Residential Real Estate – A Train Wreck Waiting To Happen?

by | May 11, 2007 | Weekly Column

trainwreck.jpgI recently read that the National Association of Realtors forecast a 0.7% decline in house prices this year. I was surprised to learn that home prices have never declined on a nationwide basis since the 1930’s—something I didn’t know despite spending 30 years in the real estate industry. I certainly knew of times, such as the mid to late 1980’s, when prices declined in Rapid City. For a period of several years, I never gave a house seller a check at closing. Instead, they wrote me one.

Of course, there will be areas where prices rise, but certainly there will be many more localities where prices decline. According to The Wall Street Journal and The Arizona Daily Star, prices are down around 4.5% in various Virginia and Arizona cities.

One mutual fund manager, The Leuthold Group, is so pessimistic about housing that they recently invested 7% of their Concentrated Core Portfolio in shorting housing stocks. They expect to cover their shorts at 30% to 50% below current price levels. Leuthold has been negative on residential real estate for a number of years, calling it a “train wreck” waiting to happen.

They blame this on government bureaucrats and politicians taking to the extreme the notion that “most every American family should be able to own a home.” This has resulted in buyers who have poor credit histories or lack down payments obtaining “subprime” loans by paying higher interest rates than borrowers with better credit scores. By Leuthold’s account, over 20% of the loans originated in 2006 were subprime.

To see how someone in the trenches viewed the subprime issue, I called my brother, David Kahler, who is thedavidkahler.jpg largest residential real estate agent in western South Dakota. He told me that prior to the subprime crash, a borrower with a credit score of 580 could get a 100% loan on a home. Since the crash, lenders have raised to 600 the minimum credit score to qualify for a 100% loan. Just as a comparison, our property management firm requires a person to have a credit score of at least 600 to rent an apartment or a home. An increase in credit scores from 580 to 600 doesn’t exactly squeeze a lot of people out of the home buying market. This makes one wonder how dire the subprime crash really was and if it wasn’t just the “crisis du jour” created by the financial press.

I also asked Dave what was happening in the Rapid City real estate market. He told me, unscientifically, that homes which sold for around $105,000 at this time last year were now selling for $115,000, up around 9%. That doesn’t sound like much of a slowdown. Dave noted that prices in Rapid City typically increase in the spring, and this year is no exception.

He said upper end houses have been slower, but inventory is unchanged. Currently, there are 1031 residential homes on the market, compared to around 998 a year ago. He also told me the market is “flooded” with unsold new construction, which would suggest there are fewer existing homes listed for sale. Accordingly, new residential construction is down substantially.

According to Amy Bockman at the Black Hills Board of Realtors, the average priced home in Rapid City increased in value by 9.1% from 2005 to 2006 ($150,400 in 2005 to $164,800 in 2006). So far this year the average price of a home is unchanged.

Perhaps the bottom line on this issue is to remember that real estate is always local. Whether you’re buying or selling, it’s wise to focus on local real estate conditions rather than national headlines or predictions.

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