April 27, 2015

Hatteras Island Real Estate:  Oceanfront Property

By TOM HRANICKA 

Watching sunrises so beautiful they can bring tears to your eyes. Seeing the full moon fill the horizon and then leave a trail of sparkling diamonds in the sea as it travels west.  Looking with child-like wonder at the sky on a clear winter night, finding it impossible to believe that there could really be so many stars.  These and a hundred other sensations and sounds are both the dream and the reality of oceanfront living on Hatteras Island.

For millions of Americans, owning a home on the ocean is a lifelong fantasy.  The dream often starts when we are children and grows over time as fond memories of happy family vacations merge with summers spent working at the beach and good times shared with close friends.  As youth matures into adulthood, the cycle repeats itself, and those who once were children, bring families of their own to enjoy the sun and the sand and the sea.  For some, the lure of the ocean becomes so compelling that they decide to purchase oceanfront property.  Others make the decision for investment reasons.

Hatteras Island is blessed by the fact that approximately 65 percent of the island is in its natural, undeveloped state, dedicated to the Cape Hatteras National Seashore and the Pea Island National Wildlife Refuge. 

According to Dare County records, there are about 819 oceanfront parcels on the island. In total, 81 percent of these oceanfront properties are currently developed.  Avon is the village with the largest number of oceanfront properties.  Buxton has the fewest. The oceanfront is close to being built out in some villages.  For example, in Avon, Buxton, Salvo, and Waves, there are only 11 or fewer vacant oceanfront home sites still available.

An overwhelming majority of oceanfront homes are in a rental program. The remainder are used as seasonal or year-round residences. 

Let’s take a closer look at oceanfront properties and the various dimensions that define this fascinating segment of the real estate market on Hatteras Island.

Oceanfront homes come in all shapes and sizes from single-story beach boxes, to condominiums, to elegant seaside retreats.  The asking prices reflect the diversity in the oceanfront market.  Single-family home prices range from $299,900 to $1.5 million, while condominiums are priced between $132,000 and $300,000.  Currently, there are 56 oceanfront cottages and four direct oceanfront condominium units for sale on the island.

As near as I can tell, the first sale of a residential property with a selling price of $1 million or more was recorded in 1999. The highest selling price for an oceanfront home was $2.1 million in 2007.  In the early 1990s, about 10 oceanfront homes were sold on the island each year.  Last year, 29 oceanfront cottages on the island were purchased with selling prices ranging from $189,600 for a home in a high-erosion area to $1.55 million. 

The real estate market runs in cycles, and oceanfront properties are not immune to these ups and downs. Because oceanfront locations are the prime properties on the island, they are often considered a bellwether for the real estate market.  From this perspective, the current real estate market is no exception to the rule.  Residential oceanfront cottages have exhibited some of the same patterns as the market in general since the buyer’s market began on the island in 2005. For example, average selling prices are off about 45 percent – the same percentage as residential sales in general.

This is a good news/bad news story. Sellers certainly do not like to see property values decline, but for anyone considering the purchase of an oceanfront home, there probably could not be a much better buying opportunity. When you think about it, a buyer in the current market can often purchase a very nice oceanfront home and lot for close to the price of an undeveloped oceanfront lot 10 years ago. 

From the rental market perspective, the variety of available oceanfront homes is reflected in the number of weeks rented, weekly rental rates, and gross rental income.  The smallest oceanfront cottages rent around 22 weeks each year, and can be leased for just under $700 per week in the off-season.  Average size homes rent from 22 to 28 weeks per year.  The newest and largest oceanfront houses are rented up to 33 weeks each year and can command rental rates exceeding $13,000 per week.  Gross rental incomes for oceanfront homes range from about $15,000 per year to $180,000!  Rental income can make the cost of owning an oceanfront home more affordable.

Whether it is for investment or as an intermediate step in owning an oceanfront home, some buyers choose to purchase unimproved lots.  Excluding properties located in areas that have experienced high erosion, oceanfront lots, which are rapidly diminishing in availability, range in price from $250,000 to $695,000.  Differences in prices can be attributed to such factors as location, lot size, ocean frontage, the usage of adjacent properties, and the subdivision within which the property is located.  Presently, there are 14 oceanfront lots for sale, five of which are in an area of high potential erosion.  

The number of oceanfront lots that have been sold in recent years is significantly lower than at their peak in 2006 when nine oceanfront lots were purchased. Since 2008, fewer than six undeveloped properties have been sold each year.  The average selling price of oceanfront lots over the past decade has declined substantially.  If the sales of oceanfront lots in high erosion areas are filtered out of the calculation, the decrease in the average selling price is about 68 percent. 

When prospective buyers are considering oceanfront properties for purchase, they will frequently ask about the cost of flood insurance. At the present time, the cost of flood insurance is quite reasonable for most oceanfront homes. The operative words here are “at the present time.”

Over the past three years, there have been several pieces of federal legislation designed to put the National Flood Insurance program on solid financial footing. In March 2014, the Homeowner Flood Insurance Affordability Act was passed by both the House of Representatives and the Senate, and it was signed into law by the President.

Of direct relevance to the Hatteras Island real estate market, this legislation reinstated grandfathering on all properties that were built to a Flood Insurance Rate Map standard since 1978. This includes all primary resident policyholders, second home policyholders, and non-resident policyholders.  A policyholder and any subsequent owner of property built in a flood zone will be allowed to continue to pay premiums based on the flood zone and base flood elevation in place at time of construction.

As I understand it, the details of how the Federal Emergency Management Agency will implement the provisions of this legislation are still being worked out.

As a footnote to the Homeowner Flood Insurance Affordability Act, there is another issue closer to home which could impact flood insurance rates. This factor is the upcoming changes in the Dare County and Hyde County Flood Insurance Rate Maps. It has been anticipated that the preliminary version of the new maps may be available for review as early as this summer with the final maps taking effect in 2016 for both counties. Initial and very tentative impressions of the new maps are that they may offer significant rate relief for a significant number of Dare County property owners. 

Considering the unparalleled uniqueness of Hatteras Island, demographic trends, the relative scarcity and desirability of oceanfront property, and current price levels, a persuasive argument can be made that if you have plans to buy on the oceanfront, now is an opportune time to turn your dreams into reality.  This is especially important if you are thinking about buying an oceanfront lot and building.  Quite simply, the supply of oceanfront property is essentially fixed, and demand over the long run can be expected to exceed the available supply.

When you reach the point of deciding whether or not to buy that oceanfront property you have been dreaming about, it is always easy to find practical reasons for putting off the decision for another year -- distance from home, possible erosion, the threat of storms, competing priorities.  And, whatever decision you make, you will probably be able to justify it.  But in the process, also think about what you will be missing - sunrises over the sea, full moons filling the sky above the ocean, the smell of salt air, the soothing sound of the waves lulling you to sleep.  This is a decision that comes as much from the heart as from the logical parts of our mind. 

They never taught us to make these kinds of decisions in school, did they?

(Tom Hranicka is a broker with Outer Beaches Realty. Questions and comments may be sent to him at P.O. Box 280, Avon, NC 27915 or by e-mail to hranicka@hatterasisland.com. Copyright 2015 Tom & Louise Hranicka.  All rights reserved.)


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