Wednesday, November 21, 2007
In a recent training video to help agents deal with the current shifting market, Gary Keller, founder of Keller Williams Realty, gave the best explanation I have heard to help understand what is happening now. I will try to summarize:
1. The real estate market and the economy as a whole are cyclical. We’ve had down markets before, and it’s inevitable that the market will turn around again and improve. The question now is when that will happen.
2. The past several years have constituted an unprecedented up cycle, with the number of sales and increase in prices steeper than normal. This means that prices may fall more than usual and more sharply before this is all over. For each local market, where we are in this cycle depends on local factors.
3. National trends touted by the media don’t necessarily apply to all local areas. What national trends are is an average of all of the local trends from all over the country. Each local market is different, and the situation here compared to California or other states may vary radically; there are even local markets which do not mirror the national trends and where prices have been falling during the past few years and are now rising.
4. With regard to the crisis in the mortgage industry, aggressive lending policies during the past several years brought many additional buyers into the housing market who possibly should not have been there. These were people with marginal credit who normally would not have been able to get financing to purchase a home. But because lenders were offering them zero-down or low-down-payment loans at higher interest rates but very low introductory rates (sub-prime loans), these people purchased homes, thus contributing to the steep increase in prices. But now the first adjustment of these ARM (adjustable rate mortgage) loans have put the interest rates very high and the borrowers can’t make the new payments, resulting in the record number of foreclosures.
5. This market correction will not necessarily end soon and depends on balancing home prices with affordability. In a normal economy, usually the median home price and median income for a particular area match up; increases in income and home prices occur incrementally, each inching up little by little. However, the spike in home prices during the past few years far outpaced salary increases for most folks. Now we’re at a point where home prices are extremely high and income levels of people possibly wanting to purchase a home have not increased significantly to match the high home prices. What this means is that home prices must come down to “affordability” levels, and normal cost of living salary increases will eventually put home prices and income back in balance. This could take awhile—how long will depend on where each local real estate market is with regard to the cycle.
The housing market in NW Arkansas began its correction about a year ago in Washington County and in the first quarter of 2007 in Benton County. Thus we’re well into the buyer’s market that has resulted from the correction. The past few years of housing boom was a seller’s market.
Ultimately it is not a question of a good market vs. a bad market. The market is the market. Well-priced homes are still selling while overpriced homes are sitting on the market, so sellers may have to adjust their expectations. But buyers are still buying; in October the number of home sales in Fayetteville was 69, only 5 less than in October of 2006.
For both buyers and sellers the rules have changed compared to the last several years of “craziness.” My advice is to seek out a real estate agent who understands these trends and can help navigate the changing housing market in NW Arkansas.
And two reports out last week point to encouraging trends in the real estate market in Benton and Washington Counties. The 3rd quarter Skyline Report and the 3rd quarter report on the economy were both released by the Center for Business and Economic Research at the University of Arkansas.
The numbers show a continued decrease in new residential building permits and improving absorption rates, both of which indicate positive movement for the Northwest Arkansas housing market.
One of the reasons for the current buyer’s market is that there is a very high number of homes on the market. In real estate terms, this is called “high inventory”. To get back to a somewhat balanced market it is necessary to decrease the number of homes on the market compared to the number of buyers.
Everyone has heard of the law of “supply and demand.” Low supply and high demand drives up prices. This was the situation of the past several years, where in order to meet the high demand, builders and developers created many new neighborhoods and built a lot of new homes. Unfortunately now, there is a huge supply (high inventory) and fewer buyers, which drives prices down. But trends in NW Arkansas as indicated by 3rd quarter data do show some positive trends.
For 3rd quarter (July through September 2007), Benton and Washington Counties saw a 5.6% drop in the number of complete-but-unoccupied homes from 2nd quarter of 2007. That’s good news in itself, but even better is that the 3rd quarter 2007 saw a 23% drop from the same period of 2006.
Put another way, in the 3rd quarter 2007, 2,276 complete-but-unoccupied houses in Benton and Washington Counties were available compared to 2,411 unoccupied homes in the 2nd quarter of 2007. This represents a decline of 8.8% in available complete inventory from the 2nd quarter to the 3rd quarter of 2007 in Benton County and a decline of 31.7% from the 3rd quarter of 2006. For Washington County, there was actually a 2.3% increase in inventory over the past quarter and a cumulative increase of 7.7% over the past year. For NW Arkansas as a whole, comparing 3rd quarter 2007 to the same quarter of 2006, the number of complete-but-unoccupied new homes dropped from 2,956 to 2,276.
The absorption rate was better in Benton County than Washington County, which is not too surprising when one considers the dynamic growth that Benton County has experienced. Washington County is a more mature market and while there’s no doubt it too has exploded in recent years, the demand has not been quite as intense as Benton County.
This probably also explains why Washington County home prices have dipped a bit in the past months while Benton County house prices have increased slightly. The average selling price of a home in Benton County increased 1.54% to $192,132. In Washington County the average price decreased 1.83% to $181,796 from $185,130.
Building permits issued in the two counties declined 33% in the 3rd quarter 2007 from the 3rd quarter 2006. A total of 653 residential building permits were issued in the two-county area during the third quarter of 2007, while the average value of new residential building permits remained unchanged at slightly under $165K.
All this points to a general improvement in NW Arkansas. Steady demand for new and existing homes coupled with a decrease in new building permits will help decrease inventory and aid in normalizing the market.
The local situation therefore is not as bleak as the national media would have us believe. It’s actually a very good time to purchase a home here.
1. Prices have decreased, while inventory is still high enough to afford buyers a good selection of homes.
2. The number of new jobs in NW Arkansas continues to increase by about 5,000 annually (3%). But Arkansas as a whole had a disheartening job growth rate of only ½ of 1%.
3. Mortgage rates have dropped somewhat and that will help people qualify to buy more home for the same monthly payment.
4. Less expensive homes are moving at a much better rate than homes costing more than $250,000.
It is also interesting to note that vacancy rates in multifamily housing are increasing throughout the area. Vacancy rates in this type of housing are very cyclical and will undoubtedly improve as the overall market improves.
Many new retail, office, commercial and industrial projects have come on board in the past year so it isn’t surprising that vacancy rates are also increasing in this sector. As buildings sit empty, downward pressure is exerted on rent prices, which may be very tough on developers who completed buildings at record high construction and land costs.
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Tuesday, November 13, 2007
And it was just about one year ago that the Quorum Court took action to regulate density around existing city limits. That law established zoning areas within two miles of larger cities and within one mile of smaller towns. Development in those areas is limited to agricultural uses and single-family homes, which must be situated on at least one acre of land.
Now the Court, by a 7-6 vote, has passed an ordinance that zoned all unincorporated portions of the county as agricultural. Residents of the rural areas will now have some say about what is built in their neighborhoods.
The ordinance amends the zoning regulations passed last year. Anything other than a single-family home on at least one acre will be required to go before the Washington County Planning Board to make the case for a conditional-use permit.
Since November 2006, the Planning Board has considered 19 proposals and denied only two: one was a subdivision with 5 homes per acre and the other was to construct storage warehouses in a residential area.
So it seems to me that the new zoning regulations actually protect property values. I know I would not want a rock quarry, smelter, red-dirt pit or noisy factory situated next door to my home, and I don’t know anyone else who does.
In the debate over the most recent decision of the Quorum Court, the usual cry arose from some of the old timers who don’t want anyone telling them what they can do with their land. I think it’s time everyone realized that NW Arkansas is being coming more urbanized every day and rules and regulations are necessary to ensure an orderly society.
I’ll even go so far as to say that I believe it might even be time for building codes in rural areas. It’s not the law yet, but I’ve seen homes in the county that are practically impossible to sell because they were not “built to code.” Buyers these days almost always hire a professional building inspector who has the skill to know good from bad in such things as electrical wiring, plumbing, and structural safety.
Substandard buildings can also be hazardous to the inhabitants. There was a fire several years ago in such a home in Washington County where several small children were killed as they slept.
I don’t ever want to read sad headlines like those again. Laws are generally to protect the people, and I think the Washington County Quorum Court has shown remarkable restraint in trying to balance traditional values with the needs for orderly growth.
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Refer to my blog archives for article posted November 23, 2006
Thursday, November 01, 2007
At the same time, other subdivisions have undergone revisions and homes are selling like hot cakes.
My take is that some of the higher-end, expensive subdivisions have a long way to go before they will be completed and occupied. Many are mostly empty or at the most half full, especially in Benton County. These were originally planned for large homes with all the amenities on large lots with many restrictive covenants to help maintain a buyer’s investment and life style.
In a concession to the reality of the housing market in NW Arkansas, some builders have revised sizes and costs downward. That’s a hard thing to accomplish. Not only is city approval usually required, but existing property owners have to agree to a relaxation of the covenants.
Smaller houses on smaller lots can affect the value of the larger homes that were built according to the tighter covenants. However, this can be accomplished without sacrificing the value of the larger home if it is done with thought and sensitivity.
I know of one subdivision, for example, where a developer purchased the land, received approval from the city to reduce minimum home size in the covenants, and is now building smaller, more affordable homes. The quality of these homes is excellent--all brick with many amenities of larger homes such as granite counter tops, fully sodded yards, etc., all for about $150K or less. These homes are "selling like hotcakes" in the midst of a supposedly a "slow" market.
Seems to me it’s far better for builders and developers to face reality, reduce costs, and sell homes than to be in a subdivision that sits empty save for one or two homeowners.
And for buyers, I would be leary of purchasing a home in a subdivision with a large number of empty lots or a subdivision where there are a lot of finished homes for sale but few or none have been sold. At some point in the future, a current buyer will want to sell that home, which will be difficult if new homes being built then are on the market and competing to be sold.
In this uncertain market with so many homes for sale, it's particularly important for a buyer to be represented by a knowledgeable buyer agent (like me for example
Buyers should also ask their agents to do a market analysis, as well as to research the history of the home (and subdivision) they have selected, in order that they don't pay too much. Prices are not what they were a year ago, but some sellers haven't gotten the idea yet.
And there are a lot of bank-owned properties out there (foreclosures anyone?) where the home is sold "as-is". So-called "short sales" may be some good deals in this regard. The buyer's agent can advise the buyer how to proceed and what his rights are in the transaction.
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