New Home Construction Gives Off Mixed Signals (Opinion)

Economists place significant attention on the residential sector of the real estate market due to its overall importance to economic recovery. New home construction is an important indicator.

Research by Streetsmart NWA supports that residential (single-family and duplex) building permits issued in the second quarter of 2010 in Washington County totaled 141. The total for the same period in 2009 was 148 with a year-over-year decline of 4.7 percent. Fayetteville and Springdale, as expected, were the two leading cities in Washington County in the second quarter in number of residential building permits issued. Fayetteville reported 78 permits issued, with Springdale reflecting 34. However, both cities experienced a decline from the same period a year prior, when Fayetteville had 80 residential building permits and Springdale 41. In the second quarter of 2010, the next-highest total of residential building permits issued was in Prairie Grove with 7.

With respect to Benton County, total residential building permits issued in the second quarter of 2010 were 242. This represented a significant increase (more than 50 percent) from the second quarter of 2009, when total permits were 161. Rogers and Bentonville reported 72 and 67 residential permits, respectively, in the second quarter of 2010. This represented a year-over-year increase of 15 permits for Rogers. However, Bentonville had the same number of permits issued as in the second quarter of 2009.

Other leading cities in Benton County for the second quarter of 2010 were Bella Vista (23 permits), Centerton (23 permits), Lowell (17 permits) and Siloam Springs (17 permits). Each of these four cities experienced a significant percentage increase over the same period in 2009.

Overall, the two-county area experienced a year-over-year increase of 23.9 percent in the number of residential building permits issued between the second quarters of 2009 and 2010. Obviously, we look at this as encouraging news, and it is. However, a look back to 2007 numbers puts this into perspective. In the second quarter of 2007 the total number of residential building permits issued in the two-county area was 696, based on our research. Comparing this to the second quarter of 2010 number reflects a decline of about 45 percent. Further perspective on the magnitude of the decline is gained by looking back at the yearly total for the two-county area in 2007, and comparing this number to the yearly total for 2009. The overall total number of residential building permits issued in Benton and Washington counties in 2007 was 2,296. The 2009 total was 1,131.

In the second quarter of this year our research shows there were a total of 452 single-family homes under construction (includes starts) in Benton and Washington counties. Benton County experienced a year-over-year increase of 23.5 percent while Washington County saw a year-over-year decline of 11.7 percent.

Overall, the two-county area experienced a year-over-year increase of 8.4 percent. Again, this is encouraging. However, in reality, new home construction has been anemic for several consecutive quarters in the Northwest Arkansas area.

We continue to be in a positive interest rate environment. Also, home building costs are favorable. Marshall Valuation Service, a leading construction cost provider across the county, indicates single-family construction costs for wood frame structures decreased about 2.6 percent between the seccond quarters of 2009 and 2010. Adding lower lot costs to the equation results in what would appear to be a bright picture for new home construction. Offsetting factors are competing single-family foreclosures, and the overall employment situation. Research indicates bank-owned homes in active subdivisions in the two-county area sold at an average per square foot price discount of almost 30 percent in the second quarter of 2010, compared to non-bank owned home sales in active subdivisions. It is obvious a return to consistent positive year-on-year growth in non-farm employment is critical to improvement in new home construction numbers. 

Tom Reed is a partner in Streetsmart NWA, which produces reports pertaining to the residential, multi-family, and commercial sectors of the market. Company offices are located at 2804 Main Street, Suite C, Fayetteville, Arkansas. The phone number is 479-575-9100.