Housing
Market Has Solid Foundation in North Carolina
RISMEDIA, Sept. 13, 2005 — (KRT) — A
$1 million building permit issued to construct a single-family
house in Wrightsville Beach, North Carolina; investors vying
to get in on pre-construction deals; a neighbor's house sold
in hours, another in just days; bidding wars escalating asking
prices.
The question every investor, every homeowner, everyone who develops
or builds wants to ask, but may be afraid to: Is there a housing
bubble in Southeastern North Carolina?
If so, when will it pop? And if it pops, what is the fallout?
In 2000, investors watched their fortunes and retirement savings
evaporate when the tech stock bubble burst. Now, with home prices
reaching for the stars, and Realtors bemoaning a scarcity of
million-dollar properties, some are questioning whether a real
estate bubble exists and if it exists, will Gotterdammerung ensue?
Fed Chairman Alan Greenspan did nothing
to quell speculation when he sounded a cautionary note recently,
saying several housing markets were "frothy" and "speculative fervor" might
exist. It wasn't very long ago investors may remember, when the
market scoffed as Greenspan issued his "irrational exuberance" statement
just months before the tech bubble burst.
Some areas of the country may be approaching
bubble status—when
available land diminishes in direct proportion to population
expansion. The real estate market has begun to cool in parts
of the United States, particularly coastal California and Florida
where some homes are overvalued by as much as 60 percent.
Ray Owens, vice president and senior economist with the Federal
Reserve Bank in Richmond, Va., said he doesn't think the run-up
in home prices are based on speculation.
The housing market is strong, he said, because the supporting
factors are strong—hence, no bubble. Incomes are rising,
the job market is strong, mortgage rates are low and the government
has passed favorable tax treatments.
This year Richard DeKaser, senior vice
president and chief economist at National City Bank in Cleveland,
studied 299 housing markets—comparing
cost of housing to household income. He used price-to-income
ratios, mortgage interest rates, relative income levels and characteristics
unique to each metro area.
As of the first quarter of this year,
he found, 53 metro areas representing 31 percent of the total
U.S. housing market are "extremely
overvalued and confront a high risk of future price correction." Those
markets were in California, Florida, greater New York and greater
Boston. In Wilmington, for example, DeKaser found that the price
of housing runs about 2.25 times income—a fairly conservative
ratio. Compare that to an area in Florida or California, such
as Santa Barbara, that have seen home values soar.
There, homeowners pay about 5.3 times their income for a home.
And while the average family income is $106,112, the median price
of a home is $564,000.
Even low interest rates can't take the sting out of that type
of bite of a family's budget.
Some analysts believe that if indeed there is a bubble, it will
not pop, but merely shrink as real estate properties go through
a price/value readjustment.
In January, Owens told civic leaders in Wilmington he did not
see a real estate bubble in this market.
That's good news for the estimated 28,000 people employed in
this area in real estate, construction and allied businesses.
He said last week, however, that that doesn't mean home prices
will continue to escalate. As sellers continue to test the market,
the market may react by pulling back, Owens said.
Tim Milam, owner/broker of Coldwell Banker Sea Coast Realty,
doesn't see a bubble on the local real estate scene.
Milam, who has been in the real estate business here since 1992
and weathered the 2001 recession and a slew of coastal storms,
believes this area still provides lower home prices compared
with other parts of the United States.
Prices are low enough, relatively, to make the region attractive
as a second-home market, he said. While the beaches have attracted
North Carolinians from the Triangle and the Triad for decades,
New Englanders and Californians have discovered this area as
an attractive vacation destination.
Waterfront prices are steep, he admits, but those properties
are in limited supply.
But golf course homes are also attractive and Brunswick County,
he said, is exploding. Even non-golfers are buying in golf course
communities such as Castle Bay in Hampstead. Some people buy
for bragging rights, he said. Others because they know that the
land behind their homes will be open space and not developed.
So what is the state of real estate in Pender, New Hanover and
Brunswick counties?
Donna Girardot, is chief executive of Business Alliance for a
Sound Economy and government affairs director for the Wilmington
Cape Fear Home Builders Association.
"There is no bubble," Girardot said.
Southeastern North Carolina is not overdeveloped,
she said, adding, "to me that says, you have too much
residential or commercial development out there."
It's a matter of supply and demand, she said, and the real estate
market still absorbing housing stock what we have.
The real estate market, she believes,
hasn't "topped out
yet." William Hall Jr., an economist at the University of
North Carolina Wilmington, is a little less sanguine.
Hall, without sounding an alarm, said
that, even though he doesn't think this area is in danger of
a real estate bubble, people wouldn't know there was a bubble
until they tried to sell their homes. A housing bubble, he
said, is different equity market bubble—stocks are more
vulnerable faster to negative market forces and they are easier
to sell.
But, he said, if there is a market that
might be vulnerable, it is the second home market in Brunswick
County. Vacation homes, those east of U.S. 17 and close to
the beaches, are vulnerable to "flipping." Flipping property has gotten some notoriety
recently as investors buy houses with the intention of a quick
sale or collecting rents. Hall feels that the Federal bank may
begin to cut back on "exotic mortgages." Some, like
interest only loans, have gone a long way toward encouraging
a building boom. If mortgage money tightens, he said, the housing
market could cool, not bust.
DeKaser, in his report wrote, "If
home prices are overvalued, then by definition, the risk of
a price correction is high. In the event that such a correction
plays out with home prices falling broadly, adverse implications
abound."
When home prices fall, only those who
want to or have to sell their homes are immediately impacted.
If a home sells for less than it was bought for, the seller
has to make up the difference—losing
real wealth in the process.
Mark Imperial is a professor of public administration at UNCW.
He said higher home prices means higher taxes. People on fixed
incomes are usually the ones who feel that pinch. He has documented
an interesting trend --long-time residents are selling their
homes on Wrightsville Beach for much more than they paid for
them. Some, he said, could be banking part of the money and buying
another home on another beach, probably in Brunswick County for
a lot less money. The same thing is beginning to happen in Carolina
Beach and Kure Beach.
If prices drop, what would happen to the new million-dollar
and multi-million-dollar home market?
Probably not much. Those who are building these types of homes,
Imperial said, can afford them. They aren't usually built as
rental properties because the market wouldn't bear a price high
enough to cover the mortgage payments.
But what may be the toughest impact and hurt the most, is that
home building would decline. While homebuilding may not be the
economic backbone of this region, it is a significant player.
The only dark cloud on the horizon, or at least a question no
one can answer at this point, is the economic impact from Hurricane
Katrina. Girardot said the market may slow a bit, building supplies
may increase in price, and subcontractors may leave this area
to go South to help in the rebuilding effort.
As for the near future, Girardot said
home buyers can "look
up and down the East Coast and find this area is still a bargain."
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