Steve Jones comments on real estate value
Read the following commentary by Steve Jones at the Indianapolis Star on-line web site:
http://www.indystar.com/apps/pbcs.dll/article?AID=/20051030/OPINION01/510300313/1031
October 30, 2005
My View: Steve Jones
The real home-value problem is excess supply
October 30, 2005
There's an old canard in the financial world that real estate is always a solid investment. Unfortunately, in Greater Indianapolis, this has not been the case. As described in The Star's Oct. 16 article, "Bringing down the house," the city is one of the few markets in the country where average home prices have experienced little or no appreciation. And this has occurred at a time when the price of lumber is especially high, suggesting that real residential property values have actually declined significantly.
Some view the relatively low price of housing here as an advantage since it would seem to suggest a lower cost of home ownership. But is it really cheaper when homes values are flat or declining?
The Star cited several macro-economic factors contributing to the poor housing market, including the loss of well-paying manufacturing jobs and a decline in median income levels. But if the economy alone explains the slide in home prices, then why do we continue to see new residential construction swallowing up ever more farmland in the collar counties? The fundamental problem here is excess supply, not inadequate demand.
Why are developers and builders effectively over-supplying the residential market? Because in a market with flat to declining prices, prospective homebuyers tend to choose the new development given that the new home prices are slightly more than what resellers require just to break even. In many cases, young homebuyers are attracted to new developments by "zero-down" loans and other inducements. But when one homeowner in such a starter neighborhood loses a job, he or she soon discovers that the resale market won't support their initial purchase price because a nearly identical residential development is going up a few blocks farther out.
The sad result is often foreclosure, brought on by the depreciation of the home value as much as the loss of income. A high foreclosure rate within a neighborhood can set off a downward spiral in neighboring property values that becomes a catalyst for even more foreclosures.
What can be done? First, better land-use planning and zoning strategies are required. This would encourage a "big picture" approach that balances industrial, commercial, residential and agricultural land use with the public's cost for schools, roads, sewers, as well as public safety and services. This means impact fees that would be borne by developers and new homebuyers.
In many cases, residential developers are really selling a neighborhood's school district. But often the property taxes on the new homes don't cover the costs of the additional children in the school system. The state's school-funding formula should be changed to stop the special subsidies offered to fast-growing school districts, which are effectively a wealth transfer from taxpayers to developers. Residential developments of more than a few units should be required to tie in with existing sewer lines or build the necessary lines up front.
With Indiana ranking second in mortgage foreclosures, this issue has clearly become a legitimate concern for state government. At a minimum, the state should start participating in the federal government program that provides matching funds for the purchase of agricultural development rights.
Land-use issues involve an inherently public component. Why should developers and builders be allowed to pump a thousand new students into your school system and expect you to pay for it? They shouldn't, not unless they pay for it.
Failure to act may have wider implications than just the housing deflation recognized in The Star piece. If residential growth continues apace in the collar counties, it means even more infrastructure needs. These are costs that could be avoided if we create the right incentives that prompt more responsible development patterns. But if taxpayers are forced to shoulder these unnecessary costs, the inevitable result will be higher property and income taxes. Then we will have lost one of the main advantages Indiana enjoys in attracting new businesses and jobs to the state.
http://www.indystar.com/apps/pbcs.dll/article?AID=/20051030/OPINION01/510300313/1031
October 30, 2005
My View: Steve Jones
The real home-value problem is excess supply
October 30, 2005
There's an old canard in the financial world that real estate is always a solid investment. Unfortunately, in Greater Indianapolis, this has not been the case. As described in The Star's Oct. 16 article, "Bringing down the house," the city is one of the few markets in the country where average home prices have experienced little or no appreciation. And this has occurred at a time when the price of lumber is especially high, suggesting that real residential property values have actually declined significantly.
Some view the relatively low price of housing here as an advantage since it would seem to suggest a lower cost of home ownership. But is it really cheaper when homes values are flat or declining?
The Star cited several macro-economic factors contributing to the poor housing market, including the loss of well-paying manufacturing jobs and a decline in median income levels. But if the economy alone explains the slide in home prices, then why do we continue to see new residential construction swallowing up ever more farmland in the collar counties? The fundamental problem here is excess supply, not inadequate demand.
Why are developers and builders effectively over-supplying the residential market? Because in a market with flat to declining prices, prospective homebuyers tend to choose the new development given that the new home prices are slightly more than what resellers require just to break even. In many cases, young homebuyers are attracted to new developments by "zero-down" loans and other inducements. But when one homeowner in such a starter neighborhood loses a job, he or she soon discovers that the resale market won't support their initial purchase price because a nearly identical residential development is going up a few blocks farther out.
The sad result is often foreclosure, brought on by the depreciation of the home value as much as the loss of income. A high foreclosure rate within a neighborhood can set off a downward spiral in neighboring property values that becomes a catalyst for even more foreclosures.
What can be done? First, better land-use planning and zoning strategies are required. This would encourage a "big picture" approach that balances industrial, commercial, residential and agricultural land use with the public's cost for schools, roads, sewers, as well as public safety and services. This means impact fees that would be borne by developers and new homebuyers.
In many cases, residential developers are really selling a neighborhood's school district. But often the property taxes on the new homes don't cover the costs of the additional children in the school system. The state's school-funding formula should be changed to stop the special subsidies offered to fast-growing school districts, which are effectively a wealth transfer from taxpayers to developers. Residential developments of more than a few units should be required to tie in with existing sewer lines or build the necessary lines up front.
With Indiana ranking second in mortgage foreclosures, this issue has clearly become a legitimate concern for state government. At a minimum, the state should start participating in the federal government program that provides matching funds for the purchase of agricultural development rights.
Land-use issues involve an inherently public component. Why should developers and builders be allowed to pump a thousand new students into your school system and expect you to pay for it? They shouldn't, not unless they pay for it.
Failure to act may have wider implications than just the housing deflation recognized in The Star piece. If residential growth continues apace in the collar counties, it means even more infrastructure needs. These are costs that could be avoided if we create the right incentives that prompt more responsible development patterns. But if taxpayers are forced to shoulder these unnecessary costs, the inevitable result will be higher property and income taxes. Then we will have lost one of the main advantages Indiana enjoys in attracting new businesses and jobs to the state.
posted by mastevens at 5:22 PM
3 Comments:
The tremendous rise in home ownership has come at a steep cost. Today's new house priced at the median gives the average new home buyer more of what they say they want in a house. And it is far more house than the majority of these home buyers were raised in. It has more square footage, more features, more creativity in its floor plan, less maintenance and far more sophisticated construction than the typical home built 20 years ago. (And all it takes is two full time employees to support the mortgage!) In central Indiana the median priced home is built as inexpensively as possible because the customer buys based upon an imputed "cost per month" as if they were renting an apartment, with little awareness of the true operating expenses of home ownership. Unfortunately, the average home buyer is willing to accept a product that literally depreciates when they move in. Rather than becoming the shelter of income and taxes enjoyed by their parents, today's homeowner lives in more house than they deserve. The high foreclosure rate indicates that it is also more than they can afford. A hiccup of only a few months lost income related to health care or job interruption is all the average mortgage holder needs to fall desperately behind thanks to a very low savings rate. The expectation of the typical home buyer is that they deserve better than their parents. Raging consumerism, not the government or the local regulations may be the bigger threat to our property values. There is considerable anecdotal evidence that we are in the early stages of a downward re-pricing of the local housing market. The tradional metric of "days on the market" of homes for sale is gradually creeping upward and the number of EXISTING homes priced at or above twice the median home price ($300,000 and up) increases daily as high wage earners are forced to "offer" their properties to a shrinking field of buyers. The fact that they don't see much traffic is a supply imbalance that isn't going away soon. But we can't force the consumer to buy an existing house if what they really want is a spec home in Avon. Only tremendous growth of higher wage jobs can get us out of the downward trend in housing values. A diverse and robust economy is more likely to burst forth in central Indiana than any other place in the state. But the near-term may be tough for some and for that we should be prepared to help.
I agree that raging consumerism is a contributing factor, but I find it hard to pin the foreclosure problem on consumers when "zero-down" mortgages are being used to lure consumers into more house than they can afford. There is a reason why lending institutions once required money down on a mortgage. Also, why have lending institutions made mortgage money so easy? Because they get paid to generate the loan. They then sell it to a mortgage pool and it's the pool's problem if the borrower goes belly up. I also agree that quality job growth would help Indy's housing market. But one can point to many cities where the local economy has been just as bad but home values have appreciated. The national production homebuilders who have come into Indy in the last 7 or 8 years have no inherent right to turn every farm field into yet another production-home site, thereby depreciating the value of the homes just built. They can only do it if we let them. That's where land-use, zoning and impact fees come in. So, no we can't prevent someone from choosing the production home in Avon. But we can prevent that production home from being built in the first place, or we can make sure the price of that new home reflects the costs of the infrastructure required to service that home. Either way, the value of the preexisting housing stock would benefit.
Local Economy Weakens
11/03/05
jk.wall@indystar.com
The outlook for the Indianapolis-area economy has gone from tepid to anemic, with the real value of household incomes and real estate values falling.
That was the prognosis given by Indiana University economist Phil Powell at a breakfast today at The Westin Hotel in Downtown Indianapolis. The annual event featured forecasts from a panel of IU economists for the 2006 performance of the state and national economies.
Powell was the last to speak on the panel and generated the most discussion. He said the Indianapolis metropolitan area has been and will continue to fall behind the rest of the country economically.
“Folks, the party boat is passing us by,” Powell told a crowd of about 210.
The region saw real household annual income fall $2,240 between 2002 and 2003, compared with a drop of $491 nationally.
Powell attributed that drop to lack of growth in the economy while high-paying corporate jobs were lost through the acquisitions of Galyan’s Trading Co. and Great Lakes Chemical Co., as well as the troubles at bankrupt ATA Airlines.
The wealth of Indianapolis-area residents is also slipping, Powell said, because builders are constructing homes faster than the population is growing. While the region’s population grew by 70,000 people between 2000 and 2003, according to the Census Bureau. But during a similar period, building permits were issued for enough homes to house 210,000 people.
The real value of residential real estate fell by 1.5 percent in the Indianapolis area between 2000 and 2004, according to research by The Indianapolis Star.
“Income is shrinking for Indianapolis households. Because of real estate, the value of their wealth is shrinking,” Powell said. “That’s not good news.”
Growth in Indiana as a state is expected to be slow but “not bad.” The state’s economy will add 30,000 jobs next year, said Jerry Conover, director of the Indiana Business Research Center. It’s on pace to add about 35,000 jobs this year.
Growing sectors in Indiana will be education and health services, construction, leisure and hospitality, and trade, transportation and utilities. Professional and business services will grow slightly. Manufacturing, which has shed jobs in 2005, is expected to be flat next year.
For the national economy, IU’s economists said they were “apprehensively optimistic.” They expect brief impact from the Gulf Coast hurricanes and economic growth of 3.6 percent in 2006.
Call Star reporter J.K. Wall at (317) 444-6287.
Post a Comment
<< Home