Residential Market Beats U.S. Trends, Oversupply Remains (Market Forecast by Tom Reed)

Streetsmart NWA produces quarterly reports pertaining to the real estate market in Benton and Washington counties. The reports focus on the single-family residential, multifamily residential and commercial sectors of the market.

Current economic conditions are obviously very trying. It seems that each time we watch or listen to a news commentary, or read the business section of a newspaper, continued deterioration of the economy is the focal point. In Northwest Arkansas past belief is that we were somewhat isolated from problems in the national economy due to our strong economic base. However, we have now found this not to be the case. While the downturn here may not be as severe as in the majority of the country, it is still significant.

A good example is the local real estate market, particularly the residential sector. There has been a persistent softness in the national residential market. The S&P/Case-Shiller Home Price Indices (20 city index) reflects that the average U.S. home lost 16.6 percent in value between August 2007 and August 2008. Twelve of the 20 markets surveyed indicated double-digit declines. In the Benton/Washington county market between the third quarter of 2007 and the third quarter of 2008, based on Multiple Listing Service data, the decline in the median home price was indicated to be approximately 7.8 percent.

The decline nationally in price is the result of several factors, including job losses and oversupply of product.

In Benton and Washington counties, based upon the most recent data reported, there is still year-on-year positive job growth.

This cannot be said for the country as a whole. In addition, based on census data, we experienced net population growth in the two-county area at just under 1,000 people per month between mid- 2006 and mid-2007 (recent evidence supports a decrease in this number).

While Benton and Washington counties as a whole are off peak job and population growth rates by at least 70 percent and 20 percent, respectively, growth is still occurring. The primary issue in the Northwest Arkansas market is an oversupply of product.

Job and population growth must continue for the existing supply of residential and commercial real estate to be absorbed.

In the residential sector of the market the absorption timetable can be estimated by considering current supply, projected annual household growth, and the historical percentage of home ownership in the two-county area.

Current supply includes empty lots in final platted subdivisions, dwelling starts, dwellings under construction, and dwellings complete but not occupied.

Existing, older dwellings that are currently vacant could also be included as well as vacant condominium and townhouse units.

Based on our third quarter 2008 research, the total supply figure in the two-county area appears to slightly exceed 19,000. This does not include the vacant older dwellings or vacant condominium/townhouse units. However, this is offset by the fact that part of the empty lots in final platted subdivisions actually don’t make the market as they represent projects that should never have been completed.

Based on census data, projected annual household growth in the two-county area over the next five years is 6,152. Some 62.3 percent of the total housing units in Benton and Washington counties are indicated to be owner-occupied.

This would support annual demand for housing of approximately 3,833. Given the current supply, slightly over a five-year absorption period is indicated. This is at least twice what the absorption period should be, however it reflects a better outlook than what the majority of growth markets in this county are facing.

Obviously, the key is whether the projected annual household growth is accurate. A reduction in this number results in an increase in the forecasted absorption period.

(Tom Reed is a partner in Streetsmart NWA. Company offices are located at 2804 Main Street, Suite C, Fayetteville. The phone number is (479) 575-9100.)