June 30, 2011


Hatteras Island Real Estate:  Anatomy of the buyers’ market

By TOM HRANICKA




Perhaps 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 residential 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 properties, 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 bottom of the market is somewhat of an educated guess, because, as we will see, various indicators topped out and recovered at different times.

Supply & Demand

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 number 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, 2011.  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 almost came to a complete halt.

The ramifications of this drastic decline in lot sales have been devastating for the construction industry on the island.  During the first five months of 2005, 67 single family residential permits were issued.  In comparison, during the same period in 2009 only nine single family permits were issued.  So far this year, 12 permits have been written.

Average Selling Prices

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 76 percent by the end of 2010.  I am cautiously optimistic that the prices of unimproved lots may be on the cusp of improving.

Properties Under Contract

The number of properties under contract to be sold is generally considered to be a leading indicator of future sales activity.  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 homes 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 improvement, we are now up to six lots under contract.

Distressed Properties

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 noticeable 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 filing. 

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 result of 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.

Lessons Learned

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 residential properties.

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.

Summary

From the foregoing discussion and statistics, the severity of the recent downturn can be appreciated.  While the dates of the high 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 future.

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.


(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] )
Copyrightę2011 Tom & Louise Hranicka.  All rights reserved.





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