The residential real estate market has been in a funk since the housing market collapsed in 2007, a major contributor to the Great Recession. The number of homes sold, and the value of those homes, has decreased significantly in recent years. Many homes went into foreclosure during and after the recession, which has contributed to declining home values.
In late 2009 and early 2010, the federal government tried to prop up the housing market, a critical component of the economy, with a homebuyer tax credit. First-time homebuyers received an $8,000 tax credit and repeat homebuyers received a $6,500 tax credit for home purchases if a binding sales contract was signed by April 30, 2010.
The tax credits gave the housing market a temporary boost. In southeastern Wisconsin, home sales were up 14.4 percent during the first half of 2010.
But once the tax credits 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).
There are some signs that the housing market is improving this year. Home sales on a month-to-month basis have been improving every month. Home sales are behind last year’s pace, but last year’s sales were artificially inflated by the tax credit. For the first five months of the year, the number of homes sold in the four-county metro Milwaukee area were down 18.9 percent, according to the Wisconsin Realtors Association.
“Sales in the first half of the year were expected to be lower than last year because of the impact of the federal homebuyer tax rebate program,” said John Horning, executive vice president of Brookfield-based Shorewest Realtors. “That program front-loaded sales last year because buyers had to close their homes by the end of June 2010 to quality for the tax break. It’s going to be several months before we can reliably use monthly sales data to reflect market conditions.”
The second half of 2011 should be much stronger than the second half of 2010, residential real estate experts say. Sales fell off dramatically in the second half last year after the end of the tax credits, but appear to be gaining steam this year.
Shorewest’s written business was up 41 percent in May and 44 percent in June, which should lead to more closings in July and August, Horning said.
“I would think by the end of the year we will probably be even to last year (in total sales),” he said.
Realtors say they expected sales to pick up in June and July, said Mike Ruzicka, president of the Greater Milwaukee Association of Realtors. June data was not available at press time. Ruzicka predicts an uptick in sale for the second half of this year that should push 2011 sales ahead of 2010.
“I expect this year to be better than last year,” he said. “Hopefully, last year was the low point.”
Buyers are starting to notice that low interest rates and low home prices make this an ideal time to buy, Horning said. However, some are trying to time the market, waiting for prices to bottom out and others are not confident enough in the economy, or the security of their own jobs, to buy a home at this time. The state’s 7.4 percent unemployment rate and the U.S. 9.1 percent unemployment rate likely need to come down significantly to bring more buyers into the residential real estate market.
A major problem for the housing market is that it is now much more difficult for home buyers to obtain mortgage financing from banks, Ruzicka said. Increased government regulation is putting more pressure on banks, which have dramatically increased standards for loan approvals, he said.
“(Financing) is the cork in the market right now,” Ruzicka said. “The underwriting process is where the problem is now.”
The slumping housing market has dragged down the value of homes. The median price for a home sold in the four county metro Milwaukee area during the first five months of the year was $146,000, down 9.9 percent compared to $162,000 during the first five months of 2010.
The surge in foreclosures during and after the Great Recession has been a major contributor to the decline in home prices. There were 24,614 foreclosures in Wisconsin last year, according to University of Wisconsin-Whitewater professor Russ Kashian, who tracks foreclosures in the state. So far this year foreclosures are down 20 percent in the state, but that is still well above the normal pace, Kashian said.
Also, there is likely a backlog of foreclosures as banks have slowed the process to clear up documentation problems, he said.
“(Banks are) just being careful so they don’t get sued,” Kashian said. “I believe there is a backlog now that we’re not seeing and there is water backing up behind the dam.”
After the foreclosure crisis passes, the housing market will be hit by a wave of homes that owners are waiting to sell when the market improves, Kashian said.
“Even when we get through this, the real estate market will suffer for a long time because there is a shadow inventory of people waiting for the market to turn so they can sell,” he said. “There are still a couple of years of inventory waiting to be sold right now that we don’t know about.”
Home prices will probably remain flat for the rest of the year, Ruzicka said. There are not any emerging factors to drive a change in prices because as there is a lack of new product coming on the market and the number of buyers remains steady, he said.
Housing construction boomed in the U.S. during the early and mid-2000s until the bubble burst in 2007. In the metro Milwaukee area housing starts peaked at nearly 3,000 in 2004 and declined steadily until 2009 and 2010 with about 850 housing starts each year.
During the first five months of 2011 there were only 345 housing starts in the metro Milwaukee area, down 12.7 percent from the first four months of 2010, according to Oshkosh-based MTD Marketing Services of Wisconsin Inc.
The lack of new home construction has been devastating for home builders and the construction industry, but the lack of home building has helped to reduce the glut of housing on the market, created during the housing boom years.
“We’re creating a lack of supply,” Ruzicka said. “Hopefully sometime in the future we get some more buyers into the housing market that will drive up prices.”
In May the metropolitan Milwaukee housing marketplace had 11.0 months of inventory, down from 17.9 months of supply in February.
“The market is returning to a more balanced level,” Horning said.
