January 2012
 |
Stephen Malpezzi
Department Chair
This article appeared in the January 2012 issue of Real Estate Magazine, published by the Wisconsin Realtors Association. |
By Stephen Malpezzi
Loren and Marjorie Tiefenthaler Professor,
James A. Graaskamp Center for Real Estate
Readers of a certain age will know our title, one of the most enduring quotes from baseball great, philosopher, and life-long learner, Lawrence Peter ("Yogi") Berra.
For the past few years I have shared some of my views about the state of Wisconsin's and the nation's housing market with the readers of Wisconsin Real Estate. My main points in recent Januarys can be summarized as follows:
Housing prices had gotten out of line with fundamentals (incomes, rents, interest rates etc.) in Wisconsin as in much of the nation, circa 2005-6, though less so in major Wisconsin markets than in much of the rest of the country; that despite our relative stability, we weren't immune from some correction, and from the recession and slow-growth economy that's gripped most of the country. I noted that by last year, house prices were largely back in line with fundamentals; though we might see some additional price weakness, as long as buyers were looking to hold rather than flip for short term profits, low rates and reasonable prices meant buyers could come back into the market with some confidence.
Well, a year later, following Yogi's dictum: house prices are still largely back in line with fundamentals; though we have seen some additional price weakness, buyers looking to hold rather than flip for short term profits have taken advantage of low rates and reasonable prices. And that's also not a bad summary of the outlook for this coming year. In other words, "déjà vu all over again."
"You can observe a lot by watching," said Yogi, and like most of Wisconsin Real Estate's readers I keep a close eye on housing price data. Figure 1 shows the WRA's median house prices, for selected metro areas and counties. The data are quarterly, are not seasonally adjusted, but are adjusted to 2011 dollars, as Professor Berra recommends when he notes "A nickel ain't worth a dime anymore." The grey area indicates the time during which the First-Time Homebuyer Credit was in operation, from 2008Q2 to 2010Q3.
Nationwide, through 2006-2009, the National Association of Realtors median house price fell 8.2 percent (adjusted for background inflation); prices then stabilized, relatively speaking, falling by about half a percent in 2010 and again in 2011. In Wisconsin, though experience in some individual markets varied, the decline 2006-2009 was a little softer, 5 percent or so; the 2010 decline was about the same as the national, 0.5 percent; but last year's state decline was a little steeper than the national average, 1.5 percent for Wisconsin as a whole.
This same qualitative picture was found in most of our major markets: (A) substantial decline from 2006 to 2009, albeit at rates below the national average; (B) relative stability in 2010; and (C) a bit more decline (or smaller increase) in 2011. In Milwaukee metro, real prices declined 4.6 percent 2006 to 2009; they fell 0.4 percent in 2010; and fell 3 percent in 2011. Madison's comparable numbers were -4.9, +2.1, +0.7; Green Bay's -4.8, +1.0, and +0.7; Eau Clair's -3.6, +2.5 and -3.4.
"In theory there is no difference between theory and practice. In practice there is." In (one) theory the First-Time Homebuyer Credit was supposed to stabilize the housing market. In practice, at first prices appeared to fall faster, possibly because in early days transactions were held back to await the credit; and in many markets the first quarter or two after the end of the credit saw another sharp decline, as sales were moved to take advantage of the credit. In the end, it's hard to prove exactly how much effect the credit had on the market, though the one positive impact I can confidently predict is that it will provide fodder for dozens of PhD dissertations and research papers over the next few years as we try to figure out whether it did matter.
"When you come to a fork in the road, take it." Compared to some markets, especially in the "sand states," we in Wisconsin borrowed and lent more conservatively, and our land use and development regulation, while not without problems, has been less extreme than some of the coastal markets, especially in California. Our demand pressure from income and population growth has been solid rather than overheated. Most of the statistics regarding defaults and foreclosures put Wisconsin well below national averages. For example, according to our colleagues at the Mortgage Bankers, in April 2011 about 1.6 foreclosures were started in Wisconsin, compared to 1.7 for the U.S. as a whole, 4.2 in California, 4.9 in Arizona and 10.3 (!) in Nevada. So while we might be less than thrilled with the past year, homeowners in California, Arizona, or (shudder) Nevada would see a one or two percent real decline in house prices as a real turnaround in their markets.
Figure 2 gives one rough-and-ready look at these regional differences. We compare Wisconsin's two largest markets, Madison and Milwaukee, to California's capital. To crudely control for income differences we divide each annual median house price by the Bureau of Economic Analysis' per capita income for each metro area, year by year.
By this rough comparison, Wisconsin's boom in the early 2000s, and the subsequent bust, were and are quite modest. But as I've argued before, and still maintain, we should not be complacent, not least because Sacramento (and the markets it represents) is our problem too. We may have been spared the worst of the housing excesses of the previous decade, but we've been hurt by the national recession that transmitted the pain from California and Nevada to the rest of the country and indeed the world. Still, statewide, our income drop has been lower than average. Wisconsin's real per capita income fell 0.2 percent from 2007 to 2010, according to BEA; national real per capita income fell 1.2 percent during that period. California fell over 4 percent, and Nevada 12 percent! But if you are in a market that's taken above-average hits to employment and/or income (such as Janesville or Racine), or you are in the construction industry, your recent experience was probably not so sanguine.
"You have to give 100 percent in the first half of the game. If that isn't enough, in the second half, you have to give what is left." Yogi must be disappointed in our inability to grapple effectively with some of the challenges we've been presented, on the policy and political fronts. As we've argued repeatedly from the Graaskamp Center, in the short run, effective remedies to handle distressed sales and the foreclosure overhang are needed to help right the housing market, and the overall macro economy. (See http://wisconsinviewpoint.blogspot.com/search/label/WI-FUR). And in the long run, we have to do a better job at tackling our fiscal problems, on both the spending and tax side http://wisconsinviewpoint.blogspot.com/search/label/economic%20crisis). So far, it's been one strikeout after another, and a lot of dropped fly balls, by both the Administration and Congress, on both sides of the aisle.
What will next year see? "I wish I had an answer to that because I'm tired of answering that question," says Yogi. Well, I'm not so tired, though my answer is much like last year's. In the end we're back to prices at or near fundamentals; employment is growing, albeit slowly; the biggest short-run risk is still the foreclosure overhang, and another year has passed without effective action. I see another year of flat-to-modest growth in housing prices, with some downside risk if a big chunk of the "foreclosure glut" hits the market, though this will be less of a problem here than in the "sand states." If we did see further declines, these would, in the main, be temporary overshooting until we work through the foreclosures and other distressed sales. If we can keep economic growth positive and slowly bring down the rate of unemployment, that will be another big plus for our industry (to say nothing of a huge plus to the firms and workers concerned!) Potential homebuyers who will be in place for five years or more, who can qualify for a conservative mortgage designs at today's low rates will find it a good time to buy. But we should end every economic outlook discussion with another lesson from Professor Berra: "It's tough to make predictions, especially about the future."