November 2009

Local Real Estate Market

Author: Frank Dunne, Jr.

There’s trouble in the economy, have you heard? Banks are failing, the auto industry is struggling, people are getting “downsized” and, in real estate, home values are down, foreclosures are up, it’s difficult to get a mortgage and nothing’s selling.

Now that we’ve got that out of the way, rest assured that what follows is not another analysis of who or what is at fault or whether or not the recession is over. Leave that to the talking heads on TV. What we have here is some commentary and opinion on the state of the local real estate market.

Why should that interest you? Look at it this way: Imagine Hilton Head Island (and Bluffton) without flocks of tourists coming in each year and without the army of real estate agents chasing them around in an attempt to turn them into permanent or part-time residents, or at least absentee property owners. Things would be pretty quiet around here. Most of us locals would probably be local somewhere else.

Face it. Tourism is hugely important, but it only gets us so far. To maintain our Lowcountry way of life, we need a solid, permanent economic base. That’s people living here, owning property, paying taxes and spending money…all year round.

The local real estate market is experiencing the same troubles as the rest of the United States, but our area possesses some unique advantages that position us to weather the storm better—and maybe faster—than other parts of the country. You need to know this because you may very well be one who can help pull it off. If you are one of the many folks holding off on buying a home, you might consider getting off the fence.

To explain it better, we’ve assembled a panel of local real estate professionals to share some thoughts about what’s going on in the local real estate market. No, the picture is not all rosy and nobody’s saying that we’re out of the woods. But it will take an informed public to get things turned around, and these comments are meant to inform you.

Our panel includes Patty Crews and Bob Bentrup of Re/Max Island Realty, Andy Twisdale of Charter 1 North Realty & Marketing, and Tom Watson of Keller Williams Realty.

CH2: To put the current real estate “slump” in perspective, how is it similar and how is it different from other cyclical downturns that you have experienced in this market throughout your real estate career?

Patty Crews: I have been selling real estate since 1973. I have seen many cycles, some caused by high interest rates, inflation, or a poor economy, and some caused by overbuilding, which makes the supply too high, but none have ever been this long or this deep.

Andy Twisdale: Inventory levels are similar to the 1991 downturn. There are about the same number of units on the market, but today we have a higher percentage of short sales and REO properties. As usual, Hilton Head Island entered later, and I believe will exit the economic downturn sooner than the rest of the country. Today we have more owner-occupied properties. In 1991, there was a higher percentage of resort rental properties, a glut caused by tax law changes from 1986.

Tom Watson: The main part is that we’ve never seen this number of foreclosures, and the impact that they have on prices has essentially caused the slump. It’s exasperated the recovery and it’s brought us to a new low in property values.

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CH2: With home values down as they are, buyers have not exactly been stampeding to get in on a great deal. To what do you attribute this consumer reluctance?

Patty Crews: The economy is by far the largest contributing factor. Uncertainty about job security, not being able to sell one property so you can purchase another, tightening credit, appraisals coming in too low and causing loans to be declined, and the question of when will the market bottom out all contribute to buyer reluctance.

Andy Twisdale: Closings per month year-to-date show a very slow first three months and an increase in the next six months. Buyers are on the fence, but there are still multiple offers on great deals, which do sell fast. The online consumer is looking each day for a deal.

Tom Watson: Credit. The banks’ reluctance to lend—particularly for villas—is the problem more than buyers’ reluctance to purchase property. There is the fact, though, that there’s a mentality that we’re still heading toward the bottom. People say: “I don’t want to buy now because it might go down $20,000 in a few months.”

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CH2: Are home values (in our market) showing signs of recovery? Can you predict when prices will return to or near a state of equilibrium?

Andy Twisdale: People who know Hilton Head Island recognize the values today. Today there are more buyers asking questions than during the first six months of 2009, but most of these people have knowledge of, and experience in, this market. I get people from out of the area asking why our prices aren’t as depressed as in their home markets, and they perceive properties as being overvalued. They’re not taking into account things like our proximity to the ocean and other attractive qualities that we have here that add value. People who recognize this will understand that we have great values now, and when they start buying (and reducing the inventory), prices should start moving back up.

Bob Bentrup: Home values are not showing signs of recovery. If the foreclosure and short sale properties continue to sell, then prices will begin to stabilize. However, I think the second—and possibly the largest—wave of foreclosures is about to hit. People who financed their properties with five-year interest only ARMs or option ARMs in 2005 and 2006 are in for a rude adjustment.

No one could have predicted the mess we are in now, and I believe no one can predict when prices will return to a state of equilibrium. Also, anyone purchasing for the long term will be fine, as we do not see prices dropping much further; if buyers are waiting for that, they will lose in the long run with the great rates offered now.

Tom Watson: We are showing signs of recovery in a sense that we are in a necessary correction. Prices were too high for too long. Property was overvalued. A lot of that correction is coming about because of foreclosures. I feel we’re close to, at least slowing down the freefall (in home values), if not stabilizing.

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CH2: Since economic activity—in this case, people buying homes—is what brings markets back, what do you, as a real estate professional, say to the public to influence more market activity?

Patty Crews: We can only keep telling potential purchasers that interest rates have never been better. In 30 years of real estate experience, I have never seen better rates. The rates are now under 5 percent for a fixed rate and under 4 percent for an ARM mortgage. I remember selling real estate when the rates were 17 percent. This is such an opportunity to lock into a 30-year mortgage and be able to buy more house for a much smaller monthly payment. The tax incentive for those who have not owned a home in more than three years is attractive. The prices have slipped back to almost 2002 values. Now is the time to get the best price at the lowest interest rates.

People should buy like they always did, because they love Hilton Head Island and want a place to come to vacation and enjoy with their family, and that might be their future retirement destination. There is just no place with quality like Hilton Head Island.

Andy Twisdale: We have not had this high an inventory in 15 years, and they’re not making any more land on the island, so you’ve got to buy what’s here. Also the baby boomers are retiring and still want to live the lifestyle that Hilton Head offers. With prices depressed and interest rates at some of the lowest levels in the past six to seven years, the stars may be lining up.

Island prices are exceptional with relative closeness to the ocean. The lifestyle on the island and in Bluffton, coupled with lower taxes and great weather makes the entire area a buying opportunity. There are many older homes and condos on Hilton Head that are located on great lots and could be purchased and rented long-term, then remodeled or rebuilt for retirement.

Tom Watson: The prices, especially on foreclosures, are at the point where they have essentially turned the clock back 10-12 years. So you’ve got a unique opportunity to get a property at ’90s prices.

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CH2: Do you think that intervention from Washington, e.g., the first-time buyer tax credit and a reported federal subsidy to light a fire under short sales, has helped, is helping, or will help? Why or why not?

Andy Twisdale: Washington’s intervention to give banks TARP funds without requiring them to lend or help people stay in their home was a mistake. The first-time buyer tax credit is a great program. The short sale process has not improved to the point where it should be.

Bob Bentrup: To a small degree, the first-time homebuyer credit has helped, but unfortunately most of those buyers do not qualify for a home, or are scared about the future of their jobs. Unfortunately, there are a lot of people out there who do not even know about the tax credit or the Making Home Affordable program. The president predicted that 7 to 9 million people would take advantage of this loan modification program, but to date, fewer than 100,000 homeowners have acted.

Tom Watson: The first-time buyer tax credit, I think, is a success. I can attribute several sales to that, and a lot of activity now is trying to make that close date by the end of November. As far as short sales go, they don’t need a subsidy; they need a plan to streamline the process.

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CH2: Objectively speaking, what and where are the best buying opportunities (single family home, villa, gated community, off-plantation, Hilton Head, Mainland)?

Patty Crews: The best buying opportunities are everywhere. Bluffton, with a huge supply of new homes, would be at the top of my list. There are distressed sales on high-end property where investors who have lost much money are anxious to walk away. Villas with high regime fees have dropped significantly, and properties in golf communities where the dues are very high are practically being given away. The baby boomers are thinking about retirement, and have seen their portfolios diminish. Most are just not willing to pay $10,000 to $20,000 a year to be able to play golf and have a fancy club.

Bob Bentrup: There are buying opportunities everywhere, especially if the buyer is working with the right realtor who has been in the business for years. There is no substitute in this market for experience and knowledge.

Tom Watson: All segments have very good deals. For example, if you’re a first-time homebuyer and need something around $100,000, there are great deals on single-family homes. Generally, off-plantation and mainland are good, with anything in Bluffton usually a better deal. But there are great values on the island; they’re just in a different financial tier. You’re going to have to spend a little more money. Villas are great deals, but they’re full of pitfalls. Loans on villas are very difficult to get, and you’re in danger of assessments because POAs are going under due to foreclosures and they can’t pay their bills, so they assess the owners. There’s that danger.

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CH2: What lesson(s), if any, have you as a real estate professional taken away from this market downturn that you would like to share with consumers?

Patty Crews: The advice you’ve heard forever: Don’t put all your eggs in one basket. Be conservative and buy only what you can comfortably afford. I have seen too many investors lose a lot of money by overextending. They bought property with nothing down and no documentation. Negative amortization does not work in a market that is declining. The banks just made it too easy to get loans. If you are going to own the property for many years, lock in the rate for a fixed mortgage. When you buy rental property, make sure you can make the payments yourself if it does not rent.

Andy Twisdale: Purchase for the long term. Think about buying a vacant lot to build your future retirement home. Real estate can be purchased with 20-30 percent down and the purchaser controls 100 percent of the value of the assets. The appreciation will be on the 100 percent of the value and not on the 20-30 percent invested.

Bob Bentrup: I think a lot of this was brought on by consumer greed, especially after the stock market did its post 911 dive in 2001, and mortgage brokers and banks offered all those “buy with nothing down” deals, no doc, no income verification, etc. When did our problems start? About five years after 2001 and 2002 when everyone was jumping in. If it sounds too good to be true, then it usually isn’t true.

Tom Watson: If you’re trying to pin down the absolute bottom, what’s going to happen is you’re going to miss the opportunities right now to pick up properties that are at fire sale prices because there are so many foreclosures. It’s not always going to be like this. This is going to get straightened out. We’re not necessarily at the bottom, but you’d be hard pressed to do wrong if you get the house you want at the price you want. If you’re waiting for the absolute bottom, by the time you find it you’ll have missed all that’s out there now. It’s like trying to catch a falling knife.

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