Economic Index

by Rod Wolverton

August 8,2008

Analysis sees continuing pain, some gains in local market

A report from Rob Wolverton
President, R. Anthony Development

The long, slow grind continues. The bad news is the Boone County real estate market is going through the same cycle of correction as the national real estate market. The good news is our market here never reached the highs of other markets and will not reach the lows of other markets.

The fact that Boone County is a primary home market, as opposed to a secondary/vacation home market, helps insulate it from the extremes of other markets. Our market here is finding its equilibrium, but some market areas still have pain to endure.

A look at market fundamentals shows that the pieces are in place for our market to endure this correction and come out healthy at the other end.

• Boone County's unemployment rate per the REDI Web site is 3.5 percent, up from 3.3 percent at this time last year. But we are healthy compared with the state unemployment rate (5 percent today versus 4.6 percent at this time last year) and the national rate (5.5 percent versus 5.1).

• The fixed 30-year mortgage, according to a local bank Web site, is 6.625 percent, as opposed to 6.875 percent at this time last year. Another piece of good news is that ARM products are currently priced significantly less than the fixed 30-year mortgage, which indicates the return of some confidence in short-term credit markets.

• The prime lending rate is 5 percent versus 8.25 percent at this time last year. This is great news for those who have money borrowed on properties that are performing well.

• Total homes sold and under contract as shown in the Columbia Multi List System (MLS) are 1,489 for the first six months of the year, compared to 1,711 for the first six months of 2007, a decrease of 13 percent.

• Total new construction homes sold and under contract as shown in the MLS for the first six months of the year were 238 compared to 299 in the same timeframe last year), a decrease of 20.4 percent. The good news here is that single-family home building permits pulled in the City of Columbia for the first six months of the year are 147 versus 249 for the first six months of 2007.

• There are 1,713 homes on the market (7.7-month supply based upon absorption over the previous 12 months) in the MLS, compared to 1,567 homes on the market at this time last year (6.37-month supply). This is going in the wrong direction.

• Total new construction listings in the MLS are 289 versus 292 at this time last year. This small change is more significant than it appears on the surface. There are currently 97 new construction condos on the market, and there have been 25 sold and put under contract in the first half of 2008. This represents a 23-month supply of new construction condos currently on the market. Currently, 192 new construction single-family homes are on the market, with 213 put under contract and sold in the first half of 2008. This represents a 5.5-month supply of new construction single-family homes on the market, which is less supply than the overall market.

• There are a huge number of developed building lots are on the market, especially high-end. In a previous report, I stated that I believe there is a 10- to 15-year supply of high-end, new construction lots currently available. This estimate may have been short.

The question now becomes, how can we find bright spots in all these negative statistics? I believe three areas of our market are bright spots.

The first area is the residential rental property market. A records freshman class is coming to Mizzou this year. What this means is that 300–500 living units that otherwise would have been vacant will be full in the next 30 days.

I have received anecdotal reports of people coming to town for internships or other reasons who would have been buyers in previous years but who are now entering into long-term, high-end leases.

Last, but not least, tightening credit markets are turning a lot of homebuyers into renters who are saving for a down payment rather than financing 100 percent of the purchase price of a home. It was reported to me that a major rental property management company in town that manages close to 700 living units has a vacancy rate of less than 4 percent. The rental property market is quickly returning to health.

The supply of new construction single-family homes is dwindling in comparison to the rest of the market. It is a great time to be a buyer if you have strong credit and a down payment. This buyer has a lot of power in today's market.

The biggest issue we have to deal with at this time is consumer confidence. Negative election-year rhetoric, national media and unrelenting negative press regarding the overall economy and $4-per-gallon gasoline have shaken the confidence of the average homebuyer.

The direction we need to go at this point is very clear. We have to stay the course and not let short-term negativity of the next few months translate into long-term problems. We have a major election year, which always has a dampening effect on the residential real estate market. The next few months are going to be frustrating, but there is typically pent-up demand that hits once elections are over. I believe we will have a big first quarter in 2009 due to pent-up demand from the election.

We must continue to be conservative with speculative home starts. Our supply of new construction homes is headed in the right direction and, as a result, we are seeing a high number of custom-build jobs today. We must allow the market to cleanse itself.

In addition, the market's high end ($400,000+) is really difficult. There is currently a 12.8-month supply of new construction and pre-owned homes in the $400,000-$449,999 price point and a 30-month supply of homes in the $450,000–$999,999 market.

My prediction for our local residential real estate market is:

• The slow grind will continue until something happens locally or nationally that helps to restore consumer confidence. I believe there are billions of dollars (if not trillions of dollars) in capital sitting on the sidelines today waiting for a place to land. Getting the elections behind us will help.

• Our local market has shown enormous resilience. We have had little good news and lots of negative news over the last 24 months. Job cuts at 3M, "declining market" tag, which is now gone due in large part to outstanding work by the Columbia Board of Realtors and the slowdown of the real estate market nationwide have led to great pessimism and a general lack of confidence. However, in the face of all this, we continue to see commercial space slowly but surely being absorbed and the sale of homes that are well presented, well priced and in good neighborhoods.

I have spoken to several Realtors who report that they are having a very solid year, and I know of several new construction projects that are doing well. Bear Creek Village, Don Stohldrier's project at Old Hawthorn, Vintage Falls and Bellwood are all new or newer projects that are doing well.

A few other subdivisions that are old enough to have pre-owned homes but new enough to have new construction homes on the market have also had a solid first half of the year. Vanderveen (49 sold and under contract, 52 listed for sale), Mill Creek Manor (30 sold and under contract, 19 listed for sale), and The Cascades (30 sold and under contract, 22 listed for sale) have all had very solid sales for the first half of the year. The common thread in projects that are doing well is that they fill a specific need in the market place and they fill it very well.

• Commercial lending for residential development and speculative building will become more difficult and remain difficult for the next six months. Builders with a strong track record, cash reserves and building in solid areas will be able to get loans to build speculative homes. However, builders who do not have all those attributes will find it difficult to find loans for speculative homes. I will be surprised if there is any significant lending for residential development over the next six months, likely longer.

• I believe mortgage loans will actually begin to loosen compared to the climate we have had for the first six months of this year. Homebuyers will need to have some cash to put into their home and they will have to have solid credit. Otherwise, they will be renters.

• The next six months will be sparse for subcontractors and suppliers for the new home construction industry. I do not see a major increase in single-family home building permits (147 for the first half of 2008, 249 for the first half of 2007, 356 for the first half of 2006 and 569 for the first half of 2005) in the next six months. I believe a large number of those permits will be for custom homes.

• I believe the number of Realtors, builders, subcontractors and mortgage lenders will decrease by up to 10 percent over the next six months.

• The sub-prime mortgage crisis will become old news. By definition, this problem has to end. The sub-prime loans will all be refinanced, repossessed or paid off at some point. If no more of these poor loans are issued, the problem has to end.

Our market has, I believe, found its equilibrium. I believe annual home sales of 1,700-2,000 are reasonably sustainable with our current local climate. Obviously, a major change in our local climate (job additions, job losses, significant changes in enrollment at Mizzou) will change this outlook. New projects in today's market either need to have a spectacular location or they must have a significant calling card (affordable price, acreage, lakes, a golf course, a new school). If a new project does not have one of these attributes, it will be unsuccessful.

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