM HRANICKA

January is traditionally a time for looking back at the previous year and looking forward to what the next 12 months may hold in store. With the final year-end statistics for 2007 just available, it seems like a good time to take stock of the real estate market on Hatteras Island.

Perhaps the broadest summary statement that might be made about the island’s real estate market is that some aspects appear to be stabilizing, while other areas continue to deteriorate. More specifically, the gap between the supplies of cottages and lots that are for sale and the corresponding buyer demand for these properties remained relatively stable during the past year. The other side of the coin is that with supply exceeding demand by a wide margin, selling prices continued to decline. Let’s take a closer look at the various dimensions that defined the real estate market. Graphic displays of these trends can be viewed in the “Market at a Glance” segment on the Real Estate and Business page of this Web site.

Supply vs. Demand

The supplies of residential properties and unimproved lots changed very little throughout 2007. Similarly, the number of properties sold remained fairly constant. In round numbers, approximately 500 cottages and 300 home sites were consistently listed for sale, while about 10 homes and four lots were sold each month. Comparing the supply and demand statistics, throughout the year there was a 3.5-year supply of residential properties available for purchase and a six-year inventory of lots.

Going behind the numbers, a good case could be made that a stalemate exists in the market between sellers and buyers. Sellers have generally been reluctant to lower their asking prices to a level that will motivate buyers to enter the market in significant numbers. Buyers, on the other hand, appear to be waiting on the sidelines in anticipation of further price declines. This attitude is reinforced by fear-based, daily news reports in the national media that often have limited, if any, relevance to our local market (see last month’s article – “A Glass Half-Empty or Half-Full”).

Another factor that comes into play is the discretionary nature of the Hatteras Island real estate market and resort markets in general. In contrast to major metropolitan markets where people need to purchase primary residences, in resort areas, sellers, for the most part, do not have to sell and buyers do not have to buy unless market conditions coincide with their personal preferences.

The supply/demand imbalance is at the heart of the challenges facing the island’s real estate market today.

Prices

Classic economic theory tells us that when supply exceeds demand prices will decline. That, in fact, is what we have been seeing in the Hatteras Island real estate market since the summer of 2005 when the buyer’s market began.

Compared to 2006, the median selling price of residential properties fell around 18 percent last year, and the median selling price of unimproved lots decreased by about 11 percent. Cumulatively, the selling prices of residential properties have declined by 44 percent since the second quarter of 2005, and the selling prices of lots have fallen 23 percent. The silver lining associated with the magnitude of these price declines is that they may signal that we are getting closer to the point of a market turnaround.

Another price-related observation that may be of interest to both buyers and sellers is the ratio between selling prices and listing prices. During 2007, the average residential selling price was around 92 percent of list price, and the average sale to list price ratio for unimproved lots was 87 percent.

Last year, buyers definitely showed a preference for residential properties in the lower price ranges. Almost 25 percent of all residential sales were in the $300,000 to $400,000 price range, and 70 percent of residential transactions were priced below $500,000. Only 8 of 129 total home sales had selling prices that exceeded $1 million.

The Pending Home Sales Index

The Hatteras Island Pending Home Sales Index is a leading indicator of future residential sales. The index measures the number of residential properties that are under contract relative to the average number of properties under contract in 2001, the first of the recent boom years.

The Pending Home Sales Index gave strong signals that the real estate market may have reached a turning point last April when it showed an upward trend for the following six months. Economists at the National Association of Realtors consider a trend to be statistically meaningful when it has persisted for three or four months. Unfortunately, our hopes were relatively short-lived when the index dropped to new lows toward the end of the year. Deepening mortgage market troubles and the threat of a recession in the national economy apparently sent buyers back into a defensive posture.

Geographic Distribution of Sales

Geographically, sales on the island were spread almost evenly among the northern villages, the Avon/Buxton area, and Frisco/Hatteras. Avon was the village that accounted for the most sales in 2007, followed closely by Frisco and Hatteras. The soundside in Frisco was the most active market segment, although the oceanside in Rodanthe and Salvo were very close in the number of sales. The oceanside in Salvo was notable for the increase in sales over the number reported in 2006.

All areas of the island experienced decreases in both the average and median selling prices of residential properties except Hatteras village and Buxton.

Financing

The financing of transactions was not a factor in the performance of the real estate market on Hatteras Island during 2007. While underwriting requirements became more rigorous across the spectrum of loans, financing was readily available for qualified buyers.

Interest rates continued to be very attractive and approached the historical low points seen a few years ago. Recently, the interest rate offered by a major lender for 30-year fixed rate loans of $417,000 or less was 5.75 percent. The interest rate for larger loans was 6.5 percent with the payment of one point. A point equals one percent of the loan amount. Some lenders were advertising even lower interest rates.

New Construction

As might be expected, the fortunes of the construction industry on the island mirrored the trends in the real estate market, especially those related to unimproved lots. By the end of 2007, 65 new single family detached residential building permits had been issued. This was down 64 percent since 2004.

Summary

When all is said and done, toward what conclusions do these numbers and trends lead us and what implications do they have for the coming year? Quite obviously, we are continuing to experience a slow real estate market on the island. Yet, within this weakness lie the foundations for the next upward cycle. Interestingly, when the stock market began its recent decline, there was a very noticeable increase in the number of online viewings of properties for sale. It remains to be seen if the volatility and weakness in the stock market will translate into a new flow of funds into real estate, and the psychological impact of reductions in the federal funds rate could also be a positive stimulus for the real estate market.

In my opinion, there is a tremendous amount of pent-up buyer demand for residential resort real estate. Prospective buyers appear to be sitting on the sidelines waiting for some sign that the time is right to buy. Eventually, they are going to reach the conclusion that the purchasing environment is as favorable as it is going to get for them, and they will re-enter the market. When you look at the market factors currently favoring buyer interests, it is hard to understand why they are not purchasing in significant numbers. There is a large inventory of properties from which to choose. There is little competition from other buyers. Interest rates are near historical low points, and prices have declined nearly 50 percent from their highs in mid-2005.

Only time will tell how these factors will ultimately play out, but 2008 appears to be looking better every day.

(Tom Hranicka is an associate broker with Outer Beaches Realty. Questions, comments, or suggestions for future articles may be sent to Tom Hranicka at P.O. Box 237, Avon, NC 27915, or e-mail to hranicka@hatterasisland.com )

Copyright©2007 Tom & Louise Hranicka. All rights reserved.