No Concerns of Slump in Waterloo-Cedar Rapids

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 market slide extended its reach to Iowa’s Cedar Valley?

No.

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 Iowa housing market is nothing more than a blip on the radar.

Housing markets across the country have been reeling since the bubble began to deflate 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. Individuals with poor credit histories were offered bad credit mortgage loans at 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.”

Of course, bad credit home loans existed long before the recent bubble. However, such 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 mortgage payments.

The exotic loans allowed individuals and families who otherwise might not have been able to purchase or qualify for a mortgage refinance.

This led to an increase in demand for homes, which drove values through the roof. But as consumers of these 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.

The Waterloo-Cedar Falls metro statistical area (which includes 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.

No matter the size of the pin, a bubble can’t be burst if it’s not present. And the Cedar Valley did not experience the rapid increase in Iowa 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 - at 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 wasn’t done here was subprime loans,” said Reisinger. “They did a lot of 100 percent or more financing and a lot of ARMs.”

Local Iowa mortgage 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.

“Then, mortgage rates were as high as 17 percent, and those were 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.”

Some area experts disagree with Reisinger’s claim the Cedar Valley was unaffected by bad credit home loan products.

“Certainly there are programs available to people via the Internet,” said one lender. “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 bad credit mortgage 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 nervousness, saying that 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.”

SOURCE: Waterloo-Cedar Falls Courier