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February 2, 2009
Hatteras Island Real Estate: 2009 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 for
us. With the final year-end statistics for 2008 recently
available, it seems like an opportune time to take stock of the real
estate market on Hatteras Island. The interesting aspect of the current
report is how little it has changed from last year’s analysis.
This is good news for all of us because it suggests that the market is
at or close to the bottom of its current cycle.
The
broadest summary 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
steady 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 in 2008. Graphic displays of these trends can be
viewed in the “Market at a Glance” segment of the Real
Estate and Business section of the Island Free Press web site.
Here is a brief synopsis of the major market indicators:
| Major Real Estate Market Indicators 2008 vs. 2007 |
|
RESIDENTIAL |
LOTS |
| # For Sale |
-2.8% |
-15.1% |
| # Sold |
-6.2% |
-7.7% |
| Sales Volume |
-15.2% |
-17.9% |
| Avg. Selling Price |
-9.6% |
-11.0% |
| Median Selling Price |
-6.6% |
-30.0% |
Supply vs. Demand
The
supply of residential properties changed very little during 2008.
The number of properties sold also remained constant. In round
numbers, approximately 450 to 500 cottages were consistently listed for
sale throughout the year, while an average of 10 homes were sold each
month. For the first time in the past four years, a decline in
the number of unimproved lots available for purchase was
reported. At year-end, there were 269 lots for sale compared to
about 320 during each of the three prior years – a decrease of 16
percent. Lot sales continued to languish with an average of only
four sales per month on the entire island. Comparing the supply and
demand statistics, there was a 3.7 year supply of residential
properties available for purchase and a six-year inventory of lots. As
a point of reference, residential sales during 2008 were at a level
last seen in 1997, while the level of unimproved lot sales was last
seen in 1994.
In
contrast to traditional supply/demand curves that we are used to seeing
in economics text books, our supply/demand relationships look more like
parallel railroad tracks. A stalemate continues to exist 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 daily reports in
the national media that emphasize declining home values around the
country.
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 areas 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 and the turmoil in the national economy are 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 2007, the median selling price of residential properties fell around
7 percent last year, and the median selling price of unimproved lots
decreased by about 30 percent. Cumulatively, the median selling prices
of residential properties have declined by almost 50 percent since the
second quarter of 2005, and the selling prices of lots have fallen 27
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. It should be noted that the extent of
the price declines that are being reported are influenced by the
statistical measure that is used. For example, when average
selling prices rather than median selling prices are analyzed, the
corresponding declines measured on a quarterly basis since 2005 would
be 36 percent for residential properties and 17 percent for home sites.
Last
year, buyers continued to show a preference for properties in the lower
price ranges. Almost 60 percent of all residential sales had
selling prices below $400,000, and 67 percent of lot transactions were
priced below $200,000.
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 to be sold relative to
the average number of properties under contract in 2001, the first of
the recent boom years.
After
rising for the first few months of the year, The Pending Home Sales
Index once again resumed its downward trend and ended the year at its
lowest level since the index was established.
Geographic Distribution of Sales
Geographically,
Frisco and Hatteras village reported the largest number of residential
sales, followed closely by the Avon/Buxton area. Sales were slower in
the northern villages with Rodanthe and Salvo being the centers of
activity. The soundside in Frisco was the most active area for
unimproved lot sales.
Financing
In
contrast to 2007, the financing of transactions was a contributing
factor in the muted performance of the real estate market on Hatteras
Island during 2008. While underwriting requirements became more
rigorous across the spectrum of loans, financing remained readily
available for qualified buyers seeking loans of $417,000 or less.
Interestingly,
only six of 121 total home sales had selling prices that exceeded $1
million during 2008. Historically, the conventional real estate
wisdom has held that the higher end market holds up in downturns.
The differentiating factor in the current market is the existence of a
challenging credit environment for these property sales. Loans in
excess of $417,000 (the conventional loan limit) were more expensive,
and the down payment and underwriting requirements became more
stringent than in the past. This is, in part, a reflection of the
lenders’ inability to sell these loans to investors and other
third parties.
Interest
rates for conventional loans reached historical lows during 2008.
Recently, the interest rate offered by a major lender for 30-year
fixed-rate loans of $417,000 or less was 5.25 percent. The
interest rate for larger loans was 6.625 percent with the payment of
one point. A point equals one percent of the loan amount.
New Construction
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 2008, 48 new single family detached
residential building permits had been issued. This was down 26
percent from 2007 and off 74 percent since 2004. The percentage decline
would have been even larger had it not been for a spike in permits
issued in September in conjunction with the development of a new
subdivision in Waves.
Distressed Properties
One
noteworthy new trend on Hatteras Island in the past 12 months has been
the emergence of a market for distressed properties. While the present
number of homes on the island that are either bank-owned or where the
homeowner owes more on the mortgage than the property’s probable
selling price (short sale) is relatively low compared to other places
around the country, we did notice the impact of this market sub-segment
in 2008. Sales of foreclosed properties increased from just four
in 2007 to 18 in 2008, and the number of short sales grew from none to
five according to data provided through the local Multiple Listing
Service.
Distressed
properties are considered to affect the overall market by increasing
the inventory of homes for sale and by placing a downward pressure on
prices. The number of owners facing financial hardship can be expected
to increase over the next few years when a substantial wave of
Adjustable Rate Mortgages (ARMs) and exotic loans are forecast to
reset. In fact, many loans are defaulting before their reset
dates.
Outlook
It
seems like everyone these days is asking which way the real estate
market is headed and what 2009 holds in store for us.
Unfortunately, crystal balls are hard to come by. The answer to
these questions in some cases depends on whose opinion you choose to
believe. Here are some facts, observations, and opinions that may help
you to formulate your own point of view.
•
Most commentators do not see a significant turnaround in the national
real estate market during 2009, although there are some reasons for
guarded optimism that signs of improvement may start to appear later
this year.
•
Real estate is a cyclical business. We are now in the fourth year
of a buyer’s market on Hatteras Island, suggesting that we may be
nearing the bottom. If we are close to the low point, then it seems
reasonable to anticipate that the market will bounce along the bottom
for a while before it once again heads upward. This appears to be what
is happening on the island at the present time.
•
There is reason to believe that a tremendous amount of pent-up demand
for real estate exists. Reports indicate that there are between
$3.5 trillion and $4.0 trillion in money market funds at this time. One
report was as high as $7 trillion! Some of this money will
ultimately make its way into resort real estate.
•
Interest rates have declined to very attractive levels. Some
believe that rates may be headed even lower. Mortgages are available
for qualified borrowers, even though underwriting standards have
tightened across the spectrum of loans.
•
The situation concerning distressed properties is difficult to sort
out. On the one hand, there are very convincing statistics that
show that a record number of adjustable rate mortgages and exotic loans
are scheduled to have interest rate resets between now and 2011. On the
other hand, government leaders and lenders seem to be making every
effort to keep home owners out of foreclosure. Then again, if the
unemployment rate continues to increase, it will be difficult for
people without jobs to make their debt payments, regardless of the
repayment accommodations that are offered.
When
all is said and done, my expectation is that 2009 will see a
continuation of current trends with a moderation in the rate of price
declines and some improvement being noted in the market as we move
toward year-end.
The
number of prospective buyers who are making inquiries and looking at
properties appears to be increasing. At the same time, the majority
still seem 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. Even
with the difficult economic situation that the nation is facing, it is
hard to understand why buyers are not purchasing in greater
numbers. There is a large inventory of properties from which to
choose. There is little competition from other buyers.
Interest rates for conventional loans are at historical low points, and
prices have declined nearly 50 percent from their highs in
mid-2005. There can be little doubt that it is a great time to be
a buyer on Hatteras Island!
(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©2009 Tom & Louise Hranicka. All rights reserved.
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