Summer Outer Banks Real Estate Primer

Unless you have lived in a bubble the last few years, you have heard the doom and gloom about the national housing market and the lending crisis. The Outer Banks has not been immune to some of this national trend. However, the Outer Banks market is unique because of our remote location and the fact that a large portion of our sales are vacation rental home sales. Marlene Roberts, a broker at ReMax Ocean Realty, recently stated, “All real estate is local.” This certainly is the case on the Outer Banks where rental income and buyers’ desire to improve their quality of life are key factors in the number of sales that occur here. This article will candidly describe the good and the bad of today’s Outer Banks real estate market.

Recent history shows that the number of buyers purchasing here has become stable. The number of people purchasing property changed dramatically between 2005 and 2006. About half the number of people purchased Outer Banks property in 2006 compared to 2005. Since then the annual number of Outer Banks property purchasers has not significantly changed. MLS statistics show there was just a slight difference in the number of Outer Banks properties sold in 2007 compared to 2006, and the number of sales during first quarter of 2008 is remarkably similar to the two previous first quarters. The typical buyer during this time period is someone who is more concerned about enjoying the Outer Banks lifestyle with family and friends than with making a killer real estate investment. Tom Hranicka, a broker for Outer Beaches Realty, stated, “Our typical buyer is someone who has enjoyed the Outer Banks for years and now is finally ready to own part of the beach.” Statistics point toward a steady number of people becoming ready to take the jump into Outer Banks homeownership.

A key indicator to any real estate market is the relationship between properties for sale and properties closing. This is called the absorption rate. The absorption rate represents the period of time it would take for all the properties currently on the market to be sold with the current level of demand. As demand increases or supply decreases, the absorption time period goes down. In a typical suburban market the rate at which the market favors neither buyers nor sellers is approximately six months. In this resort and vacation rental market, that time is likely closer to a year. Since the beginning of our down turn, our absorption rate has stayed above 30 months for all but a few months. This is one factor that has driven prices lower. When the absorption rate begins to decline, it is likely that the bottom of the market is close at hand.

Since we reached our peak levels of inventory in July of 2006, inventory has remained at levels well above demand throughout the year. The trend every year during this buyer’s market is that inventory grows from its lowest point in January to its highest point in late June or July. It then goes down to its lowest point at the end of the year with many listings expiring at midnight on New Year’s Eve. Sellers realize that the best time to sell is in the spring and summer, and many take their houses off the market after the summer season. May 2008 was the first time since at least 2004 that the inventory actually went down before late June. It’s too early to tell but this may be the first sign that the absorption rate is going down as well. Who knows…we may look back at May of 2008 as being the bottom of the market.

Another factor that has driven prices lower is the amount of foreclosure properties that have sold. This year close to 10% of the properties sold through the local MLS were bank owned. Banks typically lower the asking prices of these properties until they sell. There are still occasional foreclosures occurring, but they do not seem quite as common as last year.

Lower prices can be found on properties throughout the Outer Banks. Even oceanfront property has come down. For example, a nine-year-old oceanfront house on a narrow lot in Nags Head sold for $1,575,000 in 2005. Today there is a house for sale that is almost identical in all ways for just $1,449,000. Hatteras Island has been affected too. Tom Hranicka stated, “Median prices on Hatteras Island have dropped almost 25% since the peak of the market.”

Similar to other investments, purchasing property on the Outer Banks is subject to human behavior patterns. When the market was good, every one was purchasing. Today the most common reason for buyers to wait on a purchase is that they do not want to purchase and have the property worth less in six months or a year. Buyers are waiting for the market to hit bottom before making an investment. Some agents have begun to see buyers bucking this “herd mentality” and deciding to invest now. Greg Roberts, a broker for ReMax Ocean Realty, recently stated, “The buyers we are seeing now are determined to purchase quickly before the market changes.”

If you’ve thought about purchasing Outer Banks property in the past or may want to purchase sometime in the future, it is a good idea to evaluate the conditions of the market prior to jumping in. Buying real estate can be compared to surfing on the Outer Banks. Local surfers watch the weather and check the ocean before diving in. Some of the conditions they look for are offshore winds and a certain size of swells coming from a specific direction. Rarely do conditions get perfect where everything comes together and the surfer gets to ride the perfect wave. But every surfer has a threshold where if certain conditions are present, he or she will go surfing. Each buyer should also evaluate the conditions of the market when considering jumping into the real estate market.

Market conditions today are not perfect but they are pretty darn good. For example, interest rates are still at low levels. Margaret Wells, a Vice President for Bradford Mortgage, recently stated, “Rates are close to historical low levels.” It is unclear what will happen to rates next year. Even just a one percent increase in an interest rate can dramatically affect the affordability of property. The mortgage payment is just about the same for a 30-year $500,000 loan at 7% and a 30-year loan of $554,000 loan at 6%. That is a 10% increase in purchasing power!

There are a few other conditions that point toward a good time to jump into this market. First, today the inventory is still very high. Buyers have a wide variety of choices and should not have to settle for a property that does not come close to meeting their wants and needs. Second, the market has not yet turned in the seller’s favor. This makes sellers more negotiable today than they have been in years. Sellers are privy to the same information as buyers; once it is known that the market has turned, they will be less likely to negotiate. Third, a purchase now allows a new owner to pick up most of this year’s rental income. A home purchased in June or early July allows the new owner to walk into thousands of dollars of instant income on vacation rental homes.

There are other reasons for being bullish about Outer Banks real estate today. Activity is up for many Realtors. Tom Hranicka recently stated, “Both showings and hits on internet real estate sites are up on Hatteras Island.” Unlike the last few years, there have been positive articles posted in the media about Outer Banks real estate. This spring the Wall Street Journal had two articles describing now as a great time to purchase a home on the Outer Banks. Well-priced properties also do not stay on the market long. Mark Massey, a broker for BD& A in Duck, recently stated, “When priced properly, buyers are there to act, and sellers are having success. However, only a small percentage of sellers have their homes offered competitively.” Second homes also still make up a large percentage of the real estate market today. According to the National Association of Realtors, the second home market represented 33% of all sales in 2007. This group is also forecasting the second home market to improve in the future due to the demographics of the country.

Conditions are good to purchase a property on the Outer Banks. Years from now will you be enjoying your property or will you be lamenting the idea that you should have purchased in 2008?