Just a couple years ago, the housing market was booming, fueled by historically low interest rates and aggressive lenders offering easy access to loans.
Property values and new housing construction soared. Speculators and flippers got into the action trying to make easy money on the red hot market.
Then the housing bubble burst as supply outpaced demand and unsustainable property value increases reversed course.
Finally, last year, the deflating housing market was dealt another major blow. The subprime crisis hit as many borrowers, especially those with weaker credit, who had received adjustable rate mortgages (ARMs), enticed by the low introductory rates, couldn’t make their mortgage payments as the rates adjusted upward. Foreclosures surged across the country.
According to ForeclosuresWI.com, foreclosures rose 27.5 percent in Wisconsin last year. It was even worse in Milwaukee County, which had a 51.5 percent increase (5,687 total) in foreclosures and in Waukesha County, which had a 40.9 percent increase (854 total).
Businesses in the housing industry are hoping that the housing market collapse ended in 2007 and hope the market will begin to recover in 2008.
“We’re cautiously optimistic that we’ve hit the bottom of it,” said Matt Moroney, executive director of the Metropolitan Builders Association.
Southeastern Wisconsin’s conservative business tradition could help the region’s housing market recover faster than other markets in the nation. Milwaukee typically goes through fewer economic boom and bust cycles than other markets, and housing industry members say the recent housing boom and bust cycle was no different.
“Residential housing is tight, but Wisconsin doesn’t get crazy when a market is super heated, and it doesn’t go crazy when a market collapses,” said Mike Mervis, assistant to real estate developer Joseph Zilber, founder of Milwaukee-based Zilber Ltd.
Recently released data from the Multiple Listing Service (MLS) Inc. seems to support that theory. Despite the housing collapse, which sent home values plunging in some overheated U.S. markets, the average prices of homes sold rose last year in Milwaukee County (from $183,907 in 2006 to $192,844 in 2007), in Racine County (from $183,171 to $183,651), Kenosha County (from $199,097 to $200,836), Walworth County (from $292,814 to $301,027), Washington Country (from $228,926 to $231,052) and Sheboygan County (from $155,936 to $164,432) in 2007.
The average price of homes sold last year fell in Waukesha Country (from $304,541 in 2006 to $301,688 in 2007) and Ozaukee Country (from $311,149 to $310,535).
“There was a run up in prices in the Milwaukee area, but it wasn’t an irrational one,” said Mike Ruzicka, president of the Greater Milwaukee Association of Realtors. “Values are holding steady.”
“There is so much hype about how drastically values have dropped (nationally),” said Bob Monnat, chief operating officer of Mandel Group Inc., a major Milwaukee residential condominium developer. “In Milwaukee, values didn’t go up as much (as in some U.S. markets). We’re a tertiary market. We are not going to surge. When the market heats up, people don’t think of Milwaukee as a place to go make a killing. In Milwaukee (during the housing boom), we had a lower number of speculators and flippers, compared to other markets.”
However, the MLS data also reveals that the number of home sales in all eight southeastern Wisconsin counties fell in 2007. In the eight counties, 24,308 homes were sold in 2007, compared with 28,116 in 2006. Homes also were on the market longer in each of the eight counties in 2007, except in Sheboygan County.
“Our transaction values are holding, but the velocity has dropped,” Monnat said.
Stung by the subprime crisis and the bursting of the housing bubble, banks have become far more cautious about loaning money to home buyers and to developers. In Racine, KeyBridge Development’s proposed lakefront Point Blue development, which was to have had 434 condos and 90 apartments, was scrapped recently because the developer could not obtain financing.
“Projects under $100 million are easier to finance than ones over $100 million,” said Rob Ruvin, owner of Ruvin Development, which is working on a pair of proposed mixed-use developments (both with some residential condos) in downtown Milwaukee.
Bankers are predicting a slow recovery for the housing market. According to the latest Bankers Economic Index, sponsored by the Wisconsin Bankers Association (WBA), demand for residential mortgages is low in most parts of the state and will likely stay that way until the housing market recovers in 12 to 18 months.
For the index, 132 Wisconsin bank CEOs participated in the survey. Of the group, 41 percent predict it will take 18 months for the state’s housing market to recover and 30 percent predict it will take 12 months. Also, 60 percent of the bankers say residential loan demand will be flat through the first six months of this year, 31 percent say mortgage demand will drop further and only 16 percent said demand will rise.
Also, in a separate announcement, Doug Duncan, the Mortgage Bankers Association’s chief economist and senior vice president for research and business development, said recently, “We expect (national) housing starts and home sales to continue to trend down and reach bottom around the end of the third quarter 2008.”
Anecdotally, some in the local housing industry are reporting that business seems to be picking up in recent weeks, sparking some hopes that the local housing market will show improvement in 2008.
“I really think the last quarter of 2007 was the bottom of the market,” Ruzicka said.
“I’m not saying we are going to rocket out of it, but I think we’ll see gradual improvement,” Moroney said. “I do think we have hit bottom.”
The number of spec homes on MLS has decreased dramatically since late 2006, and building permits have decreased, Ruzicka said, which has helped bring supply closer to balance with demand.
However, the downtown Milwaukee condominium market has an oversupply of units, some in the industry say, and influx of new housing developments downtown could be slowed in 2008.
“The ones that haven’t started yet would be foolish to start in this environment,” said Michael “Mick” Hatch, a partner in the real estate practice at Foley & Lardner LLP. “I think there’s going to be real softness in the condo market. I don’t think we’re going to see many new big projects get under way for awhile. I think it’s going to be awhile before it gets better again.”
“The demand is good, it’s the supply that is causing issues (with downtown condos),” said Blair Williams, owner of Milwaukee-based Wired Properties. “We have condos in Milwaukee that have been on the market for over a year. We may have irrational values assigned to certain condos.”
Some would-be condo buyers have been slow to purchase because they have struggled to sell their suburban homes in the slow housing market, said Tim Gokhman, director of sales and marketing for New Land Enterprises LLP, a Milwaukee condo developer. Although downtown condo sales slowed last year, he said only some segments of the condo market are in excess supply.
“You can’t say it’s totally an oversupply,” said Gokhman. “I think there’s an oversupply of some specific unit types and price ranges. In what we are doing, we don’t see an oversupply. It’s normal for a project to take two years to absorb.”
However, Monnat estimates the supply and demand of condo units in Milwaukee is out of balance by about 650 units. The downtown market may not reach equilibrium until 2009, he said. As a result, Mandel Group has decided to delay its 61-unit Domus condo development in the Historic Third Ward. Still, construction should start on that project by the end of the year, Monnat said.
The struggling housing market has created a great environment for buyers, and that may encourage more people to buy, which could reenergize the housing market.
“It’s a great time to be a buyer,” Monnat said. “There are a lot of deals to be had on existing inventory. I wish I was in the market right now. Projects are hurting all over the place. I can go out and cut a hell of a deal.”
While the subprime crisis has essentially ended subprime lending, buyers with good credit are in high demand, Ruzicka said.
“Mortgage brokers are tripping over themselves looking for people with good credit,” he said.
The sagging U.S. economy will likely encourage the Federal Reserve to keep interest rates low, which could also spur recovery in the housing market.
“That might be a catalyst,” Moroney said. “Interest rates have dropped, and may drop more.”
Another factor that could help the housing market is the falling price of building supplies, which should help keep the cost of new homes down. During the housing boom, the price of building supplies soared. But now that the market has collapsed, the demand and therefore the price of building supplies has come down, Moroney said.
“One builder just told me that the cost of lumber is at a five-year low,” he said. However, the cost of oil-based building supplies remains high because of the high cost of oil on the global market, Moroney said.
Home builders are working hard to make competitive offers to buyers, he said.
“I think a lot of people have sharpened their pencils and putting forward their best offer,” Moroney said. “It’s a very competitive market.”
During the housing boom the apartment market struggled as many traditional renters decided to take advantage of low interest rates and own a home instead. As the housing market collapsed many of the traditional renters came back to apartments. That combined with the lack of apartment building development in recent years has resulted in high apartment occupancy rates.
Apartment building owners have been able to refinance their loans to make them profitable again, Monnat said.
“Our borrowing rates are favorable now,” he said.
Rents in downtown Milwaukee’s apartment market are still too low to support most new apartment developments, Williams said.
Mandel Group is looking for opportunities for new apartment developments when the deal works, Monnat said. The company’s North End development, a mix of apartments, condos and retail space, benefited from tax incremental financing, low property cost and new markets tax credits, he said. The company is also considering plans to expand its Gaslight Lofts apartment complex in the Third Ward. Expanding an apartment complex is more economically feasible than building a brand new one, Monnat said.
“It’s unbelievably difficult in Milwaukee to make luxury apartments work,” he said.
