Market Rebounds

Editor’s Note: Northwest Arkansas’ economy didn’t fall as far as many during the recession and is recovering faster. In a six-part series that began Sunday, NWA Media explores what’s driving the rebound and how it’s changed our future.

The market is looking up for homebuyers and home sellers in Northwest Arkansas as values increase, mortgage rates drop and inventory climbs.

The recovery, while steady, is also slow.

Home sales in the area peaked at 8,695 in 2005 before falling to 5,290 in 2008, according to the Arkansas Realtor Association. Numbers have increased each of the past two years. Paul Bynum, MountData owner and principal broker, said Benton and Washington counties are on track to grow again this year. MountData is a real estate marketing firm.

“The numbers this month look good. We are about 150 sales above last year for the month,” he said.

George Faucette, an owner of the local Coldwell Banker franchise, said his company is year-to-date ahead of where it was last year, but there is still room for improvement.

“I think we can get back there but it is going to take a while,” he said. “I do feel pretty bullish. I think we hit bottom a year ago.”

Bynum expects improvement to continue in the next few months, but said it’s hard to make any long-term projections because of the unknowns.

“If all we had to worry about is the local economy, I would say things will definitely keep improving,” Bynum said. “But everything is so connected with everything else, you have to look at it all.”

The Crash

The housing bubble was a main component of the recession that gripped the country for 18 months. The National Bureau of Economic Research reports the recession ran from December 2007 to June 2009.

The U.S. fell into a mortgage crisis in 2007, but it wasn’t felt locally until late 2008. Home sales in Benton and Washington counties plummeted 39 percent from the market’s height in 2005 to its lowest point in 2010.

Values dropped 27 percent during the same period.

Foreclosures shot up 852 percent.

It was easy for potential homebuyers to gain credit approval in the years leading up to the housing market’s collapse. Financial institutions required little documentation and purchases required small or no down payments, said Todd White, production manager for Arvest Mortgage Co. People were buying houses they couldn’t afford.

Many subprime and adjustable-rate mortgages fell into default. Subprime loans are for people with blemished or limited credit histories and carry higher interest rates. An adjustable-rate mortgage has an interest rate that changes periodically.

Faucette said the market was poised for a crash.

“We needed a correction. Things were out of hand,” he said. “In the long run I think we will have a healthy market again, but it will be hard in the short term.”

Kathy Deck, director of the Center for Business and Economic Research at the University of Arkansas, said the real estate bubble bursting had a detrimental effect on many other areas.

“When you think about real estate you see it plays so many different functions to so many different constituencies,” she said.

A slow real estate market means manufacturers are making fewer goods such as furniture, which impacts the transportation sector because fewer items are being shipped. The need for fewer loans means the financial sector shrinks.

“You can go business by business and find a tie to real estate,” Deck said.

Nationally manufacturing and exports helped the economy in the short term, but Deck said real estate needs to recover for long-term growth. Deck believes the market will show slow improvement.

“One thing that kept (Northwest Arkansas) in better shape than many other parts of the country is we still had affordable housing,” she said. “Housing needs to be attainable.”

The rebuilding period the real estate market is now in is not new. Bynum said everything goes through cycles. As soon as people forget the pain of the economic crash, which he said usually doesn’t take very long, the “I can make a fortune” attitude takes over.

“That is the perfect grounds for setting up a bubble,” he said. “We’ll go through this cycle again. A new bubble will happen and it will all blow up again.”

Market Improves

Home sales improved to 5,507 last year from a low of 5,290 in 2008. Sales were up in 2009 to 5,730, but were skewed because of an $8,000 federal first-time homebuyer credit.

White said he doesn’t think the tax credit necessarily prompted more people to buy a home.

“I think it pulled people from buying in the future,” he said.

The number of first-time homebuyers has been low the past few years, but is set to improve in 2013, White said.

“The first-time homebuyer is who gets the chain moving,” he said. When people look for entry level homes, it encourages existing homeowners to step up into the next level of housing.

Bynum said when people are buying homes in a brisk market, inventory is low. A stable market is when there are between five and six months of inventory, he said. Months of inventory is figured by dividing the number of homes on the market by the number of sales.

Anything below that stable level is considered a seller’s market. In 2004, there were fewer homes on the market for buyers than ever, Bynum said.

The low inventory meant homes were on the market for a short time and demanded high prices. After the housing bubble burst, inventory hit 20.7 months in December 2007.

The area’s months of inventory for existing homes was 6.3 months in November, the median days homes sit on the market was 62, and the median price per square foot was $76, according to Bynum’s monthly real estate report. That’s an improvement from the median 76 days on market and $67 per square foot in the area in November 2011.

Both Benton and Washington counties are showing year-over-year improvement.

Existing homes for sale in Benton County spent a median 63 days on the market and pulled in a median of $75 per square foot in November, compared to 80 days on the market and $65 per square foot in November 2011.

Washington County’s median days on market and price per square foot last month were 57 and $80, compared to 68 and $69 a year earlier.

Faucette predicts home ownership will remain in the 64 percent to 65 percent level, but population growth will fuel an increase.

“I think we are in a new normal. We are getting to a good level of transactions,” he said.

Finding Financing

Home sales can not thrive without available financing. Lending requirements have tightened post-recession, but loans are available. White said it was natural to see credit guidelines tighten after the housing collapse.

In the early 2000s, lending practices became very lax and there was little documentation and easy approvals, he said. That changed in 2008 when guidelines became more stringent and banks once again began checking mortgage applicants’ income levels, work histories and credit scores.

White said borrowers also are expected to have a down payment.

“It’s basically back to normal underwriting,” he said. “It’s making sure people have the ability to pay their mortgage and still be able to pay their other bills.”

Daren Blomquist, vice president of RealtyTrac, an online marketplace for foreclosure properties, said data shows when people get into homes they can actually afford, the foreclosure rate drops.

“We are seeing evidence that loans in recent years, those taken out since 2008, are performing much better,” he said.

White said he expects Arvest to hit a record high $2.6 million in home loans this year. The previous annual high was $1.9 million. Historic low mortgage interest rates are pulling in both new homebuyers and existing homeowners looking to refinance. White said approximately 65 percent of Arvest’s home loans were for refinancing.

“Arvest is experiencing the best purchase year we’ve ever had,” he said.

Rates or a 30-year fixed mortgage dropped to 3.35 percent in November. Rates were in the 6 percent range in 2007.

Foreclosures

People able to secure a mortgage are finding good deals on the glut of foreclosures that have flooded the market over the past few years.

Foreclosure numbers dropped in the past 16 months because of a court case. That case was resolved this summer, opening the door for many foreclosures to proceed. Industry insiders worried that the lawsuit’s resolution would inundate the market with foreclosures.

“Typically when we see legislation or a court ruling dealing with foreclosure, it’s not really fixing the problem. It’s just delaying it,” Blomquist said.

That hasn’t happened yet. Numbers have ticked up a bit, but remain below rates at the worst of the housing crisis. There remains a concern that more are to come, but no one knows if or when that will happen.

Foreclosures in the two-country area were highest in 2010 when they were 6,984. There were 1,239 foreclosures filed in Benton and Washington County this year through October.

Benton County has reported the highest foreclosure rate in the state each year since 2007, followed each year since 2008 by Washington County.

Kendra Murphy-Golden, a Realtor with Keller Williams Realty, specializes in short sales and foreclosures. She believes there are many foreclosures about to go on the market.

“If you drive around and look, you will see all the homes with blue tape and a white piece of paper in the window showing it’s in default,” she said.

When the lawsuit was filed, she had to pull seven houses off the market.

“Only one of those seven is back. The others I’ve just been baby-sitting,” Murphy-Golden said.

One change in recent years is an increase in the number of short sales banks allow. Short sales are when a property sells for less than what is owed. The process is becoming an increasingly popular action. Blomquist said 12 million, or 27 percent, of homeowners nationwide owe more on their house than it is worth.

The short sale process was long and frustrating for many people looking to buy a house at the beginning of the crisis.

“The entire industry is becoming more accustomed to short sales and that is helping to streamline the process,” Blomquist said. “The industry is moving to make it part of the normal process.”

A current trend is an increase in short sales prior to the start of the foreclosure process, he said. Pre-foreclosure short sales accounted for 21 percent of all home sales in Arkansas in the third quarter. Foreclosures accounted for 6 percent.

“That shows the shift,” Blomquist said.