Is This The Bottom?

by Dave on May 15, 2009

As first appeared in Coastal Sussex Weekly, April 30, 2009:

Elusive like the holy grail, the bottom of the market is on the minds of many buyers, sellers and those in the real estate economy today at the Delaware Beaches. But it may have come and gone without much notice in January according to some, and in listening to local professionals, this may be the best time to buy.

In 2005, there were 6,164 non-commercial real estate transactions in Sussex County, a record amount that suggested the peak of the real estate boom. By 2008, that number had sunk 53%, to 2,875 transactions. In January of this year, just 113 such transactions took place. But many say that the bottom has hit and that better times are ahead.

“Consumer sentiment is rebounding,” says Chris Schell, president of Schell Brothers Construction, one of the area’s largest builders. “There are a lot of fence-sitters out there and now you’re starting to hear about how the bottom is happening, with new and existing home sales up last month unexpectedly. I do believe that the lowest point for sales will be January.”

Schell points to extraordinary circumstances in the economy as a whole that have affected housing, and that those factors could play into a quick rebound. “This whole collapse was mental,” says Schell, who cited years of economic data in a recent speech to Realtors in Millsboro. “What caused that was what I call “the TARP trials” (referring to the federal Troubled Asset Relief Program passed in October of 2008).

“They had to scare everybody to accomplish their goal. You scare consumers into their shell, and you’ve got a big problem. The TARP trials flipped that switch. Now, we’re finally coming back and people are saying, ‘Maybe the world isn’t coming to an end.” If you look at history, the deeper the chasm in a recession, the quicker it bounces back.”

Local Realtors are seeing signs of such a rebound.

“We hit bottom,” says Nick Carter of Jack Lingo Realtor in Lewes. “If the price is right, we’re selling things now in a matter of days or weeks. I sold a house in Cape Shores listed for $2 million in a matter of weeks.” The Cape Shores house, currently pending settlement, boasts six bedrooms, four and a half bathrooms and bay views. The total time on the market for that particular home was just 28 days. But all is not rosy, says Carter.

“The gap between the buyers and the sellers is as wide as its ever been,” says Carter, who cites offers as low as 50% of the asking price on properties. “Plus, the banks aren’t letting the money go.”

Not too long ago, Realtors couldn’t keep up with the demand, and the market increased several fold by 2005.

One property which shows just how intense the market highs were is located in Port Lewes, a townhome complex located on the Delaware Bay adjacent to the Cape May-Lewes Ferry Terminal and close to the Cape Henlopen State Park. This particular unit sold for $499,000 in June of 2004, and then re-sold just one year later for $750,000, an increase of 50% in just 12 months.

Of course, not all buyers benefited from the boom. As the sellers were pocketing the 50% profit in Cape Shores in June of 2005, a home in the Rehoboth Beach Yacht & Country Club neighborhood sold for $1,300,000. By April of 2008, that home sold for $1,125,000, a decline in value of 13.4%.

“We’re three and a half years into this thing,” says Carter. “Traffic in the office was as low in January as I’ve seen it, but there’s a huge, pent-up demand. As soon as rates start going back up again, we’ll see a run. There’s a lot of inventory in the area.”

First-time homebuyers, spurred by the recent federal expansion of an $8,000 tax credit, are one segment that is growing.

“About 50% of our business is first-time homebuyers right now, says Scott Dailey, managing partner of Capstone Homes.  “They can get financing on a Capstone home with almost no money down.  The cost to own a Capstone home is very close to the cost to rent in the Lewes area.

“Right now is a tremendous opportunity for a first-time homebuyer,” Dailey adds.  “I think everyone would prefer a new home over an existing home, and existing homes in our price range tend to be more dated floorplans in more dated communities.”

However, one of the effects of the downturn in demand over the last few years is the drying up of most new residential developments, something Matthew Peterson of Element Design Group saw come to a screeching halt.

“Reisdential (developments) literally stopped in 2008,” notes Peterson. “Our planning efforts have flipped to commercial planning and engineering from residential. It’s been switching for the last two years. Very few people are moving forward with their developments, and a lot of the developments have switched to very small phases.”

The commercial market, however, has seen signs of life, according to Peterson, whose firm designed the new Bethany Blues in Lewes and the upcoming Big Fish Grill on the Wilmington Riverfront. “It’s coming on the back of the growth boom. The people that were investing in residential real estate have switched to retail.”

Much of the new commercial development comes as professionals, particularly doctors, are banding together to build their own customized space.

“A lot of these doctors, they are doing a lot of partnering to take on their own space,” says Peterson.  “Nephrology Associates of Delaware is going to final approval on a 3-acre site in Milford where they’re going to put in a 6,500 square foot building and eventually another 13,000 square feet next to it. That, plus a lot of tenant fit-outs for doctors. But a lot of that is Millsboro, Milford, away from the beach.”

Other commercial interests are trending downward, right along with the economy and the residential market, according to Brittany Danahy of Sperry Van Ness-Miller Commercial Realty in Rehoboth Beach.

“The landlords now are starting to realize that they have to either negotiate, reduce their price, or some sort of incentive,” says Danahy. “Some of the bigboxes are down here and looking, but there’s only so many places they can go.
These mom-and-pop businesses are the heart and soul of what we’re doing down here.”

Danahy’s colleague, Casey Kenton, sees a silver lining a few miles away.

“I think everyone, including us, are amazed when Lowe’s and BJ’s come into Millsboro with 1,500 people and they’re drawing people from 60 miles out,” says Kenton. “If they can do it in Millsboro, this market’s going to do well for a long time. If and when we run out of space for the big boxes (near the beach), you’ll see them move out away from the area. You’re going to see the outlying areas like Bridgeville and Milford and those areas grow, too.”

With the new administrations in Washington and Dover, and the bottom of the market arguably having arrived, there is much optimism in the air.

“Housing starts are way up,” says Schell. “It’s starting to heal. The first time homebuyers are coming back into the market. The stock market going up is huge. We could see a manic run in the stock market, and that could heal everything.”

Schell cited economic data in his recent speech to Realtors that shows sharp upturns in housing activity leading the way out of the last several recessions. The Rehoboth-based builder is known to send Realtors lengthy emails detailing the economic conditions and how they are affecting real estate at the beach.

“Even with GDP growth, the deeper the recession was, the quicker it bounces back. We’ve bounced right back from the 70’s, 80’s and 90’s recessions.”

Schell is not alone in his optimism.

“Although sales have not begun to approach the levels most would like to see, there is increasing buyer interest,” says Rose Walker of Vickie York At The Beach Realty in Bethany Beach.   “More people are beginning to look seriously for property.  The attraction of lower home prices and lower interest rates for mortgages has convinced some that this is the time to buy.  The selection of properties on the market also makes it a much better opportunity than has existed in many years.”

“This is one of the best buying opportunities we’re going to see in the real estate market in the next 20 years,” says Carter.  “People could look back in a few years and say ‘what were we thinking? Why didn’t we load up the wagon with all the real estate we could get?”

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