Cameron School of Business at UNCW

Rising Prices, Unit Sales and Housing Inventories: Factors Influencing the Real Estate Market

Posted by Cameron School of Business on Aug 17, 2018 12:15:00 PM

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Guest Blogger: Dr. Edward Graham, Professor of Finance, Cameron School of Business (This post was originally shared on WilmingtonBiz.com on August 15, 2018)

The Housing Bubble and the Real Estate Market Recovery

The U.S. residential real estate market has been a leading topic in the news over the last decade or more. With increasing mortgage delinquencies in late 2007, and the bursting of the real estate bubble soon thereafter, home values across the U.S. began an historic decline. The Case-Shiller Home Price Index, in Table I below, captures both the escalation in home values between 2000 and 2006, the correction in house prices as the housing bubble burst, and the recovery, on average, of the housing market across the US by mid-2018. Prices, on average across the US, more than doubled in the years ending in the spring of 2007. In the Cape Fear Region, using an admittedly informal but representative “index” created using home sales data provided by the Wilmington Regional Association of Realtors (WRAR), prices increased over 75% in the years ending in the spring of 2007. Prices then fell across the local market, but have since recovered. Few expected the recovery of the real estate market, in either Southeastern North Carolina or across the nation, to be as rapid as it has been.

Reflected in the data in Table I, declinations in house prices were observed across the US and the Cape Fear Region between 2007 and 2012. Since then, prices in most neighborhoods across the Wilmington area have reached or surpassed prior peaks in 2007. Discussed below, this pattern has proven a quandary for the new student in real estate investments, as he or she examines local “opportunities.” Real estate is once again “expensive,” and finding “deals” with assured favorable returns is becoming more complicated.

Table I– Implied Housing Index for the Cape Fear Region: January 2000 – September 2017
(The Cape Fear Regional Index is subject to reporting error, and small sample bias.)

Month, Year

Cape Fear Regional Index*, **

20-City Index***

January 2000

100.00

100.59

March 2001

110.88

115.09

March 2002

109.08

123.31

March 2003

112.11

138.36

March 2004

123.12

156.88

March 2005

135.52

183.12

March 2006

152.48

206.03

March 2007

177.21

203.78

March 2008

165.09

174.90

March 2009

143.74

143.15

March 2010

138.77

146.85

March 2011

147.84

141.23

March 2012

138.52

137.37

February 2013

143.74

149.80

May 2013

156.02

156.06

April 2014

163.49

168.73

March 2015

160.99

174.98

March 2016

164.27

184.52

March 2017

179.06

195.35

June 2017

188.91

200.43

September 2017

187.27

203.63

December 2017*

*

204.44

March 2018*

*

208.50

* http://www.wrar.com/home-sales-stats-buyers-and-sellers-menu/resid-mls-stats-buyers-and-sellers-menu.html
Changes in available data, as of late 2017, preclude the continuing assembly of this Cape Fear Regional Index.
** Cape Fear Regional Index based upon reported Realtor data, through the third quarter, 2017.
***Index derived from the Case Shiller Index, Standard and Poor’s

How do these data inform real estate investors? From an investor’s or a lender’s viewpoint, home prices relative to a property’s income have become lofty. A key metric employed by both real estate lenders and investors (these remarks may not apply directly to the traditional homebuyer) is the capitalization rate or “cap rate.” The cap rate on a real estate investment is simply the property’s net operating income divided by the price paid for the property. For example, if a newer but modest home in the Ogden area sells for $200,000, and rents for $1500 per month, it earns $18,000 (12 months x $1500 per month) per year in potential gross income. Assume operating expenses (this ignores vacancies and mortgage interest and depreciation taken for tax purposes) such as property taxes, insurance, maintenance and management total $8,000 per year; the property has a net operating income or NOI (its potential gross income minus expenses) of $18,000 - $8,000 or $10,000. The cap rate on this home is the home’s NOI divided by its value or $10,000/$200,000 = .05 or 5%.

With no financing, that 5% yield is the return that the investor will earn. That cap rate will support very little financing (investment property interest rates are close to or greater than 5%), and the property is a costly prospect for the new real estate investments student. Several years ago, as suggested by Table I, cap rates – even in the Cape Fear Region – of 8% or more were not uncommon; cap rates of 10% or more were briefly the norm in many areas. The real estate investor today needs to be far more patient, more selective, and more willing to accept a lower return than was the case in the riskier times of several years ago.

A confluence of factors has contributed to the "pricey" real estate outcomes being observed today in the Wilmington area, across the Southeast and across the nation. [see WRAR article and Mansion Global article ] Prices nationwide have increased over 7%, on average, over the last year, and the inventory, also nationwide, has fallen over 14% as of January of this year. The supply of homes available for sale in the Tri-County Wilmington market has fallen over 15% in the last year (as of May of 2018), and an inventory of less than four months of sales exists for townhomes and condominiums. Some of the incentives for the apartment construction in the area become clearer when this data is considered.

Concluding Remarks: Local Housing Prices and the Prospective Investor

As I teach my real estate investments course in the Cameron School, students discover patterns that are all too familiar to local real estate professionals. As a result of a healthy local and national economy, the attractiveness of the Cape Fear Region to folk outside the area, a declining area and nationwide inventory of available homes and the continuing availability of modestly-priced financing, demand outpaced supply and driven prices up. This seems a favorable time for a homeowner considering selling her home, but the same might have been said a year or two ago when prices then seemed generous, yet were lower than today. Only time will tell with this market! While the old saying was always: "Location, Location, Location," the more successful real estate investor might counter, "Timing, Timing, Timing!"

Real Estate Investment Analysis is an elective course in CSB's Professional, Online and Executive MBA catalogs. For more information on our MBA programs, visit our website.

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Cameron School of Business at UNCW

UNCW was established as Wilmington College in 1947. The Department of Business and Economics became the Cameron School of Business in 1979. Focused on the transformation of today’s business world from the industrial age into the information age, business education at the Cameron School of Business is focused on the technical, analytical and interpersonal skills students will need to lead this fundamental change in the business world through the 21st century.

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