June 8, 2010

Hatteras Island Real Estate:  Signs of Recovery


Early June is truly a wonderful time on Hatteras Island.  Summer visitors are starting to return for their vacations.  The oleanders are in full bloom, and the ocean is a magnificent kaleidoscope of blue.  Perhaps the excitement and anticipation of a new season is causing me to be overly optimistic, but I honestly believe that the worst of the recent market cycle is behind us, and the island’s real estate market is on the road to recovery.

A real estate commentator once observed that nobody rings a bell when the market has reached a bottom.  In other words, the only way that we know the low point in a market cycle has been reached is in hindsight.  I think this is true, in part, because there is no single indicator that tells us the exact point at which a turnaround has begun.  The situation is somewhat similar to starting up an engine after it has been sitting idle for a long time.  At first, the engine spits and sputters.  Then, once all of the cylinders start firing, it begins to run at full power.

Here are the indicators that I am seeing that suggest to me that a market recovery is in progress:

•    While the inventory of residential properties still exceeds buyer demand by a wide margin, the supply and demand curves are slowly trending toward each other.  At the current pace of sales, it would take about two years to sell all of the residential properties currently being offered for sale.  By comparison, during the summer of 2008, there was a 4.1 year supply of homes and condominiums.

•    The monthly number of sales is increasing.  During 2008, about 10 residential properties were sold each month on the island.  That number rose to 15 sales per month last year, and it has held essentially unchanged at that level for the first five months of 2010.  February 2009 was the month with the lowest number of reported sales.

•    The decline in the average selling price of residential properties that we have seen since 2005 seems to be ending.  In fact, we have started to see a slight rise in selling prices between January and May of this year.  It appears that 2009 will have been the year that selling prices bottomed out.

•    Looking at longer term price trends, after being above the island’s historical growth curve for eight years, the average residential selling price in 2009, and thus far in 2010, are very close to the “normal” rate of appreciation.

•    Finally, the Hatteras Island Pending Home Sales Index, a leading indicator of future sales activity that is based on the number of properties under contract to be sold, has been above its long-term downward trend for the past 11 months.  The lowest point of this statistical measure occurred in December 2008.

Before we get too excited, let’s not forget about those cylinders of the market engine that are still not operating the way they should.  The major market segments that continue to exhibit significant weakness are the more expensive properties, unimproved lots, and foreclosures and short sales.

•    The emerging market recovery has not benefited all price ranges equally.  Sales of residential properties have been concentrated in homes with selling prices below $500,000.  Only about 15 percent of all residential sales since January have had selling prices above $500,000, and the highest reported residential sale this year was $815,000.  One of the main challenges faced by the sellers of higher valued homes is that financing is tight and underwriting standards are rigorous for loans in excess of $417,000.  Lenders have to fund these loans out of their own assets, and there is a limited, if any, market to resell “jumbo” loans to investors.

•    Unimproved lots have really been hit hard during the buyer’s market that the island has experienced since 2005.  During 2009, just 30 lots were sold on the entire island, and 15 lots have been sold this year between January and May.  Like high-end residential properties, the availability of financing for unimproved lots is quite limited.  It is my understanding that only three lenders on the Outer Banks are currently making lot loans, and the underwriting for these loans is quite stringent. A foreclosed lot on the soundside in Avon recently sold for $18,500!   My instincts tell me that this could represent the bottom of the market cycle for lots.

•    The sales of foreclosed properties and short sales (the sale price of the property is less than the amount of the mortgage) represent almost 50 percent of residential sales.  Since these properties are nearly always sold at a substantial discount, their presence in the market places a downward pressure on selling prices.

While the number of foreclosure sales has remained fairly constant, the number of short sales has dramatically increased over the past year.  My sense is that this increase reflects a growing awareness by sellers of the advantages of a short sale as a pre-foreclosure alternative and a higher level of comfort with the short sale process among real estate agents.  I also believe that the number of short sales is understated, since some sellers choose to bring cash to the closing table vs. having their credit adversely impacted by a short sale on their record.

An interesting discussion is going on in the real estate and financial media concerning foreclosures.  The majority of reports have projected a massive increase in foreclosures during the next 18 months as interest-only and option ARM loan interest rate reset periods come due.  However, an emerging school of thought suggests that lenders will control the volume of foreclosed properties that are released into the market in order to avoid depressing the overall value of their portfolios.

Prospective buyers seem to recognize the uneven nature of the real estate market recovery on Hatteras Island.  Buyers frequently comment, “I am not really sure if the market has reached bottom, but it is close enough that I don’t want to miss the next wave.”

In summary, I think we are seeing some pretty convincing evidence that real estate market conditions on the island are improving.  I also think that the recovery, as it progresses, can be expected to be a gradual vs. a rapid turnaround.

The practical implications of these statistics and trends are twofold.  If you are a seller, those properties that are priced to reflect current market conditions rather than past values will be the most likely to be sold.  If you are thinking about purchasing a home or a lot on Hatteras Island, it is a great time to be a buyer while we are still in the early stages of the market recovery.

All things considered, these trends are good news for everyone, and they seem to track with other positive reports about the rental market and the local economy.

(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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