2012 Ann Arbor Residential Real Estate Market
Article written for 
www.annarborbusinessmagazine.com
The housing market appears to be on the mend. Sales are up, foreclosures are down, inventory has shrunk, interest rates are lower, and buyers are out looking for purchases.
While this is good news, some concerns still persist, particularly with hesitant home sellers and tighter loan qualifications for prospective home buyers. Sellers are tepid, not sure if now is the right time to sell. And a number of buyers are finding it difficult to get a loan, due to higher loan thresholds and increased attention to the process of verifying the supporting financial documents.
Reasons for Optimism
First the good news. Last month, the National Association of REALTOR®s reported existing-home sales “continued on an uptrend in December.” For 2011, existing-home sales rose 1.7 percent to 4.26 million homes, up from 4.19 million in 2010. And total housing inventory of existing homes dropped 9.2 to 3.4 million homes. In real-estate-speak, this represents a 6.2-month supply, down from a 7.2-month supply in November.
The market also looks positive for new housing starts. The National Association of Home Builders (NAHB) reports that Single-Family Housing Starts Rise 4.4 Percent in December, and its housing market index rose to 25 from 21 in December, hitting its highest level since mid-2007. And according to NAHB, 2011 “ended on a positive note with economic activity continuing to expand at a moderate rate and the housing sector finally gaining some positive momentum after bouncing along the bottom for most of the year.”
This positive uptick for the national housing market seems to be reflected in the Ann Arbor area as well. Rick Taylor has been a REALTOR® with Charles Reinhart Company for 10 years. Taylor is active in the Ann Arbor area market, selling 24 homes last year and 26 homes in 2010. As a result, Taylor is a President’s Club Member, a standing achieved by only 10% of REALTOR®s throughout the U.S.
Taylor is bullish on the housing market in 2011. “We are just inundated with business right now,” says Taylor. “Believe me when I tell you. I know that sounds self-serving, but I can objectively tell you that we are very busy.”
“When Pfizer left,” Taylor continues, “I can’t tell you how many dozens of people I moved into this area and then we had to move them out. Pfizer was just the kiss of death for us when they left, and we really hit hard times long before the recession hit. We were all really suffering 5-6 years ago; 2007 was really a dark time for us. But now the market has stabilized. Those homes are now off the books, so to speak, and our market is coming back.”
Taylor underscores the point that this increased housing activity is not necessarily evenly distributed in the region. Ann Arbor and the surrounding area tends to maintain a stronger market, while the housing market for the areas farther out may not be as strong.
“Ann Arbor and Washtenaw County is an island in it of itself. We have the University of Michigan, we have the University of Michigan Hospital, and we have Eastern Michigan University, which, by the way, doesn’t get the credit it deserves for bringing in a lot of money. We also have startup companies and intellectual companies. Our market is probably, if not the strongest in the state, at least one of the strongest in the state. We have a very, very strong real estate market here. That news just doesn’t get told enough and it needs to get out.”
Not only is activity up, says Taylor, but foreclosures are down. Foreclosures artificially deflate housing pricing, so the drop in foreclosures marks a move toward real market value for homes.
“Foreclosures are slowing down which is a good thing,” notes Taylor. “The banks actually have been pretty smart about not dumping everything they have on the market right away. They knew that the pricing would drastically drop if they put too many on at once so they were pretty good about just putting on a couple here, putting on a couple there, letting them sell before they put more on and that was pretty smart. So my foreclosure business is dwindling and I can tell you that as much as I appreciated the business, I’m glad to seeing it going away for the most part.”
Taylor is not alone in reporting a significant bump in buyer activity. Linda Lombardini is President of the Ann Arbor Area Board of REALTOR®s (AABoR) and a real estate agent with Trillium Real Estate, a 6-member team of real estate agents who focus on the Ann Arbor area market.
Lombardini is as bullish as Taylor, agreeing that buyer activity is up from previous years. “Many of us have painted a pretty rosy picture at this point,” notes Lombardini, “but in the past four or five years, today is rosy in comparison to so much of what’s happened. Being the end of January, we’re busy and we’re very excited about that.”
Lombardini concurs that the general Ann Arbor area is performing a little better than surrounding areas. “Ann Arbor certainly is the core of what we do. Some of the outlying districts are not doing quite as well, but Dexter, Saline and Ann Arbor are really strong.”
“People are calling to list their homes, and buyers are calling to go and see homes. Obviously that’s how we work, so the three areas in the Ann Arbor area have inventory that is really easy to sell and our buyers are buying them, which is just exciting. I just can’t tell you how exciting it is. I think you can probably imagine. We’re getting phone calls every day, which is fabulous for the beginning of the year.”
Lombardini also mirrors Taylor’s view that interest rates are remarkably low. “They are good. I’ve been doing this for 21 years. Interest rates were 19 percent at one point. Now they are 3 or 4 percent. That’s good! It’s amazing!”
Reasons for Caution
But before we get too enthused, there are at least two reasons to be cautious about the Ann Arbor area housing market.
The first reason for caution is that home owners remain hesitant to sell. The large buyer activity should drive up housing prices and encourage home owners to list their homes, but that hasn’t been happening yet in large numbers.
“The biggest problem that we have is the lack of sellers,” explains Taylor. “We have more buyers right now than we do sellers. Sellers are typically afraid, nervous, and afraid to put their toes in the water. It’s unfortunate because we as REALTOR®s kind of have to educate the selling public that the market has recovered in our geographic area. That’s important to know.”
The second reason for caution, and perhaps more concerning than the first, is the tightened loan qualifications. In 2008, the U.S. housing market hit a crisis point due to a combination of loose loan qualifications, sagging home prices, and poorly priced mortgage backed securities (MBS) securitized and guaranteed by Federal National Mortgage Association (Fannie Mae) and purchased on the secondary market by the Federal home Loan Mortgage Corporation (Freddie Mac).
In 2008, roughly $6 trillion of the $12 trillion in U.S. mortgages were either owned or guaranteed by Fannie Mae and Freddie Mac, thus requiring unprecedented financial support to prevent a collapse of the market. Consequently, mortgage loan qualification standards today are strict and are closely scrutinized. While this tightening will help prevent a repeat of the financial crisis, it also presents a barrier to economic recovery.
Jeremy Shaffer is Associate Vice President at Ann Arbor State bank. Shaffer has more than ten years of mortgage lending experience and has worked at several local and regional mortgage lenders in the area and is well acquainted with the Ann Arbor are market.
Shaffer is pointed in his comments that the mortgage loan qualification process is excessive. “The pendulum has now swung the other way,” Shaffer describes. “A few years ago the requirements were loose. Today the process is time consuming and stringent.”
Shaffer goes on to explain that the buyers who have trouble are those with atypical incomes streams. “If you have income that comes from multiple sources or income that is volatile, loan underwriters are very slow and careful with evaluating the buyer’s ability to pay the mortgage loan payments.”
Shaffer recalls a client who applied for a mortgage. His client’s bank statement showed an unusual deposit of roughly $1,000. The underwriter requested further verification of the one-time deposit, presenting his client with the chore of chasing down proposer documentation for that small deposit.
Entrepreneurs and contract workers may have difficulty, since income comes from many sources and the incomes stream is up and down over time. Recent retirees can have difficulty as well. Many applications require a demonstration of two years of retirement income history. A recent retiree does not have that history and would, therefore, likely have some difficulty from the underwriter.
Shaffer is clear that the tight mortgage loan requirements have a negative effect on our economy. “After the high unemployment numbers,” Shaffer emphasizes, “the strict qualification requirements for mortgage lending are the most significant drag on our economy.”
Other Ann Arbor lenders paint the same picture. Kristy Haboian is Vice President & Mortgage Manager at the Bank of Ann Arbor and has over 25 years of retail banking and mortgage lending experience. Haboian notes that the market is generally good, but loan qualification remains an issue.
“Things have sort of slowed down, and there’s a little bit of uncertainty as to what this year will bring. [Interest] rates are very, very good for people who are qualified and able to purchase. And so I’m anticipating another good year, as long as rates remain somewhat low.
“However, qualifying people is a little more challenging with all the new regulations and rules. These rules just make it a little bit harder, a little bit longer to get final approval on loans. There are certainly borrowers that are well qualified. The borrowers that have qualification issues are those who are a little bit out of the box, specifically things like income and assets and where those things are coming from and how they are paid. For these borrowers, it can sometimes be more of a challenge.”
2012: Optimism with Caution
Overall, then, 2012 looks positive and somewhat encouraging. Housing activity is clearly up from 2010, and there are many reasons we can expect that the housing market is finally on the upswing.
It would seem, though, that the 2012 housing market will be fairly modest, as sellers remain uncertain and loans remain relatively difficult to obtain. According to Haboian, “I’d say [obtaining mortgage loans is] probably going to get more difficult. There’s still a lot of concern and uneasiness about what has been done in the past that I think it will be more of a case of like I said more tightening than anything.”
by David Baker and Margaret Baker
www.bakerstrategy.com
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