When autumn arrives on Hatteras Island, the pace of life starts slowing down. There is more time to talk to friends and neighbors whom we may not have seen much over the past few months, and it is a time to catch up on the things that have taken place during the busy days of summer.

In this article, I would like to summarize some of the main real estate related trends and actions that have occurred over the past few months.

Signs of Market Recovery

As the year progresses, there are very encouraging signs that the real estate market on Hatteras Island may be on the road to recovery.  Consider these market indicators:

• Average selling prices are moving closer to the historical growth curve that we saw prior to the boom years.
• The supply/demand curves are starting to trend slowly toward each other after being relatively flat and far apart for the past few years. If present trends continue, it looks like the market will be back in balance again in about two to three years.  This projection tracks closely with the estimates that are being given by industry leaders.  
• The number of monthly residential sales is starting to show a marginal increase. For the last several years about 10 residential properties have been sold each month on the island. So far this year, the monthly average number of sales has risen to 13.
• The Hatteras Island Pending Home Sales Index, a leading indicator of future sales, has remained above its long-term downward trend for the past seven months.

We are not out of the woods by a long shot, and the recovery is anticipated to be gradual vs. a rapid turn around. There are still areas of significant weakness in the market.

• On a cumulative basis, between January and August, the number of foreclosure filings on the island equaled the number of sales of homes and lots.  Foreclosures nationwide are expected to increase through the fall of 2011 as exotic loans that were issued during the days of loose underwriting enter their interest rate reset periods. The magnitude of interest rate resets for No Documentation and Option ARM loans has the potential to create a second wave of foreclosures that could throw any market recovery off track.
• Very challenging financing conditions still persist for some segments of the market.  While loans are readily available to qualified buyers for loan amounts of $417,000 or less, financing is still tight, and underwriting requirements are still rigorous for higher priced residential properties and for unimproved lots. This year, only six homes have been sold with selling prices of $700,000 and above, and just 18 unimproved lots have been sold on the entire island.
• The presence of foreclosed properties and short sales, as well as the continuing gap between the supply of properties and the corresponding buyer demand, can be expected to keep pressure on the selling prices of both houses and lots.

For sellers of properties on Hatteras Island, the most important watchword in today’s market is “price.”  If you price your home or lot competitively, you stand a much better chance of selling it than if you hold on to unrealistic or outdated perceptions of value. For buyers, now is the time for action.  We are either at or very near the bottom of the current market cycle. There is a wide selection of properties from which to choose. Prices have significantly declined from the levels that existed during the height of the boom years, and interest rates continue to remain near historically low levels.

Dare County Delays Property Revaluation

Revaluation is the process through which the county reappraises each property for real estate tax purposes.  State law requires that real property be appraised at least every eight years, but counties have the discretion to conduct the revaluation more frequently.

In Dare County, the last revaluation took place in 2005, one year short of the eight-year requirement, in recognition of the appreciation that real estate had experienced during the “boom years.” At the same time the county changed the revaluation schedule to five years with the intent of avoiding large changes in tax bills in the future.

As luck would have it, the real estate market began to contract during the summer of 2005 and has continued to do so for the past four years.  This means that the growth in property values that occurred has been replaced by a cycle of depreciating values.

Here is where the story gets a little more complicated. Based on the commissioner’s decision in 2005 to schedule revaluations every five years, the next revaluation was planned for 2010. However, because real estate sales and the economy in general have weakened, the tax revenues that the county is receiving have declined. If the county proceeded with a revaluation next year, it was estimated that 73 percent of property owners would have seen an increase in their real estate taxes. So, the commissioners decided to delay the revaluation until 2011 when it is anticipated that the economic climate will be better, and any tax increases would be less of a burden on property owners.

This tax increase scenario would have occurred, in part, because of the formula for determining the tax rate that each property owner pays.  Real property is assessed at 100 percent of the fair market value as of Jan. 1 of the revaluation year. In its simplest form, the procedure for setting the tax rate is a formula in which the budget adopted by the Board of Commissioners minus various other sources of revenue is divided by the assessed value of all properties in Dare County. The tax rate that is derived in this manner is then expressed as a dollar amount per each $100 of assessed value.  If the budget stays the same or increases while the assessed value declines, the tax rate mathematically goes up.

There are a couple of observations that might help to provide some perspective for this somewhat technical discussion. First, during times when real estate values are increasing, most of us are paying a lower amount of taxes than we should. Conversely, when real estate values are declining, we may be paying more.  Over the long haul, if we average the “overpayments” with the “underpayments,” it probably works out that we have been paying fairly close to what we would have paid if our properties were reappraised each year.

Second, except for some generalizations, it is essentially impossible to determine the exact amount that each of us will be paying in real estate taxes after the next revaluation because of the variables involved in the reappraisal process and the ultimate tax rate determination.  It has been estimated that owners of non-oceanfront properties will see a small increase in their annual real estate tax bill, while oceanfront property owners will see a decrease. This is a reflection of the amount of decline that each category of property has experienced during the downturn.  Oceanfront properties have generally decreased in value more than non-oceanfront properties.

When taxes enter into your discussions, you may find it interesting to compare the real estate taxes that property owners pay on their Hatteras Island properties with the taxes that you pay at home or in other resort areas.  In most instances, it is my sense that Hatteras Island taxes will be lower. As we look at the many reasons why island properties are so attractive to prospective buyers, reasonable real estate taxes emerge as another benefit.  

Insurance Controversy Resolved

As you may recall, earlier this year there was quite a controversy concerning changes in homeowner insurance rates, deductible amounts, and surcharges that the North Carolina Insurance Commissioner approved for policies written in the coastal counties. Thanks in large measure to the combined efforts of the Dare County attorney and the government affairs director for the Outer Banks Association of Realtors, the changes which unfairly penalized coastal county homeowners were modified by the state legislature and approved by the governor in late August.

• The Beach Plan policy deductible for wind damage (the amount that the homeowner must pay out-of-pocket before insurance coverage kicks in) would have increased from a flat rate deductible to 2 percent of the home’s value as stated in the policy with a minimum deductible of $1,000 on a per occurrence basis. In the revised version, the deductible was cut to 1 percent of the home’s value with a minimum deductible of $1,000 on a per occurrence basis.
• The Beach Plan is allowed to charge higher rates than private insurance companies for the coverage that it provides. This additional cost is called a surcharge.  Surcharges for full peril coverage (the majority of policies) were scheduled to increase from 115 percent to 125 percent of the comparable private market insurance rate.  The surcharge for policies that provide only wind coverage would have increased from 105 percent to 115 percent. The surcharges in the final bill were left unchanged at 115 percent for full coverage policies and 105 percent for wind only coverage.
• To assure that the Beach Plan has enough funds available in the event of a catastrophe, a provision was added that excluded insurance for homes valued at more than $750,000 unless coverage for the amount in excess of $750,000 is purchased from a private carrier prior to the issuance of a Beach Plan policy.
• In a separate action, a rate increase of 6.5 percent approved by the North Carolina Rate Bureau for non-Beach Plan homeowner’s insurance policies bought in Dare County remained unchanged after unsuccessful litigation was filed to stop the increase.

Apart from the specific changes noted above, I think that one of the most important aspects of the legislation was that it represented recognition on the part of the North Carolina legislature that decisions about insurance should acknowledge that the different geographic regions of the state are interdependent when disasters strike, rather than each region being viewed in isolation from the others.

New Consumer Protection Laws Affect Real Estate Closings

One of the by-products of the recent turmoil in the mortgage market has been the enactment of several new consumer protection laws. Some of the goals of this legislation have been to provide buyers with better information when they purchase a home and to give them adequate time to review and to understand the terms and conditions of the loans they are acquiring.  Full disclosure of the costs associated with their purchase was also an objective.

In addition, there has been legislation that attempts to reduce some of the potential for inaccuracy and undue influence on the appraisals that are required as part of the loan underwriting process. Most local lenders may no longer select the appraiser for loans that they originate. The appraisers are now selected by the lender’s home office or a management company. 

This has had good and bad consequences. On the beneficial side, the opportunity for collusion on appraised values has been reduced.  On the negative side, some appraisers are being selected to value properties in locations for which they have limited knowledge of the local market.

The end result of the enhanced disclosure requirements is that it may take longer to close real estate transactions than it has in the past, and extra time may be required to meet the financing provisions contained in the offer to purchase and contract. 

Both your real estate broker and your lender should be aware of these new timelines, and they will work with you to assure that the dates in the contract are realistic.  A rule of thumb is that the closing of a real estate transaction should be able to occur about 45 days after agreement is reached between the buyer and the seller.

I hope you find these summaries both interesting and informative. In their own way, each of the changes is making a positive contribution to the environment for buying and selling property on Hatteras Island.