Keep up with the news and you can't help but think we're in the middle of a major real estate implosion.
From March 4 on NPR: "If you want to see the madness and the grisly aftermath of the U.S. housing boom and bust, look at Florida... Empty condos, collapsing values. The heart of the Florida meltdown—in Miami, the southwest, the Gulf Coast—could be Exhibit A for what went wrong in American real estate."
From the March Atlantic Monthly: "At Windy Ridge, a recently built starter-home development seven miles northwest of Charlotte, North Carolina, 81 of the community's 132 small, vinyl-sided houses were in foreclosure as of late last year. Vandals have kicked in doors and stripped the copper wire from vacant houses; drug users and homeless people have furtively moved in."
From the April 24 Los Angeles Times: "The number of California homes lost to foreclosure in the first quarter surged 327 percent from year-ago levels... [Said] DataQuick president Marshall Prentice: ‘The main factor behind this foreclosure surge remains the decline in home values...the foreclosure problem could spread beyond the current categories of dicey mortgages, and into mainstream home loans.'"
Empty condos on every corner? Copper theft? Foreclosure notices being handed out like leaflets at a convention? What can we expect in these parts? Is the Knoxville home market going bust?
"Homes are still selling," says Sally Sparks, a broker with Century 21 who sells all over the area, but primarily in West Knoxville. "What I have found personally is that entry level homes under the $150,000 range are still selling quickly. And the only difference between now and three years ago, when I first became a broker, is that houses are taking a little longer to sell and sellers have to be realistic on pricing, particularly on homes in the $250,000-$400,000 range."
While real estate agents may be optimistic by nature, statistics show that while house prices have dipped for the past year overall, they're up for the most recent two months that the Knoxville Area Association of Realtors (KAAR) has released data for. The median price for a two-bedroom single dwelling went from $70,000 in March to $79,200 in April, for example, and the median price for a four-bedroom unit jumped to $240,000 from $229,900 in that same time period.
Yet the national housing hysteria has touched the Knoxville real estate market. While sales haven't come to a screeching halt like they have in California, Florida, and the Rust Belt, they have slowed down, and in some cases created a buyer's bonanza market.
Some of the deals going down are so favorable to the buyers that people like a man we'll call "John Smith" aren't comfortable revealing their identities when they talk about the bargains before the sale closes—and their buyer's agents urge them not to until the ink is dry on the documents granting them Santa Claus-caliber terms.
Smith, for example, will soon close on a home in the $300,000-$350,000 range at a discount, just a month after he started checking out houses in West Knoxville. "I wasn't even sure how serious I was," he says. "I saw a house I liked and it was basically out of my price range. I asked for a price that was in my range and they accepted."
The sellers were not in any kind of financial difficulty and the home had been appraised at a higher value, but they wanted to sell and move—and they had competition.
"They were very motivated to sell," says Smith "They did a lot of fix ups... some that I didn't even ask for. For example, I was wondering if there was any mold in the crawl space, and all I asked for was a test, but they completely remediated it.
"I was just lucky that the market is in the state that it's in."
Downswings, Gluts, and Dips
What are the local trends that lead to glorious curb-appeal extras, substantial discounts, and highly competitive sellers? First, sellers are concluding fewer sales in the Knoxville metro area: The sales volume for April dropped about 20 percent over the same time period last year, from 1,416 to about 1,144 sales closed in April, says the KAAR. And we've got a slower market, with an average 100 days listed before sale for single-family units sold in April, and 168 properties—around 15 percent—for sale more than six months. Another 180 languished on the market 121-180 days.
At the same time, foreclosures were up almost 46 percent from 2006 to 2007, with 0.6 percent of local households receiving the dreaded notices. While that compares with a full 5 percent of households foreclosed in 2007 in Detroit, the number one metro area for foreclosures, the trend is still bad news for the foreclosed homeowners and builders, and for a housing market that doesn't need any more excess inventory.
And don't forget houses in the $500,000-plus range that refuse to budge from the local market lists. We've got lots and lots of those. "There are currently 1,137 single family homes priced at $500,000 and above in the Knoxville area," Knoxville real estate agent and blogger Jim Lee wrote in his May 21 blog post, using KAAR figures. "Twenty-four homes over $500,000 sold and closed this past April, so there is still a very, very plentiful supply in that price range. At that absorption rate translates into almost a four-year supply of homes priced over $500,000!"
The one trend Knoxville is not sharing with areas like California, not even a little, is decreased home values. Yes, people are pricing some homes below their appraised value so they'll sell quicker in an excess inventory environment. And true, the median Knoxville metro area home price—$146,000—dropped 2.7 percent from the last quarter of 2007 to the first in 2008. The April report from KAAR goes on to say that the median price of a home with four or more bedrooms fell more than 12 percent to $240,000.
But—and this is an important distinction for the average home owner who has a reasonable mortgage and doesn't need to sell anytime soon—these statistics mean only that the averages of the prices of homes that sold were lower. Local real estate values have not been affected.
The misconception makes small builder Tim Ellis, owner of River Birch of East Tennessee, do a slow burn. "When the statistics come out and say that home prices have dropped 16 percent nationally in the past year, that simply means people are buying cheaper houses than they would have a year ago," he says. "That does not mean that your house is worth 16 percent less than it would have been worth three months or a year ago. It's not the same thing.
"It's the same as the radio ads on the sports station, ‘Your neighbor just got foreclosed; you need to refinance right now!' A neighbor who was foreclosed doesn't necessarily make the value of your house drop down to where you owe more than it's worth. The value is still the current, fair appraisal value."
In reality, our real estate values are so stable that Knoxville ranked seven on Forbes.com's list of the Best Places to Buy Foreclosed Homes. List authors Matt Woolsey and Jon Bruner had this to say about their selections in the March 19 story: "Our goal was to differentiate inexpensive foreclosure markets from those that are undervalued, as cheap foreclosures in flimsy markets don't necessarily make strong investments... Only cities on Forbes' best places list, which measures criteria such as quality of life and the local economy... where foreclosures aren't symptomatic of local economic ruin, were measured."
Wherefore Art Foreclosures?
Knoxville's foreclosure rate of 0.6 of a percent and year-over-year increase of 46 percent is only high enough to place us 72 on a list of the 100 largest metro areas. But the foreclosures mean a reduced pool of buyers and more houses being sold by companies like RealtyTrac, an online outfit that exclusively lists foreclosed property and advertises savings in double-digit percentages.
Just like our friends on the West Coast, the stage for a lot of those foreclosures was set with a few splashy years of loose appraisals (that coincidentally would match the amount requested for loans) and "creative" financing, often dealt down by mortgage brokers who weren't even local, settling on preposterous terms that sometimes involved out-of-state lenders—or even out-of-country.
"In 2005 and 2006 we saw the trend where the appraisals were too high and the amount of money being loaned became 100 percent of the value of the home or even higher," says Jim Slyman, who's been a Knoxville real estate auctioneer and agent since 1971. "So if the market for the home you paid $300,000 to buy slips even 10 percent, you now owe more than $30,000 over and above your loan."
Along with traditional high-end home buyers, many average folks got bitten. "The reason there have been so many foreclosures is a lot bought houses who should never have been able to qualify," says Lee. "Some middle-income people were offered those great big house deals, and unfortunately, they took them."
Adjustable rates played a part, too, says Lee. "A lot of lenders were making interest-only, adjustable rate loans—and we all know that they adjust the interest only one way. A seller or lender would offer a 100 percent loan for the entire purchase price, and offer 2 percent interest at first. The buyer's not only not building up any equity, he can barely keep up with the 2 percent and then it doubles. That's not such a big deal when your house is in the $150,000 range, but when it's $500,000... "
It wasn't that people didn't realize they could never build up equity with that financing arrangement. The idea was more to live in an "interest only" financed house for a few years and then "flip it" at a higher price and start all over again. A tough economy made home values stand still, though, and the concept fell flat—more drastically in markets like California than here, where the voodoo financing was widespread, but enough in this area to rev up the foreclosure rate starting about a year ago.
Now that too-high appraisal/too little equity flaw in the Knoxville home market is going through the painful cycle of correction. "This time last year, you could still get a zero-equity deal, but lenders have tightened their guidelines," says Lee. "It's tougher to quality for a loan right now."
For the Knoxville market, that means two things: some buyers have been eliminated from the market due to poor credit or past foreclosures, and aspiring sellers have to watch their Ps and Qs when they price their houses. "If you don't have a good price, based on a tight appraisal, your buyer's not going to be able to get the loan," says Lee.
Even then, discounts are common. Painter Farms at West Emory, for example, succeeded in moving six completed $193,900 to $252,900 spec homes off the market in April with $15,000 reductions and $3,000 in incentives, says Steve Killian, of Pinnacle Real Estate, exclusive listing agent for the development. "These homes are selling for as low as $85 per square foot, which is an incredible price for new construction."
Mini-Mansions Run Amok
There are numerous theories on why there are so many homes for sale in the $400,000-$500,000-and-up range in Knoxville (which we'll call mini-mansions, not to be confused with shoddily constructed houses in other markets that run the same price, since $500,000 in this area can buy a nice and nicely built place). But most sellers, realtors, and even builders agree there are far too many for our market to absorb. "There are a lot for sale, and not that many buyers," says Lee. In April, 64 houses in the $400,000-plus market were sold—less than 1 percent, leaving another 1,966 for sale.
Spec builders are at least partly responsible, says Slyman. "One of the problem areas of local housing is new-construction houses in the $500,000-$700,000 range. When the less expensive homes started selling instead, and the average sales price declined, the builder all of a sudden had to face the reality that his construction loan is higher than the house can be sold for, at least immediately. The buildings were in progress when the economic downswing started—and some of the builders didn't stop. That equation has caused some foreclosures on newly built houses before they're even sold."
Lee has some sympathy for the mini-mansion builders. "Those were the houses that were selling, and builders build what's selling at the time. I think everybody got caught with a lot of inventory, and they're suffering now because of it."
Tim Ellis, who does build spec houses in the $400-$530,000 range in a subdivision in West Knoxville's Hardin Valley area, along with three other small builder buddies, knows several competing builders whose properties have been foreclosed. "Right now I'm building two custom homes in this subdivision, and another builder friend is building one... two of the four of us have closed custom houses in the past 60 days," he says. "The difference is that the spec houses aren't selling as quick. Each of us four has two spec homes in Hardin Valley, and all four have one that's already finished and hasn't been sold... but our hopes are still up."
Part of the excess inventory, says Ellis, originated in poorly managed subdivisions. "When a developer sells lots to anybody, and then the owners hire a builder who shouldn't be building in that price range... the houses are not appealing, there's no unity in the subdivision, no architectural control." Back before the glut of houses, developers in cohesive subdivisions with just a few lot owners could sell more units, more quickly—but their looser competitors eventually sold their units, too.
"When you have a slowdown, like now, those unappealing houses don't sell," says Ellis. "There's a lot of them. Some builders have six of the same house with completed construction, and none of them have sold.
"They have overextended, and that hurts all of us because there are too many houses on the market."
One mitigating factor, says Ellis, is that KAAR active listing and sales figures include both resells and new homes. "Starting at around $300,000, a lot of owners only want a new house—they want to pick out certain things," he says. "So particularly in the customized market, we're not in competition with every single unit listed on the market in that price range."
But there is a furious competition in the luxury, mini-mansion price range. Just a quick glance at local home catalogs reveals offers for homes sold "$10,000 below 2007 comps," or involving any number of discounts, bonuses and premiums—from cash to landscaping to financing terms.
A lot of those measures depend on how far in debt the owner or builder is, and how long they can keep paying the mortgage or building loan before the bank takes it back. "One builder I know who's in great shape debt-wise still auctioned off several houses in the subdivision Falcon Point," says Ellis.
Typically, an auction reserve price is at least 10-15 percent below the house's appraised value. "He just wanted to cut his losses, and he wants to keep building other properties," says Ellis. "It's hard to do that if that much of your credit line is tied up in houses that won't sell for a while."
Knoxville, Definitely Different
One great irony in the whole real estate slouch is that local consumers' attitudes are becoming self-fulfilling. "I think a lot of people are buying into what they read in the national news about a housing meltdown," says Lee. "A lot of people are nervous about the economy, the fear of the unknown, and the natural reaction is to do nothing....so they're not buying."
Another phenomenon in play is that certain price houses, ordinarily those in the $350,000-and-up range, are highly dependent on "move up" buyers. "There's a domino effect," says Sparks. "People moving up are taking longer to get into the higher ranges because it's taking longer to sell their lower-priced houses."
Alice knows this all too well. "I don't sell to as many buyers moving up as I did last year and the year before that," he says. "I would say three of my last four closings were people moving to Knoxville from elsewhere. And we've all lost sales because someone couldn't sell his house."
Another reason people aren't entering the buyer's market: They've read the national news and are worried the market is too unstable, that a new purchase might sink in value right away, says Slyman.
"Or they're hoping for prices to drop, waiting and renting," says Lee. "I know they are, because they're my clients—for the most part, renting and waiting."
In the Knoxville market, though, appraised values are unlikely to go down except at properties where they were overvalued before. Even mini-mansions aren't necessarily being appraised for less; their owners are just sacrificing to sell them quickly in a glut market. House values around here stay nice and steady, for a number of reasons.
"Knoxville is actually as stable as most and much more stable than quite a few cities and states," says Lee. "That's partly because we have a really diverse economy that's not dependent on any one industry. We have the UT main campus, the research labs at Oak Ridge—our employers are diverse and some get a lot of funding from the government. Plus, this is a very attractive area for retirees, due to the weather, the cost of living, and so forth."
The stable employment base means that while a few individuals always have tough times and lose homes, we don't lose jobs in one fell swoop, like, say, Detroit. There in the Rust Belt, the loss of automotive employment was the main instigator of sinking home values (because no one is moving in or "buying up"); that couldn't happen here.
There are also parts of the Knoxville market impervious to the stress of the economy and the dip in real estate sales volume, says Slyman. "The downtown area is one of them—the homes for sale sell quite quickly and the demand is steady. And the UT area is another. The number of students needing housing at a certain price is steady, and in fact is increasing."
Slyman will auction 10 student condos and four student rental houses in Fort Sanders in June, and he expects all of them to be sold at the asking price—or near it. "With those, the entire value is set by how much income the units produce, and that's not going to change with the current economy or any other factors that are affecting housing values in other states."
Build, Sell, Buy, or Wait?
The hard part is predicting if the sluggish real estate sales volume and days-on-market trends will shift... or if builders and buyers should retool their strategies.
"When us builders lunch together, we've been discussing whether we should be building more specs when we have those that haven't sold yet," says Ellis. "Construction costs are already up 10 percent... I just had a load of gravel delivered and it costs me 40 percent more than it did a year ago. I'm trying to decide whether to have inventory on old construction prices when the market breaks, or just to raise prices on those new houses. I also have to consider that it costs about $3,000 a month for a spec house in this range just to sit there... "
His advantage over bigger builders, says Ellis, is that he just shoots for five to six completed properties per year—he doesn't have to push on in a glut market. "It's hard to grind a big machine to a halt and even harder to start it back up. I'm just a little builder so I can go play golf for six months."
Sellers, too, are grappling with whether to list their homes now or wait, or if they must sell right now, what they can expect. Even in a dipping, not crashing, sales market, an amateur can get overwhelmed.
"Across the board, almost all my properties are appraised for more than what they'll sell for, usually by about 5 percent," says realtor Jim Lee. "If the price of the home is $500,000, the number's just bigger."
Even that sales rate is based on a house truly priced at market value, says Lee. "A lot of sellers are still living in the past, engaged in wishful thinking, the ‘My house is better than yours' syndrome."
"One of the biggest mistakes people make is overpricing a home, thinking they can negotiate later," says Sparks. "If I want $250,000, I can't ask for $260,000. I have to be more on the mark than that nowadays."
Builders and re-sellers have to carefully consider when the market might break. "Everybody comes up with a new idea about that every day," says Ellis. "But I don't have a clue."
The decision to buy, though, that should be a no-brainer if you have reason to get a new house, says auctioneer and realtor Slyman—he thinks buyers will reap the benefits of people listening to the national news and deciding Knoxville is in crisis.
"There's no question about it, right now is probably one of the best times in the past 30 years to be buying a home," he says. "How many times in your life are you going to be able to buy a house that didn't lose its value at a discount?
"I'll make this prediction," says Slyman. "One year from now, things will be totally different. Prices will move up. Those who have not bought in this great market will be regretting it."
Corrected: Tim Ellis' last name.