One of the first things that many people notice about markets is the tendency for prices of similar items, offered by different sellers, to trend in the same direction. Because of competition and markets, any big spread in prices tends to become smaller or disappear entirely. Sometimes the market isn’t all that’s at work in this price-equalizing process, however. Note the rapid transformation of the once-sleepy residential and fishing community of Oak Island, N.C., into a hectic real estate market, complete with soaring property prices and bumper-to-bumper traffic.
The “equilibrating price” principle for identical goods explains why, everything else equal, the asking price of land and homes in highly similar beachfront communities tends to equalize over time. Since home prices and properties are highly variable and subjective, this is only true to point. Still, the closer one beach community is to being a substitute for another beach community (in the view of consumers), the closer their market prices will be. It’s buyers themselves, in fact, who eliminate price discrepancies by flocking to low-priced and under-priced communities. The rush to buy or rent ‘cheap’ bids prices up, due to a heavy increase in demand. Eventually, the price advantage in one community disappears, and a ‘market-clearing’ price for particular types of properties, for rent or for sale, emerges.
In the mid 1990s, property on Oak Island, N.C., sold at a fraction of the price—about 25 percent—of its high-priced neighbors on Carolina, Holden, and Kure beaches. While prices of beach community homes have risen across the board in the past decade, current prices in Oak Island communities are now comparable to prices in these communities. To reach that par, property values on Oak Island have increased much more rapidly than on nearby beaches, about 8- to 10- fold vs. 2- to 3-fold, over that time.
Why the especially rapid increase on one barrier island? Since 2003-04, a significant part of that price rise must be attributed to taxpayer generosity, and more specifically to the Army Corps of Engineers’ Wilmington Harbor beach renourishment project. Completion of that project in 2003-04 resulted in a dramatic increase in useable beach area—70 feet of beach, plus protective dunes(PDF), along the Atlantic (southern) shore of Oak Island. Oak Island now rivals its once pricier, and more popular, neighbors in attracting vacationers and vacation homebuyers. In essence, the Army Corps of Engineers project made “everything else equal” in terms of the physical characteristics of the beaches, leaving consumers and investors to exploit a huge price discrepancy on Oak Island.
To illustrate the difference that 70 feet of newly constructed useable beach area has made, it’s important to understand that prior to beach renourishment, seas washed underneath oceanfront homes at high tide, and beachside stairs ended in the water. To find a patch of sand, beachgoers either sat underneath raised homes to stay out of the tide, or amid the flotsam on the beach during low tide.
The taxpayer-funded renourishment project changed the entire character of Oak Island’s beaches. They are now wide and very appealing. Taxpayers shoulder most of the cost of this, and similar beach renoursihment projects for the state’s shorelines; local residents pay a small assessment, depending upon distance from the beach. These beach amendments, though, must be repeated every 3 to 7 years to remain viable. At an annual cost that can vary from $350,000 to $3 million per mile of beach, the taxpayers of North Carolina are treating beach property owners to a huge capital gain, in the form of higher property values.
There are winners and losers in this scenario. Many taxpayers will never benefit from the improved beaches in the state because they live too far, dislike the beach, or lack time or resources to gain access to its attractions. Those who visit the shore benefit because non-users must contribute tax monies as well.
Owners who do not plan to rent or to sell will probably face substantially higher property taxes, and insurance premiums, when property is reassessed for tax purposes. Higher property values may have the unintended consequence, therefore, of squeezing fixed-income or long-time owners out of the community. On the whole, it’s a mixed economic bag.