Two years ago, as the nation’s residential real estate market began to fully feel the impact of the recession, industry analysts pointed to the end of 2010 as the beginning of the recovery. Now, as that milepost has passed, many believe it may not improve substantially until near the end of 2012.
Real estate professionals say that three things must happen before the market can improve: a loosening up of credit by lending institutions, a reduction in the inventory of distressed homes that have inundated the Utah market and a boost in consumer confidence.
Furthermore, something has to change to reverse the worst depreciation rate for residential home prices in Utah’s history—a drop of 10 percent in value through the second quarter of 2010. Though better than the nationwide average, it’s still among the bleakest economic developments in real estate in Utah since records have been kept.
“Economists felt things would look good in 2011, but I’m not so sure that’s going to happen right now,” says Jillinda Bowers, past president of the Salt Lake Board of Realtors and an associate broker with Prudential Real Estate. “With all of the pending foreclosures—and what banks decide to do with releasing them on the market—that will determine what 2011 will look like.”
Bill Heiner, president for 2010 of the Salt Lake Board of Realtors and a realtor for Remax, says the current environment feels a bit like the 1980s. Depreciation during some of those years ranged in the 3 to 4 percent area but, as Heiner points out, “Interest rates were much higher then and prices were lower. Back then, frankly, a lot of people were trying to get out of Utah. Now, the state is creating jobs, which is a real positive, and people are trying to come here.”
A Buyer’s Market
Heiner is astounded that “we don’t have more sales than we do. This seems like a prime time to buy.”
In the second quarter of 2010, there were 3,537 homes sold in the Salt Lake valley, according to Heiner. That dropped 36 percent during the third quarter, to 2,245. The last forecast he saw predicted a 3 to 5 percent loss in pricing for the year, continuing the downtrend in values. What was once considered normal was a 5 to 6 percent improvement in value.
Industry analysts thought that two years after the economic downturn, values might return to a positive—perhaps up 2 to 3 percent. That hasn’t happened.
Purchasing a home under current conditions would seem to be an inviting prospect. Interest rates on home loans are at historic lows, some hovering around 4 percent fixed for a 30-year loan. Residential home values have dropped dramatically, making the current market attractive to buyers on both fronts—price and interest rates. Still, sales of both existing and new homes remain slow.
“I think buyers use to buy out of emotion, but not now,” Bowers says. “It’s all about price, and it’s hard to compete with the number of homes that are foreclosures or part of short sales. Four percent of the inventory in the valley is now made up of foreclosures. We’re usually around 2 to 3 percent maximum, and that was in the ‘80s. Homeowners who don’t need to sell right away are waiting to list until prices rise, and that pulls the inventory of non-distressed homes down. We’re down about 30 percent in our inventory [for non-distressed properties] from our normal.”
“It’s important that distressed inventory be moved more quickly,” Heiner adds. “Banks need to act faster on short sales. One in four homes in Utah is in some sort of distressed situation right now—either foreclosure or short sale.”
Realtors are also faced with another reality with their clients—a stiffening of the credit market. What once seemed a slam dunk for homebuyers in getting a loan has changed.
“I jokingly say that in the old days, if you had a job and good credit, you could qualify,” Heiner says. “Well, you still need both of those today, but it is harder. A credit score over 700 is almost the minimum anymore.”
“The pendulum has swung the other way,” Bowers agrees. “We need it to be somewhere in the middle. Banking institutions need to loosen up and put some of that TARP money out there in the form of loans. Unfortunately, the government didn’t put any guidelines on what [banks should] do with that money, and with more stringent FHA charges, that adds to the difficulty for some to qualify.”
Part of that qualifying process involves appraisals, another hurdle that is harder to leap in the current economy.
“Appraisals are scrutinized more than they have in been in the past,” Heiner says. “Many have two reviews by a mortgage company. The timing factor is detrimental to the process. Still, the good qualified buyers of late, if they are patient, haven’t had a problem getting financed.”
Signs of Recovery
The challenges aren’t limited to the Wasatch Front. Gary Thayne, a partner with Coldwell Banker in St. George, says the situation in Dixie has been made even worse by a high unemployment rate—close to 9 percent. Many of those job losses were in construction-related businesses, including small businesses such as plumbing, carpet, cabinetry, etc.
“We were really caught in the boom with investors during the time when prices were increasing—between 2005 and 2007,” he says. “Resort areas everywhere were getting overinflated prices. So now our foreclosures are greater than even in northern Utah.”
Still, all three realtors have found reasons to be optimistic that things will turn around, albeit later than had been hoped.
“I have seen a little upsurge in some areas,” Bowers says. “Upper-end homes are selling a little better. And even though we’ve seen home prices drop, Utah is still in much better shape than other states. Job growth is up about 2 percent here, and that is one reason I feel we’ll see a resurgence.”
“A lot has to do with consumer confidence,” Heiner says. “Until that confidence comes back, and employment continues to improve, it’s going to be tough. Until the shadow buyers—the Generation Y individuals and couples still living with their parents—can start to qualify for loans, there will be a pent-up demand without a lot of movement. I’m thinking that if interest rates stay down, things may start to pull up by the middle to end of 2012.”
Thayne sees the new St. George airport, which is slated to open this month as a positive.
“It will take some time, but easier access via air will make this climate even more attractive to people,” he says. “We’re kind of in a perfect storm for buying in St. George. There needed to be a correction in pricing, and in the long run, the correction will be right.”