Housing Market Corrections Needed

Knoxville real estate may be readjusting to where it needs to be

Anyone who thinks the federal bailout of distressed mortgage lenders is going to buoy the sagging Knoxville housing market had better think again.

However severe the much-publicized credit crunch may have been nationally, it's had little impact on mortgage lending locally. Realtors and mortgage bankers generally agree that there's an ample supply of mortgage money available here to qualified homebuyers.

The key word, of course, is "qualified" and both the larger regional banks and smaller community banks and credit unions which are now prevalent on the local mortgage lending scene have much stricter credit standards than was all too frequently the case in the heyday of sub-prime mortgages two or three years ago. Gone are the days of home purchases with no down payments on the part of the borrowers with poor credit scores, and so are the lenders that supplied them.

"If someone with good credit wants to buy a home today, no problem, but it's going to take a down payment of 10 percent or better on a conventional loan," says veteran realtor Jim Lee of Coldwell Banker. FHA-insured loans can still be had for 3.5 percent down payments, and a growing majority of local buyers are now gravitating toward them even though the insurance premiums add 1.5 percent to borrowing costs.

Stricter credit standards, which are unlikely to ease in the foreseeable future, have contributed to the 22 percent decline in home sales (to 6,261 single family units) during the first half of this year, as reported by the Knoxville Area Association of Realtors. And a big overhang of unsold homes resulting from the slowdown has crimped new home building even more so.

Contrary to the belief of many realtors that the housing slump locally has been less severe than nationally, these declines both exceed the national average by a considerable margin. If there's any consolation, home sales prices don't appear to have dropped by quite as much as the national average of nine percent, let alone the 41 percent decline recorded in hard-hit California, according to MarketTrack.

If the $700 billion federal bailout of strapped financial institutions were to contribute to a housing market turnaround, it would be by way of allaying fears that have kept prospective homebuyers out of the market. But while the bailout may avert some worst-case collapse of the financial markets, most economic forecasters don't foresee it doing anything to bolster consumer confidence and spending in the near term. Indeed, predictions of a recession are growing ever more widespread with rising unemployment and weak sales of everything.

As painful as the downturn may be, a strong case can be made in the case of housing that a shakeout was needed from the excesses of earlier this decade. According to the Realtors Association, home sales in the Knoxville area rose from 9,720 in 2000 to 17,411 in 2006. That's an 88 percent increase during a period when population and employment both grew about 8 percent and the number of housing units increased by 11 percent—all according to the U.S. Census Bureau.

So what on earth can account for home sales rising nearly 10 times faster than any of the above? One might suppose that an increase in homeownership played a part, with first-time homebuyers aided—or abetted—by easy credit. But, in fact, the Census Bureau reports that the homeownership rate in Knox County actually fell from 67 percent in 2000 to 63 percent in 2006.

More rapid turnover in the housing market obviously has to be a big part of the answer. One almost conjures up a mental picture of houses being traded like stocks or commodities by short-term investors and speculators. And with home sale prices on a 40 percent upward slope from an average of $115,000 for a three-bedroom house in 2000 to $162,000 in 2006, there were certainly profits to be made from doing so. Indeed, the Knoxville housing market outperformed the stock market; and since 1997 gains of up to $500,000 from the sale of a residence owned for at least two years have been exempt from capital gains taxes to which stock market gains are subject.

While acknowledging that some purchasers have been buying and selling multiple homes for short-term profit, the president of the Realtor's Association, Lee Mrazek, believes that much of the turnover is due to other factors. More work-force relocations, more parents buying residences for college students then selling when they graduate, a propensity to parlay appreciation in the value of a smaller home into purchase of a bigger one are all among them.

But Mrazek goes on to say that the boom years of the middle of this decade were probably an anomaly and that the decline to current market activity and price levels don't necessarily constitute a bust. "We may just be readjusting to where we should be," she suggests.

At an annualized rate of about 12,500 so far this year, sales are still 35 percent ahead of where they were at the beginning of this decade and the $167,400 average sale price of a three-bedroom house is 45 percent ahead. The big concern now is whether fear factors may drive them down further, not whether they'll "recover." m