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Hatteras Island Real Estate: A glass half empty or half full?
By TOM HRANICKA Enough is enough! The sensationalism and hyperbole that are characterizing newspaper articles and television reports concerning the real estate and mortgage markets have reached the point where a plea for rational, balanced presentation is no longer just desirable – it is a necessity. Fear-based headlines like “Mortgage Meltdown,” “Home Implosion,” and “Credit Crisis” may achieve the objectives of selling papers and causing us to turn away from whatever we are doing to watch the TV, but they do very little, in my opinion, to foster an objective understanding of the relative strength or weakness of current market conditions. More importantly, they say little, if anything, about what is actually happening in our local Hatteras Island real estate market. Here on the Outer Banks, we are all too familiar with this style of reporting. When a hurricane forms off the southeast coast, reporters and newscasters with all of their supporting equipment converge on the island. Miles away, out-of-state property owners and seasonal visitors sit glued to their televisions, listening to dire reports about the storm and its potential consequences. As the storm approaches, 30 mile per hour winds, which are commonplace to island residents, are portrayed as ominous portents of the disaster that will surely follow. On the scene reports are updated every few minutes. Once the hurricane finally arrives, it usually lasts for several hours and then moves out to sea or heads north. Except for a few local stations, the subsequent silence from those same reporters is deafening. They have moved on to the next “crisis.” Non-resident property owners are left to wonder if their homes are still standing. Six months later, property management companies continue to receive calls from seasonal visitors asking if Highway 12 is open yet. Did the storm cause damage to the island and to its infrastructure? It almost always does. However, except for exceptional storm events like Hurricane Emily in 1993 and Hurricane Isabel in 2003, the most usual scenario includes short-term electric service outages, flooding of the highway, loss of roof shingles, and some wind-driven rain damage to cottages. Within a few days to a week, life is pretty much back to normal on the island. I am certainly not challenging the accuracy of the housing and finance market statistics that are being reported, and the personal pain and economic hardship of foreclosures should be a heartfelt concern for all of us. I am questioning the choice of which statistics are used and the spin that is put on the numbers. Are there serious systemic challenges facing the mortgage industry today? Yes, without question. Are the dynamics of supply vs. demand, prices, and the length of time that properties remain on the market different from the environment that existed two years ago? Most definitely. Does the bad news about financing and real estate overwhelmingly outweigh the good news? Not by a long shot! The following comments and observations represent my best effort to offer some sense of balance and perspective on the issues that are at the forefront of current news reports. The Mortgage Market The
difficulties facing the mortgage market are primarily related to
“sub-prime” loans, and they are the most severe in a
relatively few states. More specifically, sub-prime Adjustable Rate
Mortgages (ARMs) are at the heart of the problem. It should also
be noted that not all sub-prime loans were made to borrowers
with poor credit. In our resort area, a substantial number of
well-qualified applicants voluntarily chose sub-prime over traditional
loans for a variety of reasons, including ease of underwriting.
• A little over 13 percent of all mortgages are classified as sub-prime by the Mortgage Bankers Association. About 11 percent of the sub-prime loans are more than 90 days past due or are in the process of foreclosure. This means that roughly 89 percent of the sub-prime category of loans are being paid on time or are fewer than 90 days delinquent. • Looking at the broader mortgage market, the Mortgage Bankers Association recently reported that the delinquency rate for all outstanding loans during the third quarter of this year was 5.59 percent. Loans in the process of foreclosure added another 1.69 percent for a total of 7.28 percent. In other words, 92.7 percent of all mortgage loans were not delinquent or in the process of foreclosure. • As a point of reference, at the end of September, only 29 out of an estimated 8,600 privately owned real estate parcels on Hatteras Island were in foreclosure – about three-tenths of one percent. • Delinquency and foreclosure troubles appear to be greatest in states that had the highest levels of speculative activity during the boom years and those in the Midwest with significant unemployment related issues. California, Florida, Ohio, Michigan and Indiana are at the forefront of these trends. • The relativities associated with the mortgage market issues also need to be appreciated. According to the Mortgage Bankers Association, “While subprime ARM delinquencies and foreclosures are climbing in all states, in most states the actual number of loans involved is fairly modest. For example, the number of subprime ARM foreclosure starts in California during the third quarter equaled the starts in 35 other states combined.” • According to the U.S. Census Bureau’s 2005 housing survey, there were 74,931,000 occupied residential units in the country. One-third of these properties (24,776,000) were owned free and clear with no mortgage debt. • With regard to the second home market, a survey conducted earlier this year by the National Association of Realtors estimated that 25 to 30 percent of vacation and investment properties did not have any mortgage debt. Financing Availability and Interest Rates Conventional loans to qualified buyers are essentially unaffected by problems elsewhere in the mortgage market. These loans, which are underwritten using traditional standards, are being made largely without any significant interruption. The mortgage market has changed. It has not shut down, and the changes that are occurring are generally positive in nature. • On the Outer Banks financing is readily available for qualified buyers. Underwriting requirements have become more rigorous across the spectrum of loans. • Borrowers who have limited or no equity in their properties and who are attempting to refinance adjustable rate mortgages are having difficulty finding alternative financing. • Interest rates are near historical low points. Low interest rates make properties more affordable and provide a strong incentive for buyers to purchase before rates once again head upward. • During the first week in December, the interest rate offered through a major lender for 30-year, fixed-rate conforming loans (loan amounts of $417,000 or less) was 5.875 percent with no points. A point equals one percent of the loan amount. The interest rate for jumbo loans (loan amounts in excess of $417,000) was 6.375 percent with the payment of one point. Prices The prices of properties have declined in most markets across the country as well as here on Hatteras Island. Lower prices in conjunction with low interest rates are a winning formula for prospective buyers. • On Hatteras Island, the average year-to-date selling price of residential properties is $487,302, and the corresponding median selling price (half the prices are above, and half are below) is $380,000. • The average residential selling price is 17 percent lower than the same measure in 2005, the year when the market peaked. The median selling price is 27 percent lower than it was in 2005. There is good reason to believe that the real estate market on Hatteras Island is stabilizing and that it may be at or near its cyclical low point. Experts agree that, except by pure luck, it is highly unlikely that anyone can time the market and purchase at the exact bottom. Buyer Perspectives Since the summer of 2005, we have experienced a buyer’s market on Hatteras Island. This has created conditions that make it an opportune time for anyone thinking about buying a cottage or lot on the island to turn their thoughts into action. • With nearly 475 residential properties and 328 unimproved lots being offered for sale, prospective buyers now have a very broad selection from which to choose. • Given the wide gap between supply and demand, both the listing prices and the selling prices of properties have decreased. The latest research that I completed indicated that most residential properties were selling for 90 to 95 percent of their list prices. • In addition to the price decreases that are being seen, buyers may find sellers more willing to offer concessions during contract negotiations. Examples might include the seller paying a portion of the buyer’s closing costs, the seller “buying down” the purchaser’s interest rate by paying loan points, and, in some cases, the seller guaranteeing a specific dollar amount of rental income for the first full year of ownership. • As a by-product of the increased supply of properties, prospective buyers should find the purchasing environment less stressful. There are fewer buyers looking at properties, and there are increased inventories of homes and lots for buyers to consider. Seller Perspectives Market conditions such as those that we are currently experiencing on Hatteras Island can initially appear daunting for property owners who want to sell their cottages or lots. However, if a few simple facts are understood and acknowledged, a much more optimistic outlook emerges. • Properties are being bought and sold all of the time, regardless of market conditions. • Referring again to the study of prices that I researched earlier this year, the majority of properties that sold between January and June had a selling price that was higher than the original purchase price. • Since 1998, the average selling price of residential properties on the island has risen 187 percent. While prices are down from their peak in 2005, the average residential selling price in 2007 is still at the fourth highest level reported during the past 10 years. • Sellers have the most control over the price of their properties and the condition of their homes. These are exactly the same two characteristics that buyers are seeking. Buyers are searching for the most attractively priced properties that are in the best condition. It is more than fair to ask if I am implying by this discussion that there really are not any problems in the mortgage and real estate industries. Quite the contrary - I am simply attempting to demonstrate that, for the most part, the situation is much more positive than the national media is portraying it. As you read the newspaper and watch television, keep two or three things in mind. First, real estate is cyclical, and it is a long-term investment. The reports that we are seeing and hearing focus on the short-term crisis du jour. Second, every real estate market is local. While there can be no denying that events in the outside world have some effect on the Hatteras Island market, the statistical profile for our resort environment is quite different from the national, primary residence market that is the basis for the reports. Third, as we have recently seen, our government is not going to sit idly on the sidelines and let an economic collapse occur, especially with elections less than a year away. By now, I think you can see the picture that I am trying to paint. Nothing is ever one-sided. Sometimes, it can be difficult to see all sides of an issue, but if we take the time, do a little research, consult with an experienced Realtor who knows the local market, and look for the positive aspects in what is otherwise being presented as a story with a foregone pessimistic conclusion, some amazing perspectives and opportunities can be discovered. As the famous radio commentator, Paul Harvey used to say, “And now you know the rest of the story!” Decide for yourself – is the glass half-empty or half-full? (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. 
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