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All Real Estate is Local
By
Courtney Durham, Broker
(This article originally appeared in the February 5, 2009 Edition of The Delta Wind)
“All real estate is local” is an old saying that I have been using a lot lately. Folks are still stopping me to talk about the housing market and what seems to be on their minds is the state of the housing market in the lower 48 and what impacts it is having on Delta. That’s when I pull out the tried and true saying, “All real estate is local”.
Don’t get me wrong, those tumbling markets definitely have an effect on our market, but Delta is in its own little economic fish bowl compared to the rest of the world. The housing market in Delta is still healthy. To my amazement, I have had a constant stream of activity this winter.
Typically, the listing, showing and selling of houses tapers off to near zero by the end of September and the rest of Fall and early Winter are all about closing up the deals that started while the weather was still above freezing. By Thanksgiving, everything is usually completed and Christmas is as quiet as a chainsaw at -55. Not this year. There has been a steady level of activity, even in these frigid temperatures.
So, what effect is the outside housing market having on Delta. First and foremost, prices have come down, especially on houses in the $200,000 plus range. These declining prices are certainly not the huge plummets that are on the national news or written about in newspapers and magazines. These price reductions are better classified as market corrections. “Market corrections?” I know, that’s just industry speak that means nothing…not really. I agree that the term is thrown around too much, but it actually has a basis in definable terms.
The Case-Shiller Index, the most widely used indicator of home prices and housing market trends, was developed by a team of economists to provide a more accurate picture of the health of area specific U.S housing markets, foreseeable trends and ultimately, their effect on the economy. They accomplish this by amassing mountains of actual real estate sales data from throughout the country and then analyze and model it based on a set standard. This index has proved highly reliable and is widely used by lenders to gauge and manage home price risk…in regular speak, how much they are willing to lend on a specific type of property in a certain geographic area.
The Case-Shiller Index predicts that prices will continue to fall until they reach an equilibrium with construction costs and incomes. These are the key components to a “market correction”. In some areas of the country, prices are expected to fall another 20-40% before they stabilize. This is due to falling construction costs and the shrinking or vanishing of incomes.
Michigan is a great example of this theory. Lots of wood products are harvested locally and it is centrally located near other major manufacturing cities, so lumber and materials are cheap. Combine that with significant job loss in a state dependant on the faltering auto industry and you get declining incomes, cheap and abundant labor and low material costs. A perfect recipe for a Case-Shiller style “market correction” in search of equilibrium…collapse might be a better term.
For now, Delta is no Detroit. Local defense based incomes are certainly well above the national average and our construction costs (primarily materials and labor) are considerably higher than the outside world. So, the fall to equilibrium in Delta is only a step ladder compared to the hook and ladder truck of outside.
Local appraisals are continuing to come down and some lenders have become gun shy about approving mortgages for appraised value, even with government bail out money. That elusive “local” equilibrium is still out there, somewhere not too far away, we just haven’t hit it yet. With that said, a change in local incomes, labor costs or materials and the equilibrium starts to move. It is a volatile and ever moving target.
Finally, the buyer has changed. The days of houses as a short term high return investments are over. Homes as a commodity were all the rage in investment strategies over the last 5 years. Look at the profusion of “Flip This House” shows on television. It was a quick and relatively safe way to turn a buck. The inflated markets made it easier than finding an orange apron at Home Depot. Many times, the returns on investment were fast and huge. I saw it several times here in Delta. There was a buying frenzy throughout the nation, even here in Delta.
Today’s house buyer is moving back into the mind set of their parents and grandparents. A home is where you live, not where you invest. Purchasing, building and remodeling decisions are becoming much more personal and long term in focus, rather than the short sided “flip” mentality of the past. Gone are the 10-30% annual gains in home value. Once the market stabilizes, home owners will likely see the modest 3% annual appreciation like those of our parents and grandparents homes. A home will remain a decent long term investment for retirement, but certainly not a short term windfall.
Also gone are the days of lenders pushing house debt ratios to 50% of an individual’s income. In the old days, they weren’t willing to lend if annual mortgage and insurance costs were more than 20% of your yearly income. As the boom grew, that number steadily grew, until the new rule of thumb was 40%, some as high as 50%. The housing debt to income ratio is steadily falling and will certainly settle much closer to 20% than 50%.
That means that we will have to adjust our wants and desires to meet our means. It is our responsibility to set personal financial limits, not the credit lenders. The HGTV ethos of a jetted tub and 50” flat screen in every house (even if you only make $7.50 an hour) played a big part in the economic mess gripping our country. This binge of lending and spending is over.
Even though our local housing market remains healthy and Delta typically flourishes during national recessions, we don’t want to turn a blind eye to what’s going on outside. Personal responsibility for economic restraint and realistic debt to income ratios are the new long term trend in housing.
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