The housing market in southeastern Wisconsin – and in the entire United States – still has a long way to go before it digs out of its hole.
In the meantime, the wounded housing market will remain a major drag that holds back the economic recovery.
Fueled largely by low interest rates and reckless lending by some banks, the U.S. and southeastern Wisconsin markets boomed in the middle of the last decade. But then the housing bubble burst and the market collapsed when many homebuyers who had purchased homes they could not afford, particularly with subprime mortgages, went into foreclosure.
The housing market collapse was a major contributor to the Great Recession, which resulted in a dramatic loss of jobs and made the housing collapse even worse. In late 2009 and early 2010, the federal government tried to prop up the housing market with a homebuyer’s tax credit. First time homebuyers received an $8,000 tax credit and repeat homebuyers received a $6,500 credit for home purchases if a binding sales contract was signed by April 30, 2010.
The tax credits helped boost home sales. In southeastern Wisconsin, home sales were up 14.4 percent during the first half of the year.
But once the tax credit ran out, the housing market went back into a major slump. For all of 2010, home sales in the metro Milwaukee area were down 13.4 percent, according to the Greater Milwaukee Association of Realtors (GMAR).
“After the tax credits expired at the end of April, the market took a precipitous decline during the summer,” said GMAR president Mike Ruzicka.
Even worse, home values remain way down. Seattle-based residential real estate industry tracking firm Zillow Inc. recently said that its Zillow Home Value Index for the U.S. housing market has fallen 26 percent since its peak in June of 2006.
“That’s more than the 25.9 percent decline in the Depression-era years between 1928 and 1933,” said Zillow spokeswoman Katie Curnutte. “November marked the 53rd consecutive month of home value declines.”
In southeastern Wisconsin, home values improved a bit in 2010, but are still well below the market’s 2007 peak. The average home sale price in the eight-county southeastern Wisconsin area was $185,792 in 2010, up 3.2 percent from $179,970 when the market hit bottom in 2009 but still down 18.2 percent from the $227,165 peak in 2007.
Homeowners and residential real estate professionals are hoping for improvement in 2011, but it will probably be a long climb out of the hole dug by the housing collapse.
“There are two clouds on the horizon that are limiting a faster recovery,” Ruzicka said. “The first is overly tight credit, making it difficult for creditworthy borrowers to qualify for a mortgage. A return to common sense loan underwriting standards would go a long way toward achieving responsible, sustained homeownership. Second is the number of appraisals coming in below a price negotiated between a buyer and seller. Too many appraisals fail to provide accurate valuation, which is causing a steady level of sales to be cancelled or postponed.”
However, the high unemployment rate and the still high number of foreclosures could be even bigger factors that will continue to hamper the housing market. The U.S. unemployment rate is at 9.4 percent, and the state’s unemployment rate is at 7.6 percent.
There were 24,614 foreclosures in Wisconsin in 2010, according to University of Wisconsin-Whitewater professor Russ Kashian, who tracks foreclosures in the state. The state had 28,725 foreclosures in 2009. But the 14.3 percent decline in foreclosures in the state last year is largely attributable to problems that banks had with paperwork, resulting in temporary moratoriums on foreclosures.
“That’s like water building up behind the dam,” Kashian said. “Those cases still need to be rectified.”
From 2002-05 foreclosures in Wisconsin averaged 10,816 per year, which is only 56 percent of the 2010 foreclosure level.
Forecloses in the state will be at or slightly above the 2010 level, Kashian predicts.
“The underlying problem, which is that people are underwater on their mortgage and they can’t sell, will continue as long as there is high unemployment and until property values increase,” he said.
But the foreclosures themselves are largely responsible for the depressed property values, creating a vicious cycle that helps lead to even more foreclosures.
The foreclosure situation will probably not improve in the state until 2014 when the population will have grown enough to absorb the excess housing supply, Kashian said. In some cases homes that cannot be sold will be demolished and removed from the housing supply.
“It’s going to be a painful couple of years,” Kashian said. “I look at these numbers every day and I get depressed. (But) eventually these homes will be absorbed and we will get back to equilibrium.”
Home construction is down significantly in the metro Milwaukee area. There were 859 residential building permits issued in 2010, up 2.8 percent from 2009 but down 71.3 percent from the peak of 2,998 permits in 2004, according to data from Oshkosh-based MTD Marketing Services of Wisconsin Inc.
Home builders are expecting modest improvement this year, said Rick Hodges, executive director of the Metropolitan Builders Association.
“We think we’ve leveled off and bottomed out,” he said. “Certainly people are looking forward to a better year in 2011.”
Anecdotally there are signs of increased interest from buyers and plan for more home building projects, but it’s spotty, Hodges said.
“We think sales will be up 10 percent this year, but that’s 10 percent from the bottom,” he said.
The dramatic decline in new home construction is necessary to help bring the housing market back into balance, Kashian said.
“I’m amazed any (builder) would even be in the Parade of Homes,” he said.
But Hodges said southeastern Wisconsin’s residential real estate market does not have an oversupply supply that is even close to the biggest housing bust markets, such as Arizona.
“It’s not as significant of a problem here,” he said.
