Builders, buyers adjust to slide in Jefferson City home sales

John Kleindienst of Capital City Construction Co. didn’t know he was walking a high wire as the national economy rode the housing resurgence to prosperity this decade.

He had tried to build eight houses a year — six custom homes already under buyer contract and two spec homes that he sold on the open market. Then came the “disaster” that reared its head in early- to mid-2005. First, the Jefferson City market for homes costing more than $200,000 chilled. Then, the market for all homes followed suit. Today, new homes in the $150,000 range are difficult to sell.

“I’ve still got two homes from ’05” in the $200,000 range that were financed at rates tied to the prime and built for sale, Kleindienst said. “They’re near Truman Boulevard — great locations.”
But they didn’t move.

So Kleindienst cut back his custom building to two homes in 2005 and two more this year. Today, he’s filling the gaps with “a lot of remodeling, a lot of additions, a lot of roofing” for other contractors.

Builders like Kleindienst have borne the brunt of the downturn in Jefferson City’s residential housing market this year after what Cole County Assessor Shawn Ordway called “banner years” in 2004 and into early 2005, particularly for high-end homes that padded assessment totals.
Among the signs of a cooling market:

•?The average 2006 sale price of local homes has dropped for the first time in memory after annual increases of 5 to 8 percent in recent years. Through mid-November, average prices had dropped to $129,320, or by 2 percent, from $131,581 a year ago.

•?Total residential sales appear certain to fall short of the records set in 2005, when 1,512 homes sold. Through mid-November, totals reached only 1,265 in 2006 with the year’s busiest sales season long past.

•?Single-family residential building permits in Jefferson City and Cole County dropped more than 10 percent through October, from 246 to 220 homes. The city’s total plummeted 30 percent while the county showed a modest gain, continuing to grab the lion’s share of new housing permits and starts.

•?With two months left in the year, occupancy in new homes is lagging. Only 250 families have moved into new Cole County homes this year, compared with 400 last year.

•?The Realtors’ Multiple Listing Service (MLS) boasts a glut of single-family homes on the market. MLS showed 828 homes for sale in mid-November, or one-third more than the usual 600-plus that represents the high-water mark in most years; the residential inventory has reached 900 this year. Of the current residential homes, 110 were new homes, or about 20 percent higher than the norm, veteran real estate agents said.

•?Upscale home building and sales have declined even for custom-built homes that have buyers before the first nail is pounded. Speculative (or spec) high-end building — to place on the market — has cut back dramatically across the country. MLS data indicates that 207 homes in the area sold for more than $200,000 in 2005, compared with 163 so far in 2006. Real estate agents agreed the entire market above $150,000 has cooled.
Balancing those signs of trouble:

•?Although many real estate agents believe homes are staying on the market longer before they sell, the MLS figures indicate a miniscule increase, from 75 days last year to 76 days now before the average home sale.

•?The “list-to-sell ratio,” or the typical markdown for sales from the original listing price, has dropped only 1 percent because the market has not triggered major price slashing by anxious sellers — so far.

•?2006 figures are compared against record activity in 2005. “I would say the times are (returning to) normal,” said Darrell Gordon, president of Coldwell Banker Gordon Co.

•?According to Jason Schwartz at Exchange Bank, interest rates on mortgages are still at near-historic lows.

Is the problem local housing or national news?
Real estate professionals struggle to explain what factors account for the local slump.

“There are no good reasons that any of it slowed down,” said Dana Wildhaber of Associated Real Estate Group, a director of the Jefferson City Area Board of Realtors. “There is plenty of property for sale and plenty of money to borrow.”

Gordon, a veteran of local contracting and real estate sales, cites a lone factor that has nothing to do with Jefferson City’s market dynamics: “negative publicity nationally.”

“It certainly does have a psychological effect when people are reading that the bubble’s burst nationally,” Gordon said.

For more than a year, the national media — including sophisticated financial publications — have brimmed with speculation that the upward spiral in housing prices would reverse, in much the same way that stocks plummeted in 2001. The housing market helped the nation recover from that stock collapse as Federal Reserve Board interest rate reductions created home borrowing conditions reminiscent of the rosy 1960s and refinancing freed money for consumer spending.

Low rates, easy lending terms and an array of exotic loan arrangements — such as interest-only mortgages — fed the price spiral. But what Gordon calls an “unsustainable” run-up in prices largely affected only California, Florida and scattered high-growth areas, not Jefferson City.
“It typically doesn’t get real bad here or real good here,” Gordon said.
Jefferson City was never the scene for “flipping” homes — or quick investments and re-sales for profit.

Local prices have risen more than 30 percent since 2000. That year saw the average home in Jefferson City sell for $99,673, while the mean bounced to $131,581 last year.

Jefferson City has ranked among the most undervalued markets in the U.S. for homes, according to analyses by National City Corp. and Global Insight. Those companies found that through June 2006, homes in this area sold for about 4 percent less than their actual value, based on local economic conditions. Hot spots like Naples, Fla., had average prices double their projected actual value.

But communities in the Midwest — which were largely untouched by the housing price boom — have been the first hit by market price reductions, although virtually the entire country has seen prices moderate. National housing starts are down, inventories of existing homes rose sharply on the market, publicly held builders are registering huge cancellation rates and major net income reductions and even some building material suppliers such as Home Depot have struggled financially.

Wildhaber and several other players in the market surmise that the surge in building in recent years saturated the Jefferson City area’s appetite for new homes, particularly at the upper end.

“I think we have satisfied a large proportion of our buyers in the last two to three years,” Wildhaber said. “I would say there’s a slight oversupply. I see an awful lot of spec housing sitting empty.”

The same oversupply problem has been cited in Columbia residential and commercial building as well as Jefferson City’s commercial market.
Local real estate agents repeatedly note the same developments where property won’t sell, ranging from condos to moderately priced subdivisions full of aging “for sale” signs to upscale additions where buyers won’t touch lots, let alone contract for homes.

Dan Bax, president of the Home Builders Association of Jefferson City and an upscale builder, noted the slowdown in business has been particularly difficult for high-end spec contractors who build to sell.

“The $300,000 home is not happening now,” Bax said, although work proceeds for average- and lower-priced homes. “There are several builders without new construction in several months.”

Some high-end spec builders have escaped the malaise that has infected the market. Jason Lale of Lale Construction, who also acts as a Realtor, generally builds one custom home and four to seven spec structures in the range of $350,000 to $550,000 — the very high end — each year. He’s managed to trim the inventory of homes he’s built and marketed from three to one, but he knows the difficulties others are facing; he recently sold one home three times before a contract held, because the first two buyers couldn’t sell their homes.

Bax said many builders have difficulty simply pricing new homes because steep cost increases for steel, concrete, copper, brick and any other materials with high transit costs have wiped out price declines for lumber. With those cost increases, smaller builders can ill afford to finance and produce spec homes that could sit for months on the market, waiting for a buyer.

And demand has dwindled even for custom builders, Bax said. “Typically, in the early fall,” prospective owners sign contracts and arrange for work to begin before the hard freezes of winter. “This year, there were not any phone calls,” he said.

Bax and several real estate agents attributed some of the slowdown to mid-term elections, even though few jobs were at stake in Jefferson City because Gov. Matt Blunt does not face re-election until 2008.

And Bax cited the lingering effects on consumers from skyrocketing fuel prices last spring and other costs that have soured buyer attitudes and squeezed incomes available for housing.

“We have a fair market on jobs right now, but income is not rising as fast as costs are,” Bax said.

Kleindienst said the financial dilemmas of potential buyers became apparent as they absorbed increases in living costs in 2005 on credit cards that they can’t pay down.

“Jefferson City needs more industry, more people making more money” to provide a true fix for the housing market, particularly considering that a modest, 1,600-square-foot home with a two-car garage easily can cost $200,000, he said.

Kleindienst and other builders and real estate agents identified little impact from interest rates that have risen one-half to a full point over the past year. Nancy Gratz, senior vice president of Premier Bank and president of its Wildwood Crossings outlet, described rate behavior the past two years as “stable” and “historically excellent.”

She has the same long memory as Gordon, who recalls the 1980s and early 1990s when home interest rates reached well into double digits.
But Gordon said the recent increase in rates might cause some young families to defer home buying because they don’t appreciate that a 6 percent quote today is near the low over the past 30 years.

What lies ahead?

With the continuing talk about a housing collapse — including one that leads to a general recession — the real estate industry continues to emphasize that with a handful of local exceptions, the value of American homes has risen steadily since the Great Depression and represents a solid investment for most families.

The National Association of Realtors this month began an unprecedented $40 million advertising campaign to combat the talk about a “housing bust.” Confined initially to newspaper ads in major markets, the campaign will expand to broadcast media in January.

From a practical, local standpoint, real estate agents say that with the glut of properties on the market, now is not the time to sell problem properties.

“You can’t be selling things that take a lot of work, that have issues,” said Sharon Keating of RE/MAX Jefferson City, past president of the local Realtors board. “You’ll be hurt on price, and it will take a long time to sell. Good ranch styles with good lots that are priced reasonably will still move.”

Wildhaber anticipates a trend toward price cuts that will benefit buyers but stun many sellers.

As chairman of the panel that oversees MLS for Realtors, Wildhaber notes with worry that 46 percent of the residential listings are for vacant homes. The buyers have moved to other homes, and they likely face the financial pressures of paying for two mortgages.

He suspects those owners could sharply reduce sales prices once the statistics are updated. “For October, November and the rest of the winter, we’re going to see” major price reductions to close sales, Wildhaber said. “We already are seeing 10 to 15 price cuts a day coming through” MLS on currently listed properties, not counting final reductions to make a sale.
With the twists and turns in real estate since mid-2005, what had been a success story of this decade has become a thriller. “We have a story that is still being written,” Wildhaber said.