Residential Market Makes Corrections

Bankers, brokers and builders are not lining their pockets as fast as they did during the last two years in the residential real estate market.
But money still is rolling in as more than $1 billion in homes sales have been closed through the first three quarters of 2006 in Benton and Washington counties. Fueled by low interest rates, only two other years — 2004 and 2005 — surpassed the $1 billion mark.
Most business people in this market say — and statistics back it up — that 2006 is more like 2003, when all involved in the residential real estate market were living very lucrative lives. That’s more like comparing apples to apples, since 2004 and 2005 were record years in Northwest Arkansas and nationally.
In fact, 2006 will surpass 2003 and maybe even 2004 in the number of homes sold in the two-county area. It should be at the very least the third best year ever despite grumblings from some who were banking on bigger returns.
“This year, our company is going to be more like 2003 and 2004 numbers,” said Pat Harris of Harris McHaney Realtors, which had more (105) million-dollar producers in 2005 than any real estate agency in the market. “I remind people that in 2004, we were all doing high-fives in the hallways and we also were very happy in 2003.”
Sales may be on track, but the obvious problem, everyone agrees, is the oversupply of lots and unoccupied homes.
Empty houses have more than doubled in the last year (from 1,257 in the two-county area in the third-quarter of 2005 to 2,956 in the third-quarter of 2006), according to the Skyline Report that’s published by the Center for Business and Economic Research at the University of Arkansas’ Walton College of Business and is commissioned by Arvest Bank Group Inc.
When interest rates dipped, home sales skyrocketed. The flood included rising price points, new Realtors in the market and ambitious developers who kept snatching up property and building homes as if the market would never slow down.
It has.
Bankruptcies and foreclosures have been filed, but most are making all their payments.
Rumors have run rampant. Some true, some not.
A target has been on Tom Terminella’s back since early summer. Rumors about the real estate mogul have ranged from him filing for bankruptcy to fleeing the country.
Neither are true, he said. He has made every payment and only heads south of the border for deep-sea fishing.
Like most developers, Terminella has been affected by the market’s slow down, but the gossip cut much deeper.
“This has been challenging times for myself and for my family,” Terminella said. “But we’ve seen some positive signs that have us encouraged and we feel like the market is starting to move upward again and will recover.”
Terminella declined to disclose exact numbers, but did say his company sold lots and homes at a faster clip during September and October than during the same period of 2005.
Others are reporting similar successes, while admitting the slowdown over the past six months has resulted in a market “correction,” with the number of housing starts falling while the number of homes purchased plays catch-up.

Who’s To Blame?
Fingers have been pointed in many directions as far as where to place the blame on the market’s need for a correction.
Builders and bankers went crazy during the last half of 2005, when it seemed the market would never slow. Outside investors entered the market in droves and began gaining approvals for new subdivisions, mostly in Benton County where there’s been an increase of 229 percent of complete, but unoccupied homes from the third quarter of 2005 to the third quarter of 2006, according to the Skyline Report.
Interest rates were low, which affected both supply and demand as buyers kept buying and builders kept building.
But most blame the local media’s negative spin on national numbers that don’t paint a true picture of the real estate market in Northwest Arkansas. It also doesn’t help that statistics comparing last year’s record numbers to this year’s average numbers are released each month by the Arkansas Realtors Association.
When using those comparisons, it’s easy to see why a few have been pessimistic.
But most believe the sky is not falling anytime soon and as interest rates stay flat, they expect home sales will continue to improve.
A few builders, like Bill Lazenby and Tim McMahon, have been relatively unaffected by the negative press.
Lazenby said his firm, Lazenby Real Estate Co., did not sell a home for about two or three weeks after the negative news first surfaced about a year ago. He’s been protected for the most part because all of his developments fall in the “affordable” price range, a market that continues to thrive by all accounts.
“We were doing well in all of our developments, from Elkins to Pea Ridge,” Lazenby said. “Then the next thing you know, there’s all these reports about how bad everything was and how builders were going broke. It was mostly national reports that were being picked up by the local news even though trends in New York City or [Los Angeles] usually don’t affect us here.
“It scared a lot of people and everything just stopped there for a while, but sure enough, they started buying again.”
Sales for McMahon’s company, McMahon Bros. Custom Homes, slowed somewhat after “peaking” in 2004 and 2005. However, the company’s numbers still are remarkable as it has closed on more than 30 homes at an average price of $550,000 this year. Last year, it closed on 42 homes at an average price of $525,000.
The company also hasn’t had the problem others have had with an oversupply, since the company truly builds custom homes for each buyer. In fact, McMahon has only one of the 2,304 unoccupied homes in Benton County that he uses as a speculative home.
McMahon also points out that a number of homes sold during those record years were skewed because some were sold to investors and not to individual buyers. Entire subdivisions are now owned by investors who are using the homes as rentals, he said.
“We did slow down, but now we are seeing more normal rates,” said McMahon, whose company has averaged 25 closings per year since 1992. “It was consumer sentiment that the media was actually fueling by the way they were reporting everything. What they were doing is saying, ‘The sky is going to fall, but it hasn’t fallen yet. Wait until it’s finished falling or wait for that bubble to burst and then buy.’
“But obviously, the bubble hasn’t burst and what the numbers are saying that we are seeing is that it really isn’t going to burst.”

Positive Signs
Proof the market is not in a free-for-all fall can be seen in a number of market indicators such as the expansion of Crye-Leike Realtors — the nation’s sixth largest real estate company — into the market.
With a branch office already opened in Rogers and another in the planning stages in Fayetteville, Harold Crye obviously believes the Northwest Arkansas market is in decent shape.
“If things are down around here, you better go tell somebody because every time you turn around, there’s another crane building something,” said Crye, the CEO and co-founder of Crye-Leike. “So somebody needs to get the word out that things are down and they need to slow down, because everything we are seeing looks positive.”
While not the banner years of 2004 and 2005 (when an average of 8,183 homes were sold each year in Benton and Washington counties), this year has produced solid numbers with 5,949 homes sold through the first three quarters.
That’s an average of 661 units sold per month, which would put 2006 in the 7,900-range by year’s end, well ahead of the 6,413 units sold in 2003. If that holds true, 2006 could even surpass the 7,731 units sold in 2004, which was the second-best year on record.
John David Lindsey of Lindsey & Associates Inc. in Fayetteville, said his company is experiencing similar improvements. And his firm should mirror the rest of the market since it was No. 1 with $704 million in revenue reported in 2005.
“We’ve had a little bit of a lull here in the last three or four months, but it seems to me that it’s picking up right now,” Lindsey said. “We should come in a little bit above where we were in 2003.” (The firm reported revenue of $555 million that year.)
“There’s still a whole lot of people moving here and those people are going to continue buying houses,” Lindsey said.
According to the Skyline Report, population in the two-county area rises by about 1,100 per month, which accounts for births and people moving in. The report also tracks employment growth, which has continued on a similar trend over the past five years.
“That’s why it is a great idea to compare 2003 to 2006 in the residential real estate market,” said Kathy Deck, associate director of CBER. “Because ’04 and ’05, while spectacular, are just not the norm.
“And as far as people moving here and being employed, it’s looked as good as it has for the last five years.”