Real Estate: Anatomy of the buyers’ market
By TOM HRANICKA
the most frequently asked question that my Realtor colleagues and I are
asked is “How is the real estate market on Hatteras Island
doing?” My answer these days is that the market for
properties appears to have stabilized, and I am hopeful that 2011 will
be the year that the unimproved lot market turns the corner.
Using this response as a launching point, I thought it might be
interesting to attempt to summarize the impact of the recent buyers’
market on a variety of performance indicators.
As near as I can measure it, I believe the beginning of the buyers’
market for both residential properties and unimproved lots began in
June, 2005. It probably ended in 2009 for residential
but we are still waiting to see if the lot market has reached its
cyclical low point. In reality, the timing of the top and
of the market is somewhat of an educated guess, because, as we will
see, various indicators topped out and recovered at different times.
My analytical framework for understanding market trends usually starts
with the supply of properties and the corresponding buyer demand for
those properties. Within this context, the inventory of
residential properties peaked in June, 2006, and reached its most
recent low point in February of this year. The annualized
of residential sales reached its high point in June of 2005 and
bottomed out in March, 2009, representing a decrease of nearly 65
percent. As the market improves, we can expect to see the number of
properties for sale continue to decrease, while sales rise until we
shift once again from a buyers’ market to a sellers’ market.
The largest supply of unimproved lots was reported in September, 2006,
while the lowest number of lots for sale occurred in May,
Lot sales were at their highest as far back as May 2002, while
annualized sales stopped declining in 2009, having fallen an astounding
92 percent! As you can see the market for unimproved lots
came to a complete halt.
The ramifications of this drastic decline in lot sales have been
devastating for the construction industry on the island.
the first five months of 2005, 67 single family residential permits
were issued. In comparison, during the same period in 2009
nine single family permits were issued. So far this year, 12
permits have been written.
While supply and demand statistics are interesting in and of
themselves, the economic influence of the interaction of these two
market forces is best reflected in their impact on prices. I
personally tend to look toward the movement of average selling prices
as the clearest indicator of the state of the market.
The average selling price of residential properties reached a cyclical
high in 2005, and bottomed out in 2009 after a decline of over 41
percent. From 2009 through May, 2011, prices have improved
slightly, but have basically remained flat.
The picture is much worse for the average selling price of unimproved
lots. After peaking in 2006, lot prices had dropped more than
percent by the end of 2010. I am cautiously optimistic that
prices of unimproved lots may be on the cusp of improving.
The number of properties under contract to be sold is generally
considered to be a leading indicator of future sales
This measure of the health of the residential real estate market peaked
in May, 2004, and reached a low point in December, 2008, after
declining 89 percent. The good news is that the number of
under contract has been showing improvement.
From the previous discussions concerning the market for unimproved
lots, you can probably guess what the under-contract statistics
showed. In August, 2003, there were 138 unimproved lots under
contract to be sold. In March and April 2009, that figure had
dropped to just two! While it may not be much of an
we are now up to six lots under contract.
No discussion of the current real estate cycle would be complete
without some acknowledgement of the role that short sales and
foreclosures have played. Short sales, as you recall, are
situations in which the seller owes more on their mortgage than the
value of the property, and the seller asks the lender to allow them to
sell the property for less than the amount of the outstanding
mortgage. Foreclosures are the sales of bank-owned properties.
Prior to 2007, we had not seen any meaningful level of foreclosure
sales since the early 1990s, and short sales were basically
non-existent. Starting in 2008, foreclosures became a
component of the real estate market on Hatteras Island, and by May of
this year, 550 homes and lots had been the subject of a foreclosure
While the number of actual foreclosure sales has remained relatively
constant over the past few years, the number of short sales has
skyrocketed. I think the increase in short sales is the
three things – a growing awareness by sellers of the value of short
sales as an alternative to foreclosure, a rising comfort level among
real estate agents with the short-sale process, and an increasing
receptivity by lenders to the short-sale option.
The most significant impact of short sales and foreclosures on the real
estate market is the limit that they impose on selling price
appreciation. Judging from the total number of bank-owned
properties nationwide in relation to the number of bank-owned
properties that are actually being offered for sale (about 33 percent),
the challenges associated with distressed properties are expected be
with us for several years to come.
Recognizing that in hindsight everything becomes crystal clear, what
were some of the signs that, had we understood them, would have told us
that the boom years could not continue?
Believe me, I have thought about the answer to this question many times
over the past six years. In my opinion, the best indicator of the
market bubble was the increasing divergence between actual average
selling prices and the “normal” price appreciation curve for
Between 1994 and 2000, the average annual selling price fit the normal
growth curve very closely. Then, beginning in 2001, the gap between the
normal growth curve and the average selling price increased
dramatically until the peak of the market in 2005 when the gap had
widened to over $300,000! Looking back, this was a clear sign that the
market was overheated and that the price increases that we were
experiencing were unsustainable.
From the foregoing discussion and statistics, the severity of the
recent downturn can be appreciated. While the dates of the
and low points of the cycle can be argued, I feel fairly confident
that, at a minimum, the real estate market on the island is
stabilizing, and we are starting to see a noticeable improvement in
some performance indicators, such as the number of sales and relatively
steady home prices. Because of the persistent overhang of
distressed properties, my sense is that we can probably expect to
experience more sales at relatively flat prices for the foreseeable
All things considered, I think we will see a consistently improving
market over the next few years, but nothing like a repeat of the boom
years from 2001 to 2005.
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]
Tom & Louise Hranicka. All rights reserved.