Housing Market on a Gradual Comeback

The Dane County housing market might never again see the heyday of 2007, when home sales reached lofty heights, but some industry practitioners appear to be okay with that. The metrics of today's market are more aligned with historic norms than the high sales numbers associated with the pre-recession, easy-money days. But that doesn't mean there isn't room for improvement, experts say, especially if the government ditches programs that have not worked to prime the market and instead focuses on forging more reasonable lending requirements.


House of cards?

Kevin King, executive vice president of the Realtors Association of South Central Wisconsin, which includes Dane, Columbia, Dodge, Grant, Green, Iowa, Rock, and Sauk counties, contends the Dane County market has held up reasonably well. In 2011, Dane County should end up with somewhere between 4,600 and 4,900 home sales. While that pales in comparison to the 7,000-plus home sales seen in the pre-recession years, King believes those years are the real aberration.

According to King, an analysis of the past 20 years of sales and population growth indicates that a normal year would see 5,500 to 6,000 annual home sales. "We're not that far away from that right now," he noted.

Other metrics aren't as positive. Dane County began the 2000s with a median home sale price of about $200,000, which peaked at about $218,000 in 2007 before sliding back to the present $210,000.

In addition, the current inventory of available homes is running about 10 or 11 months, even with single-family homes, and market balance is about six months of inventory. "For any price appreciation, we need to see a drop in our inventory," King stated.

King estimates that 20% of the overall market is "under water," meaning the balance of the mortgage is higher than the value of the home. This includes distressed sales of homes and homes in the pre-foreclosure stage.

The historic norm for the percentage of underwater homes is in the low single digits, but King would not characterize the Dane County housing market as "distressed," a term used to describe the situation in several hard-hit areas. Despite the drop in
average values since 2007, he said the median sale price has risen an average of 3% since 2000. "Price-wise, we have not seen any of the incredible drops in prices that some areas of the country did," he asserted. "We've been pretty darned stable."

Stable, perhaps, but also vulnerable to political winds. James Imhoff, chairman and CEO of First Weber Group, said the Dane County housing market suffered in the first few months of 2011 due to issues related to the controversial budget repair bill and the rollback of collective bargaining for government employees. Looking forward, it remains to be seen how the housing market and the local economy will be impacted by government employees now having to pick up a greater share of their pension and health insurance benefits.

"If about 20% of the employees in Dane County are employed by government, schools, and the university, and now all of a sudden they will end up losing $4,000 to $6,000 for having to pay their own retirement and their own health insurance, their take-home pay is going down to a considerable degree," Imhoff noted. "Some consumer confidence dropped in the market when they realized how much this would take out of their family budgets."

Imhoff said that within First Weber's statewide operations, Dane County historically was perceived as a leader in the comeback of the housing market. "It has not been a leader this time," he said. "Our numbers have suffered to a greater degree here than they have in even northern Wisconsin. Our markets in Minocqua, Eagle River, and Rhinelander have come back much stronger than the Dane County market or the northeastern market. The central part of the state is fine. Milwaukee has had a good year up until the last couple of months, but Dane County has suffered a little bit."

Real solutions

Virtually everyone agrees the 2010 housing tax credit accelerated sales that would have occurred anyway, and while that program might have picked the low-hanging fruit, it's actually one of the government's more successful attempts to stimulate the housing industry.

"They didn't really increase the volume of home sales, they changed the timing of the sales," King said. "Looking back now over the decade, the boom period did something very similar. It moved sales into 2004, 2005, 2006, and 2007 that would have been taking place naturally later in the decade and into where we are now."

The government's frustration has some wondering aloud whether it should stand aside and simply let the market hit bottom, but King and others contend there are sensible ways to stimulate home buying.

One barrier is the 760 average credit score (762 for Fannie Mae; 758 for Freddie Mac) now required to secure a mortgage. Lawrence Yun, chief economist for the National Association of Realtors, has suggested that dropping the average score to a still solid 720, and imposing a similar reduction in the score for Federal Housing Administration loans, 698, would qualify 15% to 20% more buyers for a mortgage loan.

In addition, King suggested the government loosen standards and allow people to invest in the excess inventory. "If we can get inventories down, if we can put them into productive use instead of sitting there vacant, that would be helpful," he stated.

Dan Duren of Duren Custom Homebuilders, president of Madison Area Builders Association, cited the sharp decline in statewide housing starts, which plummeted from 35,000 new homes permitted in 2005 to only 6,400 new homes permitted in 2010. In Dane County, housing starts dropped to 49 in September of 2011, just one start above the lowest total ever recorded for that month (recorded in 2009). September housing starts had reached 239 in 2003, according to MTD Marketing Services of Wisconsin.

Changes in the appraisal process are among the barriers to recapturing previous momentum, and Duren would like to see the government remove a straitjacket from appraisers. He said appraisers are being directed not to place added value to custom features on homes. "The comps (comparables) aren't there," Duren stated. "The comps they are using are either distressed properties or older homes. When building a custom home, the values are different than what's out there for a lot of the houses on the market. The appraisers have their hands tied because federal guidelines are not giving credit for a lot of the custom features that are built into homes."

Some conditions already exist to help the housing industry rebound more quickly. Historically low interest rates of under 4% in some cases have Imhoff, who remembers how difficult it was to sell homes with the double-digit interest rates of the early 1980s, shaking his head in disbelief. Banks have plenty of money to lend at these low rates, and loans are available with 5% or 10% down.

Duren said it's important for housing to make a comeback because it's connected to almost every other part of the economy, particularly small retail businesses and auto dealerships. "The automotive industry is a prime example," Duren noted. "When construction is going strong, contractors are buying trucks. Municipalities are affected by lower income from permits and lower taxes collected from new houses. Retail businesses are helped when new home buyers come into an area and buy clothes and groceries.

"From the people doing the work on the houses and the homeowners dining at local restaurants, it's just amazing the impact housing has on our economy, just amazing."


Downtown Condos

After a period of overbuilding, the condo market looks for equilibrium, but only the downtown submarket shows signs of life.

Debby Dines has heard all of the unflattering characterizations about the local condominium market. She's heard all about how the market took a beating after 2005, in part because of overbuilding, and in part because of the financial crisis that hit the economy like a ton of bricks. Market watchers have been outspoken about how not much thought went into future absorption rates or supporting demographics, but Dines really doesn't take issue with any of the incoming fire. With the exception of the downtown Madison condo market, the local segment that Dines is the most familiar with, unit and dollar sales continue to slide.

Countywide, unit sales are down nearly 20% in 2011, while dollar sales have declined by 16.5% compared with 2010, according to the Multiple Listing Service. For downtown condos, however, it's a good news story, as 2011 unit sales were up 17% and dollar sales were up 15% through Dec. 8. Historically low interest rates and moderating prices are only part of the explanation because eventually, the fundamentals of buying on location are heightened in a challenged market.

In an area that boasts of developments like the Marina, Kennedy Point, Metropolitan Place, and Capitol West, the recession appears to be over. "The downtown has weathered the downturn better than other areas," stated Dines, owner of Dines, Inc. "The first rule of real estate is to buy on location. When the market is great, people don't think about fundamentals as much. When the market is tight, the old rules come more into play."

At the moment, the overall condo market has just over a two-year supply of available units, and there are no other approved condo projects going up. According to Dines, it's probably going to take another three to five years for the next project to be approved, which means the market will reach a point where suddenly the inventory will be gone and nobody will have gotten the green light to put up anything new. "I can't predict when it will happen, but it will happen," she said.

The reason the condo inventory tends to be heavier than the single-family home inventory is obvious: an entire condo building has to go up at once. If a developer is planning a 150-unit condo project, all 150 units have to hit the market at the same time. If a homebuilder is developing a 150-unit subdivision in the suburbs, individual homes can be constructed 10 at a time, sold off, and then another 10 can be built.

"So with condos, by default, you're going to have to put up a lot of units that will have to hit the market at a given time," she explained.

While a healthy inventory for homes is about six months, the same measure for a healthy condo market is anywhere from six months to one year – assuming no new development is going up. "For awhile in the downtown market, we had three months of supply," Dines said. "There was so little opportunity to buy anything and there was nothing developed. In our heyday, you were lucky to have a condo stay on the market for a month or two. That was an exceptionally good market, but I'd say anywhere from six months to a year is considered a stable, normal environment."

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