The appraiser's perspective: Water property valuesCharlie W. Elliott Jr., MAI, SRAappraisals, pricing, values
There probably has not been any subject more on the minds of
property owners, lenders and appraisers than that of property
values on and around the beaches, lakes and sounds throughout the
United States. As most of us have observed, property values, at
least for now, continue to go through the roof. Those of you who
regularly read my columns know that recent appreciation in these
areas has reached as high as anywhere from 25 to 40 percent. Not
only are the square foot values increasing on the typical home, but
the size of the homes are is increasing at a rate not seen in the
past. What is it about people that makes us want to be on and
around the water? Those scholars of evolution will be quick to
point out that we came from the water, so why not revisit it?
If one looks at a map of the country where the larger property
value increases are taking place, it is easy to see that it is
occurring around the rim of the continental United States.
Beginning in Maine and moving around in a clockwise direction
through Boston, New York, the Carolinas, Florida, the Gulf Coast,
around to California and all the way up to the Seattle area, we are
seeing this significant increase in property values. While there
are other areas on the water experiencing property value increases,
such as around lakes and rivers, the granddaddy of them all seems
to be oceanfront and other near-ocean properties. Why is this?
These properties have been here all along without such a strong
rush to purchase in the past. Yes, they have usually been more
in-demand than inland properties; however, there seems to be a
great surge in values, especially for some of these properties, in
the new millennium. While each location and situation is somewhat
different and there is no one-size-fits-all explanation, listed
below are a few of the reasons I attribute to this phenomenon. This
is not just based upon my observations and opinions, but also that
of many of my professional colleagues, such as bankers and
economists.
First, and this is more of a personal opinion than a
professional one, people like to think that they are hobnobbing
with the rich and famous. So where do they go? They go to the
beaches and surrounding areas where such activity occurs. This
increases the demand for such property. Such a theory may seem
somewhat artificial; however, it can be very real, especially when
the market is in an upward trend.
Next, we live in a very affluent society. We are not just
talking about the top one percent here. As in many less affluent
areas, a much larger percentage of our populace has discretionary
money to invest. Due to recent experiences, many of our investors
have negative feelings toward typical investment vehicles such as
stocks, bonds and mutual funds. Therefore, to avoid putting all of
their eggs in one basket, they seek other investment vehicles, such
as real estate, as a hedge. So what better way is there to invest
than to own real estate and enjoy the opportunity to use it in a
beautiful location?
We have talked much about demand, but those of us with at least
a modest education in economics know that supply is also an
important part of the equation. Here, many economists believe lies
a large part of the answer to why water properties are increasing
in value at such a rapid rate. Yes, there are fewer acres along the
coast to develop than inland. By looking at a map of our country,
it would be easy to conclude that property at or near the water
represents a small portion of all property. Perhaps as little as
one percent of all property would be in this category, depending
upon how it is accounted for. But this is not the only
supply-driven issue.
A significant issue relative to the supply of real estate is
whether or not it is available in real time. We all know that the
amount of land is more or less fixed, that it already exists and
that it cannot change. On the other hand, the amount of marketable
real property consists of property that has been developed or has
been approved for development quickly. That would mean that such
properties have met all environmental requirements as well as all
federal, state and local development ordinances. Perhaps where
water properties are of a concern, we have uncovered a substantial
clue as to the real time supply. We all know that politics,
physical infrastructure and environmental concerns delay the
development of land on and near our beaches. Therefore, development
of water properties is more expensive and time-consuming than that
of inland properties. This places pressure on the market price
because of the increased cost of development as well as the short
supply due to the delay in availability. In some highly populated
areas, development approvals may require five to 10 years. This
places upward pressure on existing housing stock prices, causing
substantial increases in value.
Finally, one reason is simply that investors see values
increasing in and around the water, so they jump inno pun
intendedand compound the already volatile situation by adding fuel
to the fire. This works to a point, but as we have seen in the
stock market recently, once the market is oversold, prudent
investors will realize the risk and pull back.
In summary, the economic laws of supply and demand are at work
along our seashores and waterways. There is a limited supply of
that water view, that sandy beach and that refreshing atmosphere.
Buyers of property are buying a lifestyle, one that is restricted
by the availability of property for immediate use. This condition
creates property price increases, which we know and cherish as
appreciation and return on investment.
Charlie W. Elliott Jr., MAI, SRA is president of Elliott
& Company Appraisers, a national real estate appraisal company.
He can be reached at (800) 854-5889,
[email protected] or
through the company's Web site at www.appraisalsanywhere.com.
