As we near the midpoint of 2010, foreclosures continue to serve as a major drag on residential real estate in Georgia, keeping the market from breaking out of the doldrums.
These doldrums were reflected in the most recent home price report from the National Association of Realtors, which showed that the median sale price for existing single-family homes in Atlanta dropped 10 percent between January 2009 and 2010—from $116,300 to $105,100. This was the biggest drop among the 20 major metropolitan areas surveyed by NAR.
Foreclosures and other distress sales are one of the main reasons for the ongoing declines in home values. At the end of 2009, 2.68% of all housing units in Georgia were in foreclosure, according to statistics compiled by RealtyTrac—up about 24% from the end of 2008, 80% from the end of 2007 and a whopping 170% from the end of 2006.
This was the seventh highest foreclosure rate in the U.S., about a half-percent higher than the 2.21% rate for the nation as a whole. The highest foreclosure rates in Georgia were in Newton (7.42%), Walton (6.46%) and Henry (6.02%) counties.
When Will It End?
OK, enough looking back at all the gloom and doom! What everyone wants to know is when will the foreclosure wave end? At the risk of piling on more gloom and doom, most experts say don’t hold your breath.
“My prognosis is not particularly good,” says Alan Ziobrowski, associate professor of real estate at Georgia State University. “I’m a firm believer in the laws of supply and demand, and we still have a very large supply of both single-family homes and condos and a very limited demand. I’m not sure how this gets corrected, other than time.”
Roger Tutterow, professor of economics at Mercer University, says that it all hinges on employment. Before foreclosures can start to subside and the housing market can turn around, “we need to see that the recovery has some legs with respect to job creation, and this isn’t happening yet in Georgia.
“Residential and commercial real estate, and the industries associated with them, have historically been very important in Georgia,” he continues, “so it’s not surprising that our job losses have been more pronounced. The more exposure a region of the state had to construction, real estate or durable goods manufacturing, the worse it performed during the downturn.”
For example, Dalton, the epicenter of the carpet industry, has had some of the worst job losses in the nation, with unemployment at 12.6%—more than two percentage points higher than the state as a whole. Somewhat surprisingly, the foreclosure rate in Whitfield County (where Dalton is located) at the end of 2009 was just slightly higher (2.8%) than the statewide rate of 2.68%.
Tutterow explains that foreclosures tend to peak during the later stages of a recession and on into the recovery, which helps explain why foreclosures aren’t slowing down yet despite the fact that the recession, at least technically, is over. “Most people try to ride it out early on and keep making payments so they don’t lose their home. However, this recession was especially deep and long—people who lost their jobs early on have gone through long periods of unemployment.”
He doesn’t expect to see meaningful job creation in Georgia until later this year at the earliest. “So I think we’ll see continued foreclosure pressure throughout this year and possibly into 2011 as well.”
On the positive side, Tutterow says that fears of another wave of foreclosures this year due to the resetting of adjustable rate mortgages taken out between 2004 and 2006 haven’t materialized. “Since the Federal Reserve has kept interest rates at their lowest levels in generations, the effect of re-pricing on monthly payments hasn’t been as pronounced as it otherwise might be.”
Jay Voorhees, CRS, RSPS, an associate broker with RE/MAX of Greater Atlanta, has a ringside seat to the foreclosure crisis, and he agrees with the economists. “About a third of all home sales in 2009 were foreclosures, and I think they will remain robust for the next 24 months.”
While many residential real estate agents and brokers are struggling to keep their businesses afloat, Voorhees decided to take a different tack early last year and enter the arena of foreclosure sales.
“It’s a totally different ballgame,” he says. “All of a seller’s responsibilities for things like landscaping, maintenance and utilities become my responsibilities. In short, foreclosures are more work, and I make less money on each sale. But they accounted for about a third of my income last year, so they were worth it.”
Government Intervention Has Helped—
But For How Long?
Both Ziobrowski and Tutterow point to the extraordinary efforts undertaken by the federal government to support the housing industry—like the extension and expansion of the first-time homebuyer’s tax credit and the continued purchase of mortgages by the feds, which is helping keep interest rates low—as helping stem the tide.
“But what’s going to happen when these programs and incentives end?” asks Ziobrowski. “My conclusion is that we probably have another leg to go down. How far down, I don’t know, but we haven’t reached the point of clearing yet where the number of buyers is roughly equal to the number of sellers.” He adds that there are still a lot of ‘shadow’ sellers out there who want to sell their homes but aren’t bothering to try in the current down market, and that these will need to be absorbed eventually as well.
Tutterow is optimistic about several the regions of the state. “Some communities have held up pretty well, like Warner Robbins and Hinesville with their exposure to military bases, and Athens and Rome with their exposure to healthcare industries and education.”
He expects Columbus and west Georgia to do well, given the massive expansion and renovation effort currently underway at Fort Benning as part of its Base Realignment and Closure initiatives and the opening of the new Kia plant in West Point. “I wouldn’t be surprised if west Georgia, from Carrolton down to West Point/La Grange/Columbus, performs as well as any part of the state this year.”
Brian Patton, CCIM, is the founder and president of Capital Reality Advisors in Cumming and the author of the recently published book, Mailbox Moo-la. You can contact Brian directly at brian@capitallistings.com.
What About Commercial Real Estate?
Many in the commercial real estate world have been bracing for the worst in 2010 and beyond, in anticipation of many properties coming due to refinance. However, there have been a few positive developments recently that may offer a glimmer of hope to commercial real estate investors.
CoStar recently noted that while the number of commercial property sales of $5 million or more declined between early 2009 and 2010, the average price paid for institutional-quality properties rose by $8 per square foot. Also, hospitality property sales were recently up more than 250 percent year-over-year, and multi-family sales of $5 million or more were up by 50 percent. These numbers could indicate that “a painfully slow rebound may be underway,” CoStar opined in a recent online article.
Roger Tutterow, professor of economics at Mercer University, explains that correcting imbalances in commercial real estate usually takes longer due to the long lag between when projects are initiated and space is actually leased.
“So I wouldn’t be surprised if vacancy rates continue to rise this year and into 2011, especially on the office side. I think we’re at least 18 months away from seeing vacancy rates start to come down, and we won’t see anything resembling normal until at least 2013.”
On the retail side, he notes that there’s still a lot of vacant space that needs to be filled, “much of it strip mall and big-box space, which is harder to fill because there are fewer candidates for it. But I do think year-over-year retail sales numbers will improve as we work our way through the summer months.”