March 3, 2010



Looking back at the buyer’s market that began on Hatteras Island during the summer of 2005, it would be hard to find a sector that has been harder hit than unimproved lots. After peaking in 2002, the number of lot sales on the island has declined for the last seven years. During 2009, only 30 lots were sold on the entire island – the lowest number recorded since I began keeping records in the mid-1990s.
   
Interestingly, despite the decrease in the number of lot sales, the average selling price of unimproved properties kept rising until 2006, after which a steep drop set in. Last year, the average selling price of unimproved lots decreased 49.4 percent from the level recorded in 2008.  The average selling price for lots in 2009 was $122,633, down over 69 percent since its peak three years ago.
Another very important factor affecting the market for unimproved lots is the availability of financing.  These days, there are only a few financial institutions that are still offering lot loans.  There seems to be a shift in the lenders’ view of lot loans back to a time when these loans were considered to have a high degree of risk.  There is no “secondary” market in which lot loans can be resold as there is for residential loans.  Therefore, the banks that are making lot loans must keep these loans in-house.

When available, a typical lot loan in today’s environment might require a 25 percent down payment, an interest rate of 6.5 percent plus a 1 percent origination fee (i.e., 1 percent of the loan amount), and probably a commitment from the borrower that they will begin construction within 12 months. The loan might be amortized over 15 years with a balloon payment of the outstanding balance after two years. There could also be a geographic limitation involving the borrower’s state of residence.

In view of the gap that currently exists between the supply of lots and the corresponding level of buyer demand, together with the presence of foreclosures and short sales in the market, and challenges with financing purchases, it is reasonable to anticipate that selling prices will continue to decline for a while longer.
      
Buyers today are looking for location, condition, and price in the properties that they are considering. In a market like the one that we are experiencing, price is a seller’s most effective marketing tool. Since the location of properties is fixed, and their physical condition (size, buildable area, etc) is usually reasonably good, the only variable left to work with is price.

In the current market, listing price recommendations from real estate brokers are based on a belief that the seller’s financial interests will be best served by pricing their lot as competitively as possible and attempting to sell it as quickly as market conditions will allow, rather than pricing it higher and then chasing the market downward. If present market conditions persist, owners can anticipate that their properties for the near term will decrease in value rather than appreciate the longer they go without selling until the cycle changes.  Most observers believe that in a falling market, the sooner you sell, the more you make, and the less you lose. 

My personal belief is that there are tremendous opportunities for buyers in the Hatteras Island real estate market today.  One example would be oceanfront properties. Excluding properties with extenuating conditions like the potential for high erosion, there are nine oceanfront lots available for purchase.  Three of these are in the $500,000 to $600,000 price range. By historical standards, these are genuine bargains. Similar patterns exist for properties in other types of waterfront and non-waterfront locations.

I think that it is also important to note the interrelationships that exist among various segments of the economy.  For example, as the fortunes of the unimproved lot market have deteriorated, the number of single-family building permits has dramatically declined. In 2004, there were 181 single-family detached building permits issued on Hatteras Island.  Last year, that number had fallen to 25.  The impact of this decline on the island’s construction industry has been heartbreaking. 
 
The bottom line conclusions of these trends and observations for property owners are that properties that are the most competitively priced will be the first to sell. For buyers, the message is that we are probably at or near the bottom of the current cycle and that now is the time to seriously consider making your dream of owning a place at the beach a reality.  The market for residential properties showed signs of recovery in 2009.  Hopefully, unimproved lot sales will demonstrate a similar resilience this year.


(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©2010 Tom & Louise Hranicka.  All rights reserved.

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