Tuesday, November 01, 2005
Steve Jones comments on real estate value
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.