Third Quarter Skyline Report Released

A few weeks ago the Skyline Report for the Third Quarter of 2006 was released. I’m a little behind on my blogging, so I didn’t report the results immediately, but (as they say) better late than never.

The Skyline Report is an economic summary of the real estate market in NW Arkansas, prepared for Arvest Bank by the Center for Business and Economic Research of the Sam Walton School of Business at the University of Arkansas.

Dubbed by some the “sky is falling” report, this summary provides a quarterly glimpse of present and future housing activity for Northwest Arkansas. For the past several quarters, the results have revealed a tendency of builders and developers to build too many homes, especially expensive homes, which are now sitting on the market. What this means for buyers is that it is a very good time to purchase a home, since interest rates are still low and there is a lot of housing inventory to choose from, especially if the buyer wants to purchase a new home. For sellers (including builders of new homes) this means that buyers are now calling the shots, so sellers need to price their homes competitively. Conditions are “worse” in Benton County than in Washington County for builders with a lot of new unsold homes.

Some of the statistics of the report summary include:

1. There were 20,791 lots in the 281 active subdivisions in NW Arkansas in the 3rd quarter, up from 19,326 in the previous quarter. Using the most recent annual absorption rate, the supply of remaining lots in those active subdivisions is sufficient for 46.8 months (almost 4 years worth).

2. In the 3rd quarter of 2006, there were 2956 complete but unoccupied houses. Benton County experienced an increase of 229% in available complete inventory from the 3rd quarter of 2005, with a 23% increase in the most recent quarter alone. In comparison, Washington County experienced a 17% inventory increase over the past 12 months.

3. From May 16 to August 15, 2006, there were 2,224 existing houses sold in Benton and Washington Counties. This is a decline of 1.9% from the same time period in 2005.

4. In the 3rd quarter of 2006 in NW Arkansas, the average sales price of existing houses increased from 3rd quarter 2005 levels by 2.3% in Washington County and by 6.1% in Benton County.

5. There were an additional 19,543 residential lots that have been at least preliminarily approved in NW Arkansas. Adding these proposed lots to those in active subdivisions yields a whopping 112.9 months of inventory in NW Arkansas (that’s 9.4 years for those who don’t want to do the math).

6. The volume of new building permits issued in the 3rd quarter declined dramatically year over year from 1405 to 870.

So what does this all mean for buyers and sellers of homes?

If no new subdivisions are approved, even in the ones already approved and underway, there are a lot of homes out there, ready for sale—almost 4 years worth in active subdivisions and almost 10 years worth in additional subdivisions already approved if these are built out. Economists might see the drop in new building permits as a negative factor, but I see it as an indication that builders and developers are finally getting smart and putting on the brakes to conform to the current reality. A further aspect of this data means that many of the approved subdivisions may not get built out quickly, given the supply of already finished homes on the market now.

Home prices as a whole are not going down. There may be some individual sellers who had their homes priced too high (from the recent seller’s market) and have adjusted them to current market conditions (a buyer’s market). But although home values are not increasing at the double digits of the past several years, there is still appreciation taking place. It’s higher in Benton County than in Washington County, but (I will repeat) home prices are not going down significantly.

Anecdotally, what I have observed is that instead of reducing prices, many builders and even sellers of existing homes are offering incentives to buyers—carpet allowances (for example) on existing homes and builder concessions and extras on new homes such as fences, blinds, closing cost help, etc., where in the past buyers would have had to pay extra for these. The prices aren’t going down (the builders had higher land, development and construction costs during the recent “boom” so it’s difficult for them to lower prices), but they are willing to help the buyers. Buyers can get more for their money now than they could last year when it was a seller’s market.

Another thing that is happening is that home sales have slowed a little compared to the last couple of years. But to put this in perspective, the last 2-3 years were the “hottest” in the history of the area and nationwide with record-breaking levels of home sales. Things are getting back to a more normal pace such as existed prior to the last few years of craziness. And a 1.9% decrease in home sales compared to 2005 is very small, which means that home sales continue to be strong in NW Arkansas. The builders and developers just kind of got ahead of the curve somewhat.

And to refer to my blog of a few weeks ago about the Bentonville development seminar, Jeff Collins of the Center for Business and Economic Research indicated that job creation is remaining steady at more than 600 new positions per month, and there are still about 1200 people per month moving to the area. This means that there is still a continuing stream of buyers available to purchase the homes that are on the market.

All in all, the “sky is NOT falling”, and I see the outlook for the NW Arkansas housing market as positive. Contrary to the national media hype, what’s happening in California and elsewhere is not happening here, and buyers seem to realize this. After a brief dip in sales in September and October (which could also be explained by seasonal factors), more home buyers are out on the streets again and seriously looking for homes. But because of the overbuilding as indicated by the Skyline report, some of those high-ticket homes may continue to sit for awhile.

One thing I should mention is that that Skyline Report is a phenomenal undertaking. What the Center for Business and Economic Research does is obtain data from the different cities about subdivision approvals, building permits, etc. Then they send out university students to physically examine what is happening on each lot in active subdivisions. They note whether lots are vacant, under construction, finished but not occupied, or occupied homes. The center also examines data from the NW Arkansas Multiple Listing Service as to home sales data and prices for homes, i.e. average and median prices for different areas

I have been working on a market report, which I (hopefully) will be able to finish within the next couple of weeks. This will provide more specific information about different price ranges, absorption rates, and availability of housing by town in NW Arkansas. Look for this in the near future.