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January is traditionally a time for looking back at the previous year
and looking forward to what the next twelve months may hold in store.
With the final year-end statistics for 2007 just available, it seems
like a good time to take stock of the real estate market on Hatteras
Island.
Perhaps the broadest summary statement that might be made about the
island’s real estate market is that some aspects appear to be
stabilizing while other areas continue to deteriorate. More
specifically, the gap between the supplies of cottages and lots that are
for sale and the corresponding buyer demand for these properties
remained relatively stable during the past year. The other side of the
coin is that with supply exceeding demand by a wide margin, selling
prices continued to decline. Let’s take a closer look at the various
dimensions that defined the real estate market. Graphic displays of
these trends can be viewed in the “Market at a Glance” segment of the
Real Estate and Business section of the Island Free Press web site.
Supply vs Demand
The supplies of residential properties and unimproved lots changed very
little throughout 2007. Similarly, the number of properties sold
remained fairly constant. In round numbers, approximately 500 cottages
and 300 home sites were consistently listed for sale, while about 10
homes and 4 lots were sold each month. Comparing the supply and demand
statistics, throughout the year there was a 3.5 year supply of
residential properties available for purchase and a 6 year inventory of
lots.
Going behind the numbers, a good case could be made that a stalemate
exists in the market between sellers and buyers. Sellers have generally
been reluctant to lower their asking prices to a level that will
motivate buyers to enter the market in significant numbers. Buyers, on
the other hand, appear to be waiting on the sidelines in anticipation of
further price declines. This attitude is reinforced by fear-based, daily
news reports in the national media that often have limited, if any,
relevance to our local market (see last month’s article – “A Glass
Half-Empty or Half-Full”).
Another factor that comes into play is the discretionary nature of the
Hatteras Island real estate market and resort markets in general. In
contrast to major metropolitan markets where people need to purchase
primary residences, in resort areas sellers for the most part do not
have to sell, and buyers do not have to buy unless market conditions
coincide with their personal preferences.
The supply/demand imbalance is at the heart of the challenges facing the
island’s real estate market today.
Prices
Classic economic theory tells us that when supply exceeds demand prices
will decline. That, in fact, is what we have been seeing in the Hatteras
Island real estate market since the summer of 2005 when the buyer’s
market began.
Compared to 2006, the median selling price of residential properties
fell around 18 percent last year, and the median selling price of
unimproved lots decreased by about 11 percent. Cumulatively, the selling
prices of residential properties have declined by 44 percent since the
second quarter of 2005, and the selling prices of lots have fallen 23
percent. The silver lining associated with the magnitude of these price
declines is that they may signal that we are getting closer to the point
of a market turnaround.
Another price-related observation that may be of interest to both buyers
and sellers is the ratio between selling prices and listing prices.
During 2007, the average residential selling price was around 92 percent
of list price, and the average sale to list price ratio for unimproved
lots was 87 percent.
Last year, buyers definitely showed a preference for residential
properties in the lower price ranges. Almost 25 percent of all
residential sales were in the $300,000 to $400,000 price range, and 70
percent of residential transactions were priced below $500,000. Only 8
of 129 total home sales had selling prices that exceeded $1 million.
The Pending Home Sales Index
The Hatteras Island Pending Home Sales Index is a leading indicator of
future residential sales. The index measures the number of residential
properties that are under contract relative to the average number of
properties under contract in 2001, the first of the recent boom years.
The Pending Home Sales Index gave strong signals that the real estate
market may have reached a turning point last April when it showed an
upward trend for the following six months. Economists at the National
Association of Realtors consider a trend to be statistically meaningful
when it has persisted for three or four months. Unfortunately, our hopes
were relatively short-lived when the index dropped to new lows toward
the end of the year. Deepening mortgage market troubles and the threat
of a recession in the national economy apparently sent buyers back into
a defensive posture.
Geographic Distribution of Sales
Geographically, sales on the island were spread almost evenly among the
northern villages, the Avon/Buxton area, and Frisco/Hatteras. Avon was
the village that accounted for the most sales in 2007, followed closely
by Frisco and Hatteras. The soundside in Frisco was the most active
market segment, although the oceanside in Rodanthe and Salvo were very
close in the number of sales. The oceanside in Salvo was notable for the
increase in sales over the number reported in 2006.
All areas of the island experienced decreases in both the average and
median selling prices of residential properties except Hatteras Village
and Buxton.
Financing
The financing of transactions was not a factor in the performance of the
real estate market on Hatteras Island during 2007. While underwriting
requirements became more rigorous across the spectrum of loans,
financing was readily available for qualified buyers.
Interest rates continued to be very attractive and approached the
historical low points seen a few years ago. Recently, the interest rate
offered by a major lender for 30-year fixed rate loans of $417,000 or
less was 5.75 percent. The interest rate for larger loans was 6.5
percent with the payment of one point. A point equals one percent of the
loan amount. Some lenders were advertising even lower interest rates.
New Construction
As might be expected, the fortunes of the construction industry on the
island mirrored the trends in the real estate market, especially those
related to unimproved lots. By the end of 2007, 65 new single family
detached residential building permits had been issued. This was down 64
percent since 2004.
Summary
When all is said and done, toward what conclusions do these numbers and
trends lead us, and what implications do they have for the coming year?
Quite obviously, we are continuing to experience a slow real estate
market on the island. Yet, within this weakness lie the foundations for
the next upward cycle. Interestingly, when the stock market began its
recent decline, there was a very noticeable increase in the number of
online viewings of properties for sale. It remains to be seen if the
volatility and weakness in the stock market will translate into a new
flow of funds into real estate, and the psychological impact of
reductions in the federal funds rate could also be a positive stimulus
for the real estate market.
In my opinion, there is a tremendous amount of pent-up buyer demand for
residential resort real estate. Prospective buyers appear to be sitting
on the sidelines waiting for some sign that the time is right to buy.
Eventually, they are going to reach the conclusion that the purchasing
environment is as favorable as it is going to get for them, and they
will re-enter the market. When you look at the market factors currently
favoring buyer interests, it is hard to understand why they are not
purchasing in significant numbers. There is a large inventory of
properties from which to choose. There is little competition from other
buyers. Interest rates are near historical low points, and prices have
declined nearly 50 percent from their highs in mid-2005. Only time will
tell how these factors will ultimately play out, but 2008 appears to be
looking better every day. -------------------------------------------------------
Tom & Louise Hranicka
Associate Brokers
Outer Beaches Realty
Avon, NC 27915
252.305.1556
hranicka@hatterasisland.com
http://www.hatterasisland.com
http://www.blog.hatterasisland.com
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Copyright© 2008 Tom & Louise Hranicka. All rights reserved.
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