3rd Quarter Skyline Report

Last Friday was the Fayetteville breakfast sponsored by Arvest Bank to release the 3rd quarter Skyline report for Washington County and Northwest Arkansas. As usual Kathy Deck, director of the U of A Center for Business and Economic Research, presented the highlights of the report, but also present was Tim Yeager, professor of finance at the Sam Walton College of Business, to talk about the $700 billion “bailout” which has received much attention in the national media.

Of interest to me was his take on the Secretary of the Treasury’s redirection of funds in the TARP (Troubled Asset Relief Program—which is the official name of the bill that Congress passed) from purchasing bad assets to a capital purchase plan. Yeager is in favor of the new plan, which he says is a better use of the funds.

The original plan to purchase bad assets was a bad situation because of the difficulty of pricing the assets, according to Yeager. If the assets were priced at the current deflated values, this would represent a permanent loss on those assets. The other alternative is to wait until the assets have appreciated again.

The new plan is to purchase preferred shares of healthy banks as well as large sick banks. There would be a dividend of 5% in the first 5 years.

Yeager also presented a suggestion that Congress should prepare a new fiscal stimulus plan—“just in case.” We don’t need it now, but if such legislation were in place for the future, it would be better for assuring the financial stability of the US economic system.

Kathy Deck prefaced her remarks about the housing market in NW Arkansas with some observations about the economy. Of importance in this regard is the fact that the unemployment rate here is 4% compared to the 6.5% national employment rate. Employment opportunities are what fuel growth to the area and thus housing growth.

Employment growth here did flatten in 2006. Thus new job creation is not terrific compared with years past (e.g. 6% employment growth at the peak in July if 2005), but in comparison to the negative employment growth in the rest of the country, we’re doing OK. Current job growth in NW Arkansas is about 1% whereas jobs are being lost in the rest of the country.

I’m not much interested in commercial real estate, so I’ll focus on what’s happening in the residential and multifamily sectors.

For multifamily, the vacancy rates for 1 and 2 bedroom apartments is still very high, over 10% for the 3rd quarter of this year. The actual rate was 12.2%, the same as the rate for the 3rd quarter of 2007. According to Deck, a healthy vacancy rate is 5% or less. The rates vary by town with Bentonville the highest with a 15.7% aggregate vacancy rate (down from 17.4% in the 2nd quarter). The rate for Fayetteville was 10.9% in the 3rd quarter, and that for Springdale was 11.6%. Rogers had a decrease to 14.1%, and the lowest aggregate vacancy rate for the 3rd quarter was in Siloam Springs—10.2%.

For residential real estate the Skyline Report primarily looks at new construction. The Center for Business and Economic Research consults with planning departments of NW Arkansas communities to determine new subdivisions which have been approved and building permits which have been issued. They obtain plats and send out students to determine what’s happening on each lot in the active subdivisions. An “active” subdivision is one where construction is currently occurring or has occurred during the past year.

They classify each lot into one of 5 categories: vacant (nothing going on), housing start (slab or foundation), under construction, complete but unoccupied, and occupied.

In both Washington and Benton Counties, the number of lots in active subdivisions has increased, but the number of homes under construction has decreased. In Benton County in Q3 of 2006, there were 12,454 lots, in Q3 of 2007 there were 16,313 lots, and in Q3 of 2008 there were 16,684 lots. In Washington County, there were 8337 lots in Q3 of 2006. In Q3 of 2007 there were 10,450 lots and in Q3 of 2008 there were 10,920 lots in active subdivisions.

There were approximately 100 homes under construction in Fayetteville in Q3, and approximately 240 complete but unoccupied homes. In Springdale there were approximately 50 homes under construction and about 120 complete but unoccupied homes. The absorption rate has been down from past quarters. This means that fewer homes are being sold.

Altogether current inventory of new homes was up in all towns of NW Arkansas with 55.8 months inventory for the 3rd quarter. What this means is that at the current rate of sales, it will take 55.8 months to sell all of the new homes on the market (almost 6 years), assuming that no additional homes are built. This does not take into account existing homes which are also on the market.

One factor of importance is the existence of a lot of foreclosure properties, which are causing a continuing downward pressure on prices. According to Deck, there are 747 bank-owned properties in Benton County, up from 502 six months ago. In Washington County there are 475 bank-owned properties up from 276 six months ago.

Altogether the price of homes sold has continued to decrease in Washington County, but in Benton County, prices have shown less inclination to decline. In Benton County in the 3rd quarter of 2008 the average sales price of existing homes declined by 1.6% and in Washington County by 4.1%.

Of more concern is the fact that from May 16, 2008 to August 15, 2008, there were 1662 existing homes sold in Benton and Washington Counties. This is a decline of 17.5% from the same time period last year.

From my point of view this is a great time to purchase a home. Prices have declined significantly and there are a lot of homes on the market, both new and resale. There are a lot of great deals now.

And for those folks who are waiting for the bottom of the market, we won’t really know when the bottom occurs until after it happens. And then prices will be on their way up again.

The important factor is that real estate investment is not like the stock market. Real estate is a long term investment, not short term. If you want to purchase a home now, plan on holding it at least 5 years to realize any appreciation. So if the market goes down a little more—bottom line is that it doesn’t matter. By the time 5 years have passed, prices will be on the way up again. Real estate is cyclical.