Housing Market Trends in NW Arkansas—Part 1

The main question that people ask me these days is “how’s the market?” With all of the doom and gloom in the national media about the so-called “housing slump” and the “mortgage meltdown”, it’s possible for sellers to be very pessimistic about selling their homes and for buyers to be hesitant about making such an investment now. But real estate is local, so national trends don’t necessarily reflect what’s happening in NW Arkansas.

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.