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Every situation creates an opportunity, and first-time homeowners and novice investors may begin to see an unprecedented opportunity unfold in the coming months in the housing market along the Outer Banks.
For a number of years, property values on the Outer Banks soared by 15, 20 or 25 percent per year and, according to Realtors, that level of increase is not sustainable over an extended period of time. “It’s (real estate sales) off,” says Maxine Rossman of the Outer Banks Homebuilders Association. “We’re going through a correction.”
Rossman notes that although the market may seem bleak for real estate investors hoping to make a quick turnaround on their properties, this is cyclical phenomenon, and previous corrections appear to have been much worse. “I don’t see it as being anywhere as severe as it was in the early ‘90s,” she says.
That correction includes the entire Outer Banks – from Corolla to Hatteras.
“On Hatteras we have seen a…decline in sales over the same period last year,” Scott Leggett, Vice President of Administration and Marketing for Outer Beaches Realty, says. Leggett also sits on the board of directors of both the Outer Banks Chamber of Commerce and the Outer Banks Visitor’s Bureau Tourism Board.
Even as demand has weakened, however, the Outer Banks real estate market has retained surprising strength. Leggett points out that although sellers who may feel they have to sell may not make as much money as they had hoped, there is still money to be made in the real estate market.
Some of the most vulnerable homes may be those purchased with some of the innovative financing that is now available, and some of those owners – especially those who purchased using an adjustable rate mortgage (ARM) and interest-only loans – will be facing additional pressure to sell in the next few months.
“A lot of sales that were ARM will be seeing new payments in the next few months,” Leggett says. “Those people who have had their property on a marginal basis will be incentivised to sell. It will still be a profitable transaction, but I think you will see the price come down.”
To a certain extent the slowdown in the local real estate market parallels the national trend. “We don’t exist in isolation,” Leggett says. “The market of the whole nation has collapsed.”
There are, however, distinct characteristics to the Outer Banks that create a unique marketplace. Most of the homes on the Outer Banks are second homes and investment properties – and, although it may be a struggle to do so, the basic expense of most of those properties are covered by rentals. In that scenario, an owner who puts a house on the market may want to sell the property, but does not need to sell it, and the pressure to adjust the asking price is simply not there. “We’re a second home market,” Leggett says. “No one has to have a second home.”
A prospective buyer, especially one who is looking at the house as an investment, is not going to invest in a property that he or she feels will not meet the basic expenses of their business.
“Our market is a little out of whack,” is the way John Bone, president of the Outer Banks Chamber of Commerce, explains it. “Buyers are not willing to pay the price and sellers are not willing to pay the price.”
Margaret Wells, a Chamber of Commerce board of director, agrees. “My Realtor friends tell me they have a lot of listings,” she says. “But a lot of the properties are listed for more than their worth.”
Wells, who, in addition to being a chamber board member, is a mortgage lender, notes another problem in a housing market with inflated values. Pointing out that residents seeking a primary or first home are in the same bidding pool as the investor looking for a healthy return on their dollars, she finds that the average price of a house on the Outer Banks does not match the median income of a local resident. “It’s so hard for me to qualify a person on a $300,000 house,” she says.
That may be changing. The employment picture in Dare County remains very strong, and median income is significantly above the state average. As housing prices stabilize and experienced workers continue to earn better wages, more and more residents may find themselves in a position to purchase a first home.
However, the Outer Banks housing market is somewhat confusing, and many of the market forces that would drive prices down in other markets conflict with forces that stabilize prices or cause them to rise.
Unlike most other markets, the housing stock is limited and there are no large tracts of land left to develop. It would seem then, that this is a classic example of supply and demand – the supply of housing stock is limited, and the demand, although not as vigorous as it was even as recently as last year, has retained considerable strength.
That supply and demand equation must also include the rental market, and here that equation becomes somewhat murky.
Most Realtors concede that there is an oversupply of housing stock on the Outer Banks at this time. That oversupply is not apparent during the summer months, but in shoulder seasons and during the winter, more and more homes are sitting vacant. Yet that concern about an oversupply of rental inventory, does not match the continued strong growth in Dare County occupancy tax collections, up 13 percent at the end of the fiscal year in June.
There are also external pressures on the local real estate market. “North Carolina is up there at the top of the heap for people moving down here for retirement,” Rossman says. She goes on to point out that North Carolina is second only to Florida as a retirement destination of the country’s aging baby boomer population. And Dare and Currituck Counties have been right in the thick of things.
But that may be changing. Although there is still a significant retirement
population on the Outer Banks, developers are increasingly looking to other areas of coastal North Carolina to create retirement communities.
There are two age-restricted projects under development in this area at this time. It is hard to envision anymore large scale developments of this nature taking place along the northeastern North Carolina coast. There are no large blocks of undeveloped land left and land values, even in a depressed market, make this type of project impractical.
The fact is, seniors are looking to North Carolina to retire, or for a lifestyle that includes coastal living. But to that demographic the actual physical location of the adult community is not as important as value for their dollar and the amenities that are offered. If those values and amenities can be found in Edenton or Hertford or Oriental, that is where they will move.
Without the additional pressures of the retiring seniors on the housing
market, there is less demand from consumers, creating a larger inventory of housing in relation to the pool of prospective consumers.
That is not the case everywhere on the Outer Banks. Leggett does not see the retirement population as a significant part of his consumer base on Hatteras Island. “No, that’s not a large part of our market,” he says. “We don’t have the infrastructure down here. The hospital, medical facilities, that kind of thing.”
The economic implications of a downturn in the real estate market are not limited to Realtors and financial institutions. Government, especially in a booming resort economy like the Outer Banks, relies heavily on the revenues real estate construction and sales generate.
“It’s been a rough budget year,” Dave Clawson, Director of Finance for Dare County, says. “The collection of fees are down. Building inspections, building permits, they’re all down.”
Yet, the long term health of governments remains very strong, and it would take a much more significant slump in real estate sales to cause any lasting damage to county coffers. Finance managers along the Outer Banks tend to be very conservative in their estimates, and as a consequence, the worst that happens is municipal and county governments match their projections instead of exceeding them. “Rating agencies really like it (revenue projections) tied to a conservative figure,” Clawson says.
It is possible that an extended downturn in the real estate market could have a long-term effect on capital improvements. The county uses land transfer taxes to maintain its capital improvement fund and most municipal governments use excess revenues for theirs.
However, the consensus is that the current downturn in real estate sales is part of a regularly occurring cycle – and, in fact, probably not as severe as it is in other parts of the country. “It’s really bad in northern Virginia right now,” Rossman says
Professionals who have been watching this market for a number of years also note that prices of the past two to three years were probably based on artificial expectations.
“There was a mentality of high expectations that were unrealistic,” Leggett says. “People were bringing a short-term observation instead of a long-term history of those trends. Those historic values always adjust. The worst thing anybody can do is panic because of concerns that the market is going to bottom. The smarter strategy is to stay the course during the current situation.”
John Bone has lived on the Outer Banks most of his adult life, and to him the current business cycle is part of the natural order of things. “I’ve been here a long time, and I’ve seen this happen before,” he says. |
