January 25, 2010

Hatteras Island Real Estate:  Top stories of 2009

Each year, several unique aspects of the real estate market seem to define and to summarize the multitude of statistics and trends that play out on the island over the 12-month period. Last year was no exception to the rule.  In many ways, the top stories of the past year were uplifting in their underlying messages. 

Here are my candidates for the top stories about the Hatteras Island real estate market in 2009.

Early Signs Of Market Recovery Emerged

In my opinion, the number one story was that as the year progressed, there were increasing signs that the real estate market had finally turned the corner and was on the road to recovery.  The strongest indicator that the island’s market was improving was that the number of residential sales increased by almost 45 percent over 2008.  Prospective buyers echoed this positive sentiment when my colleagues and I often heard statements like, “I am not sure whether the market has actually reached bottom, but I think that it is close enough so that I don’t want to miss out on the next upward cycle.”

Like any reported event, there was also a “back story” behind the numbers.  While everyone was extremely happy to see sales increasing, the upward trend was limited to residential properties priced below $600,000 with the highest number of sales restricted to the price ranges of $400,000 and below.  Higher priced sales were severely limited with only seven sales of $700,000 or more and just two sales over $1 million.  In addition, the sales of unimproved lots dropped to the lowest level since I began tracking market data in 1994. 

Three other trends supported the conclusion that the bottom of the cycle may have been reached last year:

•    Average residential selling prices moved closer to the historical growth curve that we saw prior to the boom years.
•    Property supply and demand curves started to move closer toward each other after being almost parallel for a number of years.
•    The Hatteras Island Pending Home Sales Index, a leading indicator of future sales, remained above its previous long-term downward trend for the last 10 months of the year.

Foreclosure Filings Skyrocketed

A significant rise in the number of foreclosure filings was my candidate for the second most important story of the past year.  During 2009, the number of foreclosure filings for residential properties and unimproved lots climbed nearly 75 percent above the levels recorded in 2008. On a cumulative basis, there were almost as many foreclosure filings on the island as there were closed sales of home and lots.

This increase mirrored trends that were seen in real estate markets across the country. Unemployment, declines in the value of retirement assets and investment accounts, and falling property values merged with difficulties in refinancing mortgage loans to make it difficult for many owners to keep up payments on their properties. This pattern in distressed properties is projected to possibly get worse before it gets better, as interest rates on No Documentation and Option ARM loans acquired during the boom years enter their reset period over the next 18 months.

While the heightened number of foreclosure filings and subsequent foreclosure sales was noteworthy in and of itself, the impact that this tragic set of circumstances had on the selling prices of properties was a very important secondary impact. 

Despite the increased number of sales that occurred during 2009, the average selling price of residential properties on Hatteras Island dropped 38 percent last year, and the average selling price of unimproved lots declined by 48 percent.  The combined effects of the supply of properties exceeding buyer demand, foreclosed property sales, and short sales (the mortgage amount exceeded the value of the house/lot) caused selling prices to continue to fall. 

The theme of more sales at lower prices can be expected to persist through at least the end of 2010.

Interest Rates Remained Steady

An important factor contributing to the increase in residential sales was that interest rates remained low throughout last year.  There was little, if any, change in the interest rates for conventional 30-year fixed rate loans in amounts of $417,000 or less during 2009. 

The interest rate of 5.125 percent with no points was fairly consistent, although there were times when the rate dropped below 5.0 percent.  Interest rates for “jumbo” loans (those in excess of $417,000) actually declined over the course of the year from 6.875 percent plus 1 point to 5.875 percent plus 1 point.  However, this decrease was not enough to overcome more stringent loan underwriting and downpayment requirements for higher priced properties.  The forecast for 2010 is that interest rates will rise to between 5.5 percent and 6.0 percent as inflationary pressures resurface in the national economy.

Rental Market On A Roller Coaster

This time last year, rental managers up and down the Outer Banks were gasping for air as reservations for the 2009 season were off by as much as 25 percent from 2008 levels.  As you recall, during the first quarter of 2009, the financial system was in dire straits, and people were just plain scared.  They did not want to commit to the expense of their annual vacation while they were unsure what the future might hold for them. 

Then, as the economic crisis eased, and consumer confidence began to rise, rental bookings increased as well.  By year-end, the number of rental weeks recorded in 2009 was at or near the same level reported in 2008.  Looking back, 2008 could be described as an “average” year for the vacation home rental market on Hatteras Island, 2009 could be characterized as “soft,” and, 2010 is projected to be “improving.”

In summary, I think it would be fair to say that we are seeing the early signs of recovery in the Hatteras Island real estate market.  Long-time observers of local economic trends often talk about there being a 10-year cycle in the real estate market.  If we date the start of the most recent upward cycle at 2001, then the current upturn appears to be right on schedule. 

I believe that we should anticipate a gradual recovery versus a rapid turnaround, and I think that it would be reasonable to expect some setbacks along the way as foreclosures increase and events on the national stage play out. 

As we try to peer into the future, let’s always remember that there is no place like Hatteras Island, that in a very real sense property on the island is a scarce commodity, and that owning a place near the ocean is an important part of the American dream.

(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 [email protected] )

Copyrightę2010 Tom & Louise Hranicka.  All rights reserved.

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