Housing market may have hit bottom

January 26, 2009
Here's something that passes as good news for central Indiana's moribund housing market: Prices might hold steady this year, after falling nearly 7 percent from their 2006 peak.

Economists and other real estate professionals say the economy may start to recover in the second half of the year, boosting demand just as the glut of unsold homes begins to shrink.

"I think prices are likely to be flat throughout the year," Richard DeKaser, a Cleveland-based economist for PNC Financial Services, said of the central Indiana market. "The reason I say that is because home prices in the Indy area today are actually very attractively valued. Because prices are attractive by any historic standard and credit conditions are likely to improve, I expect to see prices basically hold their own over the course of the year."

Yet DeKaser's no unbridled optimist. "The absence of depreciation will certainly be welcome," he said, "but higher hopes of meaningful price increases are also not likely."

Given the rapid price drops of the last couple of years, some sort of stasis would be a welcome change. According to statistics from the Metropolitan Indianapolis Board of Realtors, the average price for a home in the 13-county metro area (which includes Marion and eight surrounding counties, plus Brown, Decatur, Montgomery and Putnam counties) fell from $154,554 in 2006 to $143,977 in 2008 (excluding the month of December, which has yet to be tabulated).

But the numbers are even more stark when Brown, Decatur, Montgomery and Putnam counties (relatively small, quiet markets that suffered minuscule downturns) are excluded. Between 2006 and 2008, Marion County saw a breathtaking 13-percent decline, from $122,468 to $106,415. Doughnut counties saw declines ranging from 3.6 percent (Hamilton) to 6.2 percent (Hancock).

"One month, it might be Hamilton County" with weak sales, said Jim Litten, president of F.C. Tucker Co.'s residential real estate services division. "Then it could be Hendricks County. There's really no consistency. The pain is getting spread around. There's no area that's immune to this."

MIBOR statistics show that from 2006 to 2008, sales of homes in the $125,000-to-$175,000 range fell 28 percent. Those in the $250,000-to-$350,000 range sank 26 percent; and homes over $1 million took a 41-percent drubbing. And while most areas and markets took a hit, this is a particularly bad time to try to market a cookie-cutter house in a subdivision on the fringe of the metro area.

"Fishers has got a lot of homes that have a similar price point under $200,000," said Greg Cooper, agent for Century 21 Realty Group One and a real estate commentator on WIBC-FM 93.1.

"There might be 200 houses with that price point in Fishers right now. So that becomes challenging. And Fishers isn't alone. There are a lot of places in this city where you have newer developments with tons and tons of houses that are all of a similar nature. Those are very tough to sell right now."

Positive signs

Yet economists and industry experts see indications of better times ahead—provided, that is, the market is spared any new economic shocks of the sort that ruined predictions that 2008 would see a revival in residential housing.

"Last year at this time I was telling everybody that I saw the recovery coming in the summer of 2008," F.C. Tucker's Litten said. "Obviously we didn't see the Wall Street firms hitting the wall and the bank failures. Remember the movie 'The Perfect Storm?' That's the way the real estate business has been the last few years. We get a little blue sky and boom, lightning strikes again."

"I'll never forget Sept. 29 of last year," added G.B. Landrigan, president of Landrigan Realtors. "That was the day the first bailout package didn't make it through Congress. We lost three sales that day. Two because the lenders put very unusual last-minute conditions on their loans, and a third because the buyer said he wanted to wait several months. He'd been planning on making an offer that day."

Still, it could have been worse—much worse. While central-Indiana homeowners saw perhaps 5 percent or 6 percent trimmed off the value of their houses last year, some denizens of California, Florida and Nevada were treated to 20-percent "haircuts." That's because in those epicenters of the real estate bubble, prices had increased by astronomical rates. Which meant that when the bottom dropped out, homeowners had a long, long way to fall.

Not so here. In good years, Indianapolis-area residential properties might appreciate at a rather tepid-sounding 3 percent. So when prices went south they didn't have as far to fall.

House prices in the nation's largest cities fell 18 percent from October 2007 through October 2008, the latest month available, according to the Standard & Poor's/Case-Shiller Index, the largest drop since the index's launch in 2000.

Getting back on track

Put together a couple of good years, and local homeowners could be back to the highs of 2006 while the next decade is still young. But don't hold your breath.

"That's all predicated on how robust the recovery will be and how quickly it comes," Litten said. "I don't think it's going to be like flipping a switch. I think it's going to be a process. We will gradually start seeing the numbers come up."

Jeffrey D. Fisher, director of the Benecki Center for Real Estate Studies at Indiana University's Kelley School of Business, said that process could be precarious. While interest rates and government programs may make buying a house more attractive, he said, they'll be useless if the people they target don't have jobs or desperately fear losing them.

"Since housing starts are way down and prices have dropped, the market is starting to clear," he said. "But it will take a while to work off the inventory. The Midwest and Indiana will probably follow the rest of the economy, although those areas depending on the automotive industry will have a tough time. I think home prices will decline a little in 2009, although the government and Fed keeping interest rates low has made home buying very attractive right now."

Butler University economics professor William J. Rieber agrees that government stimulus programs, coupled with diminishing housing stock, should create a local market that either stabilizes or only goes down a little bit more.

Unless, of course, something happens. Again.

His favorite candidate for an economic monkey wrench is a fresh spike in oil prices. The cost of crude deflated like a cheap balloon as the recession deepened, but if the economy in the United States (or China) revives, it could once more head for the stratosphere.

"We've benefited from lower oil prices," Rieber said. "Who knows what oil prices will be the second part of the year? If we go back to last year, they were very high and people were predicting they would go even higher. Who knows what they will be next year. That's why these forecasts are so difficult."

In F.C. Tucker's recently released 2009 market forecast, Litten said one of the most hopeful signs is that the region's housing inventory dropped 13 percent last year, with 2,513 fewer homes on the market in November than during November of 2007. Hendricks County showed the steepest decline, 19.6 percent.

Another factor that's sponging up the market's excess capacity is that housing starts have fallen off a cliff. In 2001, according to the Builders Association of Greater Indianapolis, 15,054 building permits were issued for Marion and surrounding counties. That annual figure remained above 13,000 until 2006, when it plummeted to 9,514. In 2008, it was a feeble 4,353.

This means that, as available domiciles become more scare, the real estate industry creeps ever closer to its magic number: a six-month supply of available houses. This is known as a "balanced" market, in which neither buyer nor seller enjoys undue leverage at the negotiating table. If housing availability slips much below that, it becomes a sellers' market, which means home prices actually could rise.

It hasn't happened yet. The Indianapolis area currently has an eight-month supply of homes. However, Litten believes a combination of historically low mortgage rates, new Barack Obama-inspired government programs, rationalization of Marion County property tax assessments, and an overall tighter market will stabilize prices and bolster consumer confidence.

"There's many people that during the last couple of years really wanted to get into the real estate market or upgrade, but they sat on the sidelines waiting to see what would happen next," Litten said. "I think that with some positive news, you're going to see those people jump in."

Still, no one's predicting 2009 will be a great year.

"MIBOR is less than comfortable with me saying this, but if you don't have to sell right now, you shouldn't be on the market," Century 21's Cooper said. "As real estate professionals, we're trying to be real honest with people about that. If you have a huge issue that requires you to sell, that is one thing. If you're just sticking your toe in the water, this is probably not the time for you."
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