June 6, 2007

WATERLOO --- There is little doubt the nation is experiencing a housing slump. Tuesday's report by S&P/Case-Shiller revealed first-quarter home prices dropped on a national level for the first time in 16 years.

Banks are blaming mortgage brokers, and mortgage brokers are blaming banks. Nearly everyone is pointing a finger at Federal Reserve Chairman Ben Bernanke for not regulating the mortgage industry.

But has the housing slump extended its reach to the Cedar Valley?

The Waterloo-Cedar Falls housing market took a step backward in the first quarter of 2007, and some of the warning signs of a slump are present. But most area experts agree the dip in the local market is nothing more than a blip on the radar.

Bubble and slump

Housing markets across the country have been reeling since the housing bubble started deflating last year. Home values in some regions of the country soared in 2005, creating the supposed housing bubble --- a gross overvaluation of the price of homes, driven by a variety market forces. With the value of homes so grossly overstated, many expected the bubble to burst, causing the value of homes to rapidly plummet and generally wreaking havoc on the housing industry.

The housing bubble can be attributed partly to predatory lending practices. Individuals with poor credit histories were offered mortgage loans at interest rates much higher than prime. These high-interest mortgages are the now-infamous subprime loans that have been the obsession of the financial media in recent months.

Other exotic loans include 100-percent finance loans, which have high rates and no down payment, as well as adjustable-rate mortgages (ARMs), which usually offer an entry rate below prime, but balloon much higher after a few months.

"People just cannot meet those high-interest loans," said Karen Atwood, CEO of Consumer Credit Counseling Services of Northeast Iowa. "It forces people to use credit cards to pay bills as they try to keep those subprime loans good. Eventually they go bad. And it is bad for the entire community as it causes people to lose faith in buying a home."

Subprime loans existed long before the recent housing bubble. However, subprime loans were historically a niche market for those with poor credit histories. Problems arose when subprime loans were being offered to a wider market of individuals, often with confusing terms and conditions that led to steep increases in the loan payments.

The exotic loans allowed individuals and families who otherwise might not have been able to purchase or refinance. This led to an increase in demand for homes, which drove values through the roof. But as consumers of these exotic loans defaulted and went into foreclosure, the supply of homes on the market went up while demand went down --- the economic recipe for a dip in the overall price of homes.

A quarterly release by the National Association of Realtors revealed the United States as a whole experienced a 1.8 percent decline in the median sale price of existing single-family homes --- a common statistic used to measure the change in the value of homes. But some areas experienced sharp declines in home values.

In other words, they saw their bubbles burst.

Home values in Elmira, N.Y., dropped 14.9 percent from the first quarter of 2006 to the first quarter of 2007. New Orleans-area prices dipped 10.9 percent, and values in the Sarasota, Fla., area slipped by 12.0 percent.

The Midwest actually experienced the biggest decline in the first quarter among the four major regions of the United States. Existing home sale prices dipped 2.8 percent. The Waterloo-Cedar Falls metro statistical area (including Black Hawk, Grundy and Bremer counties) home values dropped 5.3 percent from the first quarter of 2006 to the first quarter of 2007, but the views are mixed on whether or not the area housing market is in trouble.

A Cedar Valley bubble

No matter the size of the pin, a bubble cannot be burst if it is not present. And the Cedar Valley did not experience the rapid increase in home prices some other areas of the country did.

"For the bubble to break, you have to have an oversupply of homes and a bad economy, and we don't have either one of those," said Reisinger.

According to figures provided by Reisinger, the median sale value of homes in the Cedar Valley have historically risen at a fairly steady rate --- around 6 percent annually. The largest increase in sales price in the last 17 years was between 1996 and 1997, when home values rose by 9 percent. The lowest was a 1 percent gain between 2004 and 2005, a time when many other areas were experiencing the huge price gains due to subprime lending.

"What they were doing on a national level that we weren't doing here was subprime loans," said Reisinger. "They did a lot of 100 percent or more financing and a lot of ARMs."

Local lenders agree. Joe Vich, CEO of Community National Bank in Waterloo, said his institution has not sold exotic mortgage loans and has not seen a significant increase in foreclosures.

"Certainly from our perspective, we don't do that type of lending," said Vich.

Reisinger said other factors prevented the Cedar Valley from forming a bubble. Unemployment levels have remained low and income is up, both of which could keep consumers out of exotic loans. He attributed the first quarter drop in home values to the winter ice storms and the cyclical nature of the business.

Dave Page, president of Oakridge Realtors, agreed. "After the ice and snow, we saw a little cabin fever kick in," he said. "But now the market appears to be recovering."

Reisinger also believes developers learned their lesson in the 1980s after massive layoffs at the John Deere Works ravaged the housing market in the Cedar Valley.

"Back in the boom days, just before we had the crunch in the 1980s, we had high unemployment because John Deere had just gotten rid of 10,000 people," said Reisinger. "Interest rates were as high as 17 percent, and those were all bad indicators for the housing market. We went all the way down to 800 sales in '82, but we just don't have any of those things right now.

"I think the builders are still remembering back to the '80s, so they're not coming in and mass building like they did back in those days."

Subprimes in the Cedar Valley

Some area experts disagree with Reisinger's claim the Cedar Valley was unaffected by subprime loans.

Statistics for foreclosures are difficult to obtain, but the Black Hawk Abstract Co. tracked the total number of foreclosures in Black Hawk County, including commercial. The numbers showed an increase in average monthly foreclosures from 23 in 2005 to 29 in 2006. So far in 2007, the average number of monthly foreclosures has shot up to 33.25.

"The foreclosures are up all over," said Atwood, whose nonprofit organization counsels individuals with credit problems. "The subprime market has contributed to this."

And while institutions such as Community National Bank do not offer exotic mortgage loans, many with poor credit found loans via the Internet or fly-by-night mortgage brokers.

"Certainly there are programs available to people via the Internet," said Vich. "Some of the brokerage companies might cater to that type of program, as well."

All of the housing numbers were down in the first quarter for the Cedar Valley when compared to 2006, albeit not by a wide margin. Total permits for new homes dipped from 76 to 29. Total sales were down to 452 from 468, and the median price of the homes that were sold dropped from $108,600 to $107,100. The average days on the market for listed homes rose from 84 days in 2006 to 86 days in 2007.

The trouble with trusting statistics such as median house prices is that they don't factor in which segments of the housing market are being affected, said Keith Jones of Valuation Services in Cedar Falls.

He said the majority of the subprime lending was done on the "older housing stock, under $50-$60,000." As those homes are put back on the market by banks and other lenders at distressed prices, the median price of housing sales is dropping.

Jones attributes most of the slowdown in sales to market nervousness, saying buyers are reading too much into national stories and trends. "There is not a crisis in the market," said Jones. "Just a recognition that markets tend to cycle."

Wait and see

The one thing everyone can agree on is it is too early to tell if the first-quarter downturn was a bump in the road or the start of a new trend. But as Jones noted with his reference to market nervousness, it could be a self-fulfilling prophecy.

The Cedar Valley's strong economic position and lack of a true housing bubble would suggest the first quarter of 2007 was more of a stabilization of prices than a full-on slump. Most experts agree the housing market will rebound nicely throughout the rest of the year.

Contact Drew Andersen at (319) 291-1418 or drew.andersen@wcfcourier.com.