Good News and Bad News--NW Arkansas Housing Market

The good news is that now is a great time to purchase a home in NW Arkansas. With continuing low interest rates and a rising inventory of homes on the market, there is a lot to choose from for buyers. Prices have come down slightly, but the market in NW Arkansas has resisted this trend (which has devastated home values in other parts of the country), largely because of a robust economy.

The fear that prices may decline after they purchase a home is not necessarily one that buyers should be concerned about, depending on how long the buyer intends to live in the home purchased. The thing to remember is that traditionally a home purchase has been considered a long-term investment, not a short-term investment with double-digit returns. The housing market is not the stock market.

Home sellers in NW Arkansas have gotten spoiled in the past several years as appreciation rates soared. That drew investors from all over the country in a speculative frenzy, competing with buyers who actually wanted to live in the homes they purchased, driving up prices even further and faster. The peak was approximately in the 4th quarter of 2005, after which prices did decline.

But prices rose too far too fast and a correction was inevitable. The real estate market, after all, is cyclical. Now the investors and speculators have gone on to seek greener pastures elsewhere, so the absorption rate has slowed. Demand has fallen with fewer buyers on the streets (there is a seasonal factor at play here—winter and bad weather DO influence the real estate market in NW Arkansas). Homes are on the market longer, even in lower price ranges.

The result is lots of choices for buyers, many of whom are looking for a great deal. There are some very good buys now, but not every home can be gotten for a “steal.” Many buyers are still sitting on the fence, waiting for prices to go down. This may happen, but activity after the first of the year has increased, and when the weather improves and more buyers enter the market, those great deals will disappear quickly. That home that a buyer may have been “thinking about” may be sold, and the leisurely pace of looking for a home will disappear.

My advice to buyers is twofold: 1) if you find a home you really like, which meets your family’s needs, make an offer before it is sold to someone else; and 2) enlist the services of a reputable realtor to serve as your buyer agent, someone who is knowledgeable about the current (constantly changing) market, who will do a market analysis on the home you are about to purchase and guide you as to a fair price to offer while assuring that you don’t pay too much.

These comments are supported by the numbers. This past Thursday morning the Skyline Report was released at the regular quarterly breakfast in Fayetteville at the Clarion Inn. Kathy Deck, director of the Center for Business and Economic Research of the University of Arkansas, summarized the real estate market for residential, multifamily and commercial properties. She was guardedly positive as she presented housing market data for the 4th quarter of 2007.

Although there has been a decrease in the number of people moving to the area due to a decrease in the number of jobs created, the current level is still respectable. The five-year average of new jobs created in NW Arkansas has been 550 new jobs per month. At one point, during the peak, there were over 650 jobs created each month in NW Arkansas. This led to about 1200 people per month moving into the area. In 2007 just over 400 new jobs were created each month, and although Deck does not have new census figures yet, she estimated the number of people currently moving to the area each month to about 900.

For commercial space and multifamily units, vacancy rates are up. Some of this is due to over-building, and a decrease in new building permits may actually be a positive thing. In Q4 new commercial building permits in Rogers, for example, approached zero, while in Fayetteville there are continuing new projects in the pipeline. The situation in each town is different.

Multifamily vacancy rates are also up. According to Deck, the “ideal” vacancy rate (according to economists) for multifamily is between 5-7%, while rates under 10% are considered OK. Fayetteville’s multifamily vacancy rate for Q4 of 2007 was still under 10% but was higher than it was in Q3 of 2007 for 1 bedroom and 2 bedroom units. However for Springdale, Bentonville and Rogers, multifamily vacancy rates were over 10% and in some cases over 15%.

For residential properties, the Skyline Report looks mostly at activity in new construction in active subdivisions. In Q4 of 2007 the available inventory of new homes (including lots and homes under construction) represented a 44.9-month supply, up from a 42-month supply in Q3 of 2007. Building permit levels for new home starts continued to be low and there were few new subdivisions getting approval from city entities. This continued a trend begun in Q3 of 2006. The only NW Arkansas town with an increase in building permits issued in Q4 of 2007 when compared to Q3 was Rogers with a slight increase. Fayetteville observed only a slight decrease, while the other major towns experienced a larger decrease when compared to Q4 of 2006.

Other statistics showed more negative numbers, which in some cases is actually a positive thing as the housing market corrects itself. For example, in Q4 of 2007, there were 2,210 complete but unoccupied new homes in active subdivisions, a decline from 2,276 in Q3. Benton County experienced a decline of 3.6% in available complete inventory from Q3 of 2007 and a decline of 29% from Q4 of 2006. Washington County experienced a 2% decline from Q3 of 2007 and a 17% decline from Q4 of 2006. This means that more new homes have been purchased and are now being lived in—a good thing.

In other cases, the negative numbers actually reflect negative factors. From August 16, 2007 to November 15, 2007, there were 1357 existing homes (as opposed to new construction) sold in Benton and Washington Counties. This is a decline of 23.9% from the same period in 2006. This means that there were fewer re-sale homes sold in this time period of 2007, compared to 2006.

Similarly in Q4 of 2007 in NW Arkansas, the average sale price of existing houses declined from Q4 of 2006 by 2.2% in Benton County but it increased by 4.6% in Washington County.

In related news (drawing on data from the Arkansas Realtor Association and other sources), the two local newspapers report that NW Arkansas is better off than other parts of the country. A Morning News article cited data indicating that home prices in Benton County actually increased in 2007 by 1% compared to 2006, while in Washington County prices remained flat. The bad news is that there was a substantial decrease in the number of home sales in Washington and Benton Counties, and homes stayed on the market longer. In 2007, according to the Morning News, the number of home sales decreased by almost 20% in Benton County and by just under 11% in Washington County compared to 2006. Nevertheless, 2007 was the 3rd best year in history for home sales in the two counties.

Another article in the Arkansas Democrat Gazette confirms that statewide the number of homes sold dropped by 8.9%, but that was only about 10% below 2005 home sales, which was the best year in history. Home prices statewide did not decline but remained steady in 2007, unlike other parts of the country.

In my opinion, the continuing high inventory may put some downward pressure on home prices. But this is a necessary correction. In past Skyline Reports, Deck has indicated that the expected decline did not occur in 2007, and the newspaper reports indicate that prices remained steady in ’07 (good news for sellers). Even now, although there has been a decline in the number of homes sold and homes are staying on the market longer, buyers shouldn’t necessarily expect to be able to have so-called “low-ball” offers automatically accepted.

It IS a great time to purchase a home, but buyers in NW Arkansas must also be realistic. Real estate is essentially local, and NW Arkansas trends are generally better than what is reported in the national media. We have a healthy market in which construction and development has slowed in order to get the current high number of new homes sold. A correction is occurring, but it’s not anything close to the “doom and gloom” that is reported nationally.

The key to making a smart home purchase in any market is an experienced real estate agent who knows the market. And even if the agent doesn’t know as much as he or she should, buyers should ask him/her to do a market analysis on the home they decide to purchase. There are still some overpriced homes out there, but most sellers--who listen to their agents—have started to price their homes competitively.

And for sellers, there is usually a range of prices at which a home can be listed. Sellers should price their homes at the lower end of that range in order to be competitive now. It doesn’t matter what a seller has in the home, the market ultimately determines the value. And if an offer comes in that is less than ideal, accept it anyhow. There are so many homes for sale that buyers may just move on to their second choice home, and sellers may end up waiting for months more to get another (probably lower) offer.

I’m still working on my own market report for 2007, so for now I need to depend on statistics from other sources. I’ll have more analysis when I get my own report done in the near future.

For more information:

http://www.nwaonline.com/articles/2008/02/14/business/021508stablehomeprice.txt
http://www.nwanews.com/adg/Business/216877