Ariesa Wortelboer and her husband, Mike are hoping to upgrade to a new home in South Jordan in the spring after their first child is born. And although they have equity in their current home, the excessively high land prices in new development are limiting their ability to actually build the home they want to raise their children in. They are asking themselves what kind of compromises they are willing to make, such as an unfinished basement or a smaller yard for their kids to play in. They may even just wait it out and not buy a new home for the next few years.
The Wortelboers are not alone. For many potential homeowners in Utah, the biggest problem they are facing is finding affordable housing. Rick Beard, president and CEO of Bank of American Fork, who’s primary business is loans to commercial residential developers, agrees. “A couple of years ago you could buy ground in Saratoga [Springs] for somewhere in the $70,000 to $80,000 range, but now it’s in the $120,000 to $130,000 range. Dirt is more expensive now.”
With the average price of a home (including the lot) in a new development between $350,000 to $800,000, most first-time homebuyers and young families simply can’t afford them. This trend has left Utahns with some alternatives, including condos and townhomes as well as higher density housing communities.
Hamlet Homes has addressed the affordability issue by offering urban townhomes to buyers. “We started with one community in Murray – Inverness Square – that was our test cast,” explains Dave Irwin, vice president and director of marketing for Hamlet Homes, which specializes in livable communities. “It was our first urban community that proved there was a niche. It just bodes well to be building condos for $190,000 to $230,000 rather than single family homes for $400,000.”
And from a lending perspective, Beard sees the move as a necessary and positive change. “There are a lot of people who need homes but they can’t afford to buy the homes that are on the market. If you can build and sell homes in the $180,000 to $200,000 range, there’s a real market for that. This market correction will force banks and developers into the types of property that people can afford so you are going to see more multi-family housing. That’s how you bring the price down.”
Hamlet’s test case proved that there is a growing niche for urban communities and mixed-use developments with smaller floor plans (typically two bedroom, two bath) located closer to the city where residents enjoy less maintenance, less commute and more lifestyle. Just two years ago, Inverness Square was the only urban community out of the company’s seven communities and represented 20 percent of Hamlet’s sales. In 2007, the more affordable urban community properties represent approximately 40 percent of sales.
A Buyer’s Market
For those lucky enough to still be in the market for a $350,000-plus home in a desirable community, now seems to be the time to buy. Developers are continuing to sell off inventory built before the sub-prime lending crash and are offering a variety of discounts to move those homes. “We don’t have a high level of inventory because we watch that pretty carefully,” explains Irwin. “We are moving through that by offering incentives and discounts. I’ve offered free finished basements, I’ve offered four months with no mortgage payment, I’ve offered $20,000 in price reduction.”
And Hamlet Homes is not alone. A quick glance through The Salt Lake Tribune or Deseret News’ real estate sections will find ads offering anything from vacations to a free car with the purchase of a new home in any number of new developments. But the real question: Is it working? Irwin says that for the first two months after the sub-prime debacle he had little response to his discounts, but by late October, buyers were back on the market and the deals were getting people into new homes. “There are some buyers that are coming back out because they are recognizing and taking advantage of the deals,” Irwin explains.
Cash Flow Crunch
While individual homeowners have made most of the headlines since the sub-prime fallout, based on the incentives and discounts being offered, speculators and developers are feeling the crunch as well. Bank of American Fork deals primarily with developers of subdivisions – many of whom lost as much as half of their customers to sub-prime loans – either the buyer could no longer qualify for the loan they needed or those who had existing homes to sell before moving into the new development could not sell their property.
“We had about a 25 percent fallout from the initial two months of the sub-prime problem where people who would have normally qualified couldn’t,” recalls Irwin.
This fallout of potential customers put a strain on the liquidity of many developers, says Beard. “Nobody is buying those lots but the developers still owe the bank on their short-term loans and they don’t have any cash to pay back the loans. So what they will do is try to extend those loans out and give themselves time to liquidate the lots that they’ve developed. If there aren’t buyers for those lots then, at some point, they will go into a default. The reality is extensions are up fairly dramatically this year.”
These factors have all culminated to bring to the forefront one underlying question: Is the Wasatch Front market overbuilt after several years of record breaking growth?
The answer: Yes and no.
Irwin’s Hamlet Homes properties (both single family and townhomes) are staying on the market for an average of 60 to 70 days. Because the national average is 90 days, this indicates that there are still enough buyers to account for the standing inventory. Beard approaches the question from another angle and says that while there is an excess of expensive homes, there is a lack of affordable homes, so the real issue is finding a balance to meet the needs of the market.
“We have increasing population growth and we have an influx of people moving to Utah,” he says. “Assuming they don’t want to live in tents, they have to live somewhere. So what you are going to see is apartment vacancy rates going down and people looking to get into homes. The affordable market is going to be a hot market if people can figure out how to tap it.” The bottom line is that developers will continue to develop, but the types of properties they build will include smaller, more affordable options.
The Bureau of Economic and Business Research at the University of Utah reports similar findings. While building permits for single family homes have dropped to levels not seen since the late ‘90s and early 2000s, permits for condos and townhomes have risen dramatically in the last year.
Additionally, Beard and Irwin both see a time in the near future where the state’s strong employment rate and the influx of people moving to Utah will finally culminate to drive up the mean salary closer to that of the U.S. average. This bump will help bridge the gap between what people can afford and what the market is offering.
Higher Density Housing
One trend that is hard to miss in many of the new single-family developments across the valley is the relative size of the home compared to the lot. While average new homes are regularly in the 2,000 to 2,500 square foot range, lots are often the same size as those holding 1,400- to 1,700-square-foot existing homes.
According to Irwin, there are a number of reasons for this change and similar solutions are being employed across the country. “Historically, the traditional product was a fairly decent size home site with an average square foot home. As land costs continued to go up, infrastructure within the cities continued to be tapped, and the sprawl further out into the suburbs ate up valuable land, it became necessary to go for some higher density.”
While most Wasatch Front cities resisted the trend initially, many are now welcoming higher density communities to address the need for housing while at the same time easing the burden on city resources. Irwin continues, “If a builder puts in 100 homes in 100 acres versus 100 homes in 50 acres, that just means more roads, more use of space, more street lights, more city services. We’ve always had a value approach where we have thought that the consumer would have tradeoffs, and a smaller yard with less maintenance was a decent tradeoff for some affordability.”
What Does the Future Hold?
According to most experts, Utah will fair better than a lot of other states in the aftermath of the sub-prime lending problem.
Beard concludes, “Utah is not going through the price correction pain you are seeing going on in the coasts and hot real estate areas. I do think you are going to see some price correction and I think how bad it is depends on how bad the public and the world perceive the credit crunch. We are going to see some of the pain; I don’t think it’s going to be as deep as the rest of the nation and I think we are going to see it go back up at that point.”
Irwin and Hamlet Homes have already adjusted their expectations based on what they’ve seen in the last quarter of 2007.
“We have a completely revised our six-month business plan based on the current market and conditions. We are much more selective on starting inventory homes – we are starting a few because we do want to keep construction moving, but at a much more cautious number. Now that the building industry has adjusted, the level of spec inventory is being sold off and people who have a home to sell have readjusted their expectations or lowered the price, I think people have put everything behind them and psychologically they’ve forgotten about all the woes and scares of this fall. They will brush that off and say, ‘We are back to normal life’ and we will see a healthy level of activity at a reduced level.”
Home Loan Woes
Sub-prime loans are dead. It’s a fact, and whether you were in the home buying market or not when the sub-prime loan debacle occurred in the second half of 2007, you know someone who was affected and is likely still feeling the pain today.
Buyers in the middle of deals found themselves on one end of the phone with a recording saying that their lender no longer existed. Homeowners with ARMs (adjustable rate mortgages) saw their interest rates (and corresponding payments) rise at exorbitant levels and the more reasonable refinancing options they were promised when they signed the papers were no longer available. Record numbers of homeowners went into default and eventually foreclosed. “There is a noticeable increase in defaults and a noticeable increase in foreclosures where people just can’t get through this period,” explains Rick Beard, president and CEO of Bank of American Fork.
Utahns felt the burden as the state was ranked 16th in the nation for foreclosure rates. However, according to data from RealtyTrac, one of the nation’s largest online real estate sites, actual foreclosures in Utah are down 2 percent from the same time last year and all filings within the state account for less than 1 percent of foreclosures nationwide. Pockets of the state have been hit harder than others, however. Tooele County, for example, is seeing foreclosure rates at 2.3 times the state average.
But some suggest that the Utah market had already reached the breaking point and simply needs a trigger to bring it back down to reasonable levels. “During 2007, appreciation hit the high that it could go and people could still afford to buy, and out-of-state investors started to drop off because they were not having good results from other parts of the country. It’s like a rubber band that was finally stretching to its elasticity and it just needed something to snap it. That something was the sub-prime market collapse that was nationwide,” explains Dave Irwin, vice president and director of marketing for Hamlet Homes.
The reality of home loan financing is now this: 100 percent financing/0 percent down and even 80/20 loans no longer exist. Unless your credit is good to great and you have a minimum of a 5 percent to 10 percent down payment in the bank, homeownership is out of reach – at least for the short term.