Real Estate Reality Check

“Hang on – we’re not out of the woods yet.”

Words of wisdom from a man who knows what he’s talking about.

Paul Welcome has been the Johnson County appraiser for 17 years now. He’s seen the cycles of the real estate industry up close and personal. And like most others in the industry, he has never seen such a wild ride as what the real estate industry has taken since December 2007.

That is the date that the Cambridge, Mass.-based National Bureau of Economic Research gives as the official beginning of the nation’s current state of recession.

The past year-and-a-half has seen an unprecedented amount of gloomy headlines, dismal predictions and downward financial spirals.

And the housing industry was caught right in the middle of it all.

Although it was not that long ago when homeowners reveled in soaring home values and happily cashed in on subsequent hooks to refinance and home equity loans, many now face a darker scenario where diminishing home values lurk hand-in-hand with short sales and foreclosure notices.

And although the beginning of this economic downturn may now be identifiable in hindsight, its end, unfortunately, is not.

That is why Welcome, like so many others, says we are not out of the woods yet.

While many indications are hinting that the U.S. economy is bound for a brighter path, it’s clearly still up the road a ways.

The good news for Johnson County residents is that we are a bit of a bright spot in a rather discouraging picture.

“We did not have the explosive growth like so many other regions, so we will not have the explosive downfall,” explains Welcome.

He is referring to markets that have been hardest hit including the West Coast, East Coast, and states such as Arizona, Nevada and particularly Florida, where if there was ever a time to buy oceanfront property, that time is now.

Another piece of the good news puzzle is that no matter the national trends, local economic fundamentals help determine what happens in any market, and Welcome says there are five key propellers behind Johnson County’s relative stability.

“First of all, Johnson County has a positive business environment,” says Welcome. “Secondly, it has excellent schools and it also has a good safety and social network. We have good infrastructure, and lastly, Johnson County’s government has integrity and is value-driven.”

Welcome says that even though Johnson County is experiencing a down market, people still want to be here.

HIGHS AND LOWS IN MORE WAYS THAN ONE

It should come as no surprise that residents covet life in Johnson County. 

For starters, the county is ranked 56th nationally based on per capita income, according to a 2007 report published by the U.S. Bureau of Economic Analysis. Money magazine included three Johnson County cities in its 2008 top 50 “Best Places to Live” ranking and half of Fortune 100 and one-third of Fortune 500 companies have operations in Johnson County.

Toss in affordable housing, above-average earnings, award-winning educational systems and abundant recreational opportunities, and it’s not hard to see why Johnson County truly sparkles as a Midwestern gem.

But even so, it is not immune to the housing market woes.

According to the Johnson County Appraiser’s Office, the overall real estate sales volume has dropped an astounding 29 percent from last year.

This percentage is derived from the number of Certificates of Value (COV), or essentially validations of sale, that have been filed in the first five months of 2009 as compared to last year’s numbers. This county-wide statistic includes residential, vacant, rural land and commercial COVs.

But for all the bad news, seasoned Reece & Nichols Realtor Kathy Koehler says that her team of agents has recently seen an increase in sales activity – a positive sign by most any standard.

She adds that about 50 percent of all sales in the last 90 days have been to first-time home buyers purchasing homes under $250,000.

“The Koehler Bortnick Team and I have seen a flurry of activity in the last 90 days with buyers getting off the fence and making buying decisions because they know they only have until December to benefit from the $8,000 tax credit, unless it’s extended, and also they are afraid interest rates are going up,” says Koehler.

Fellow Reece & Nichols Realtor Kristin Malfer says that she too has seen positive sales trends in the last few months.

“Corporate relocations and first-time home buyers are two categories of clients that are very active for us right now,” says Malfer. 

Although five years ago few would argue that a seller’s market reigned, it’s undisputable that it’s now a buyer’s market–for a variety of reasons.

Koehler contends that the Obama administration’s tax credit and low interest rates are helping to spur sales. On the flip side, she notes that for sellers who purchased homes in the last few years, the realization that they likely will not make a profit or break even is leading to contracts in which buyers are getting the best deals Koehler’s ever seen in her 25 years in real estate.

She sees a similar scenario with new home builders.

“New home construction builders are being much more competitive in their pricing, spec homes are going for less money and builders are throwing in finished lower levels,” says Koehler.

Koehler concurs with Welcome that Johnson County does not experience extreme highs and lows like some other states. 

“The increase in home values each year is approximately 3 to 4 percent, which means we never had huge gains of 10 to 20 percent, but then we never had huge decreases,” says Koehler. “So, Johnson County has been a very stable area and a good place to put your money when investing in a home.”

While foreclosures and short sales are up as high as 50 percent in some states, Koehler says they are up roughly 33 percent in Johnson County in the last 90 days.

BIG CHANGES IN NEW CONSTRUCTION

When it comes to new construction, sadly, it’s impossible to ignore the inventory of gorgeous new homes for sale.

It’s also hard to ignore the fact that building permits have dramatically dipped. In 2006, there were 2,369 new home permits in Johnson County, but in 2008, there were only 905.

Although Tim Underwood, executive vice president of the Home Builders Association of Greater Kansas City, says that most new homes are out of reach price-wise for first-time buyers, new homes certainly still have a loyal following of buyers seeking upper-bracket homes.

In fact, ReMax Premier Realtor David Costello sees new homes as having an advantage over other upper-bracket homes for sale.

Many real estate agents agree that the upper-bracket homes, ones $500,000 and up, are experiencing the toughest slowdown.

And as one might expect, the higher the home price is, the slower it will likely be to sell.

For example, Koehler suggests that homes above $1 million could easily be on the market for two years instead of one.

But new homes may have an inherent advantage.

As Costello puts it, “You gotta get sexy.”

He goes on to say that if an upper-bracket home buyer is looking at a resale versus a new home, the new home will likely have the upper hand.

“It’s much more sexy when everything is brand new,” says Costello. “New appliances, new paint, new fixtures, new lighting – it’s all very appealing. It’s a price war and a beauty contest.”

Yet builders still face snags, including the fact that customers sometimes cannot sell their existing homes and therefore cannot complete the new home sale. It’s a domino effect.

But perhaps one of the most interesting trends occurring in new home construction, according to Underwood, is that potential buyers are now guided more by what they need rather than by what they want.

A survey released in April 2009 by the Pew Research Center seems to back up this claim as the report states that recession-era reevaluations have consumers thinking twice about the definitions of luxuries and necessities.

As might be expected, many Realtors report that high-end home buyers are actually spending much less than they originally planned to spend, even when they can afford more.

“It’s probably the worst new home market in a long time, so what I can see in our industry is change,” says Underwood, who’s been a fixture at the HBA for 26 years. “The biggest issue now is that we know the market is changing, but to what, is the question. Our members are trying to figure out their market going forward.”

He predicts that in the future we will see smaller, more affordable housing in Johnson County.

“The average size of the new home has peaked and it is starting to decrease,” says Underwood, even as he cautions that changes won’t happen overnight. 

“We’ll also see more redevelopment and infill housing,” he adds.

HOME IS STILL WHERE THE HEART IS

Koehler still says that her overall recommendation is to “sell now, buy now.”

She says that sellers who wait to put their homes on the market will face other maintenance pitfalls down the road, whether it’s a new roof, new air conditioner or otherwise.

“I tell my sellers not to wait,” says Koehler. “There will always be a buyer.”

And for today’s buyers, golden deals are absolutely up for grabs.

Koehler notes that even when the market stabilizes, it’s never going to be as predictable as it was seven years ago. Dramatic home value increases of 7 to 8 percent will likely be non-existent, and competition will be even steeper.

“There will be new incentives going and more bells and whistles on homes,” says Koehler.

There is little doubt that the roulette wheel is still spinning in today’s real estate market. Clarity of what’s to come is at best foggy. Only time will tell what the long-term impact of the tax credit for first-time home buyers will be and whether the impending upturn in interest rates will significantly impact buyer interest and sales activity. Of course, unemployment figures remain the real numbers to watch. 

Like most things in life, the real estate industry will weather its ups and downs. But ultimately, as consumers begin to feel a deeper sense of economic and personal security, this will in turn translate into an important catalyst for the housing market. It’s just a matter of when.

One thing that will never change is the fact that buying real estate is one of the most important financial decisions a consumer will ever make. At its essence, home buying is a personal decision that is influenced by life demands and financial position–regardless of what the market is doing. 

While truly safe bets may be a rare find right now, perhaps a bit of patience and strategy paired with a little luck will up your odds of scoring a prize deal for the home of your dreams.


words: Rachael Hedgcoth

photos: Paul Versluis

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