The Cameron School is known for an outstanding faculty who, while extremely skilled in research, love engaging our students not only in the classroom but also in a host of applied learning activities. This week’s blog features one of the CSB’s most engaging faculty members, Professor Edward Graham. He is a beloved professor of finance and our resident expert on real estate markets. He discusses the possibility of sustained recovery in real estate markets.
By Edward Graham, Professor of Finance
Department of Economics and Finance, the Cameron School, UNCW
A Little Background
The Cameron School is charged with introducing its students to the ebb and flow of commerce, to the underlying precepts of the business world, and to the theories and tools that brace the student for employment and success after graduation. These “theories and tools” are presented within a general context – a business “core” – for each of the general business disciplines: operations, information systems, accounting, business law, marketing, management, economics and finance. From among these disciplines the student chooses a major or a “concentration.” The finance concentration houses the study of real estate.
An earlier class in real estate principles, covering such features of real estate as real estate law and real estate marketing, can serve as a foundation for the real estate investments class. The students are introduced to the idea of real estate and real estate investment “from 30,000 feet” and are then, in the investments class, required to consider a specific piece of real estate in the Cape Fear region. Field trips to properties near the university frame this consideration.
For most students the coursework is an important stepping stone on the way to graduation, and for some it is the beginning of a career in a real estate-related field, such as home sales or mortgage lending. The recent trends in the economy, and in the housing market, provide a backdrop for their work. The real estate “history” below frames contemporary real estate study.
Financial Theory, Real Estate and the Housing Bubble
The U.S. residential real estate market has been a leading topic in the news over the last several years. With increasing mortgage delinquencies in late 2007, and the bursting of the real estate bubble soon thereafter, home values across the United States 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, and the correction in house prices as the housing bubble burst. Prices, on average across the U.S., 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 more than 75 percent in the years ending in the spring of 2007.
Evident in Table I are the general patterns of home values across the market served by the WRAR. Though dramatic declinations in house prices were observed in some subdivisions across Brunswick County, and values in Carolina Beach – which had escalated greatly in the years before 2007 – fell more than 50 percent in many areas, the overall Wilmington market suffered less than the national average, and it has recovered, significantly. While prices have not returned to their pre-bubble-bursting values, many prices in many neighborhoods are 90 percent or more of what was observed in 2007. Some market niches, such as the one for homes more than $1 million, still suffer, but middle-income markets are in far better shape than a few years ago.
Table I – Implied Housing Index for the Cape Fear Region:
January 2000–June 2014
*Index based upon reported realtor sales in the region between 2000 and mid 2014
**Index derived from the Case Shiller Index, Standard and Poor’s
***The January 2014 data for the Cape Fear Region, though seemingly contradictory, is drawn carefully from the reported WRAR data, and seems only to be a statistical outlier.
The Real Estate Market Post-Bubble: Looking Forward
Several comments about the local and national real estate markets can be made after reviewing Table I. First, between March 2006 and March 2012, prices nationally corrected more than 30 percent, on average, after more than doubling between 2000 and 2006. Locally, Realtor data suggests that between March 2007 and May 2012, prices corrected less than 24 percent. Evidence since the spring of 2012 implies that prices nationwide “bottomed” in the spring of 2012, and have since largely corrected for the losses before that bottom. Prices today in communities in Texas and Colorado, near San Francisco, in many neighborhoods in New York City, and in areas near hydraulic-fracturing booms are at all-time highs.
It needs to be remembered that real estate data need to be handled carefully. Real estate market activities and the behavior of real estate market participants do not lend themselves easily to traditional financial or economic theory; real estate markets are “inefficient.” The capital markets are more easily examined given their rich historical databases on which to build research; no such set of data exists for real estate in general, much less for particular pieces of real estate. This is certainly true in Wilmington as well, where the ultimate impact of a new subdivision or development, like Mayfaire, might not become evident for months or years. Daily price and volume information may exist for a given stock, and suggestions about that stock’s value may differ day-by-day. A greater quandary exists with real estate, where a particular piece of real estate may “trade” only a few times in an entire lifetime.
The real estate student at UNCW appreciates that much of the traditional theory that he or she learns in the business or finance classroom applies only awkwardly to real estate. Recent trends, nonetheless, have been encouraging. A convincing and sustainable reversal of the substantial values suffered in the real estate community between 2007 and 2012 has occurred, and a real estate market recovery is in place.
For 2014-2015, Dr. Robert T. Burrus, Jr. will serve as interim Dean of the Cameron School of Business at the University of North Carolina Wilmington. Before taking on the role of interim Dean, Burrus was the department chair for economics and finance and a professor of economics. He has been on Cameron’s faculty since 1998. The Cameron School of Business has 90 full-time faculty members and 29 administrative and staff members. The school hosts approximately 2,000 undergraduate students and 170 graduate students. International students come to study at Cameron from all over the world. The Cameron School of Business is AACSB accredited; offers capstone experiences; houses a Financial Trading Markets Room; provides for overseas learning opportunities; and is a founding member of the Trans-Atlantic Business School Alliance. To learn more about the Cameron School of Business, please visit http://csb.uncw.edu/. Questions and comments can be sent to [email protected].
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