Comments on Traders Point, Indiana: Steve Jones comments on real estate value

Local Economy Weakens 11/03/05jk.wall@indystar.com...

2005-11-03T17:03:00.000-05:00

Local Economy Weakens
11/03/05
jk.wall@indystar.com
The outlook for the Indianapolis-area economy has gone from tepid to anemic, with the real value of household incomes and real estate values falling.
That was the prognosis given by Indiana University economist Phil Powell at a breakfast today at The Westin Hotel in Downtown Indianapolis. The annual event featured forecasts from a panel of IU economists for the 2006 performance of the state and national economies.

Powell was the last to speak on the panel and generated the most discussion. He said the Indianapolis metropolitan area has been and will continue to fall behind the rest of the country economically.

“Folks, the party boat is passing us by,” Powell told a crowd of about 210.

The region saw real household annual income fall $2,240 between 2002 and 2003, compared with a drop of $491 nationally.

Powell attributed that drop to lack of growth in the economy while high-paying corporate jobs were lost through the acquisitions of Galyan’s Trading Co. and Great Lakes Chemical Co., as well as the troubles at bankrupt ATA Airlines.

The wealth of Indianapolis-area residents is also slipping, Powell said, because builders are constructing homes faster than the population is growing. While the region’s population grew by 70,000 people between 2000 and 2003, according to the Census Bureau. But during a similar period, building permits were issued for enough homes to house 210,000 people.

The real value of residential real estate fell by 1.5 percent in the Indianapolis area between 2000 and 2004, according to research by The Indianapolis Star.

“Income is shrinking for Indianapolis households. Because of real estate, the value of their wealth is shrinking,” Powell said. “That’s not good news.”

Growth in Indiana as a state is expected to be slow but “not bad.” The state’s economy will add 30,000 jobs next year, said Jerry Conover, director of the Indiana Business Research Center. It’s on pace to add about 35,000 jobs this year.

Growing sectors in Indiana will be education and health services, construction, leisure and hospitality, and trade, transportation and utilities. Professional and business services will grow slightly. Manufacturing, which has shed jobs in 2005, is expected to be flat next year.

For the national economy, IU’s economists said they were “apprehensively optimistic.” They expect brief impact from the Gulf Coast hurricanes and economic growth of 3.6 percent in 2006.

Call Star reporter J.K. Wall at (317) 444-6287.

I agree that raging consumerism is a contributing ...

2005-11-01T21:24:00.000-05:00

I agree that raging consumerism is a contributing factor, but I find it hard to pin the foreclosure problem on consumers when "zero-down" mortgages are being used to lure consumers into more house than they can afford. There is a reason why lending institutions once required money down on a mortgage. Also, why have lending institutions made mortgage money so easy? Because they get paid to generate the loan. They then sell it to a mortgage pool and it's the pool's problem if the borrower goes belly up. I also agree that quality job growth would help Indy's housing market. But one can point to many cities where the local economy has been just as bad but home values have appreciated. The national production homebuilders who have come into Indy in the last 7 or 8 years have no inherent right to turn every farm field into yet another production-home site, thereby depreciating the value of the homes just built. They can only do it if we let them. That's where land-use, zoning and impact fees come in. So, no we can't prevent someone from choosing the production home in Avon. But we can prevent that production home from being built in the first place, or we can make sure the price of that new home reflects the costs of the infrastructure required to service that home. Either way, the value of the preexisting housing stock would benefit.

The tremendous rise in home ownership has come at ...

2005-11-01T18:09:00.000-05:00

The tremendous rise in home ownership has come at a steep cost. Today's new house priced at the median gives the average new home buyer more of what they say they want in a house. And it is far more house than the majority of these home buyers were raised in. It has more square footage, more features, more creativity in its floor plan, less maintenance and far more sophisticated construction than the typical home built 20 years ago. (And all it takes is two full time employees to support the mortgage!) In central Indiana the median priced home is built as inexpensively as possible because the customer buys based upon an imputed "cost per month" as if they were renting an apartment, with little awareness of the true operating expenses of home ownership. Unfortunately, the average home buyer is willing to accept a product that literally depreciates when they move in. Rather than becoming the shelter of income and taxes enjoyed by their parents, today's homeowner lives in more house than they deserve. The high foreclosure rate indicates that it is also more than they can afford. A hiccup of only a few months lost income related to health care or job interruption is all the average mortgage holder needs to fall desperately behind thanks to a very low savings rate. The expectation of the typical home buyer is that they deserve better than their parents. Raging consumerism, not the government or the local regulations may be the bigger threat to our property values. There is considerable anecdotal evidence that we are in the early stages of a downward re-pricing of the local housing market. The tradional metric of "days on the market" of homes for sale is gradually creeping upward and the number of EXISTING homes priced at or above twice the median home price ($300,000 and up) increases daily as high wage earners are forced to "offer" their properties to a shrinking field of buyers. The fact that they don't see much traffic is a supply imbalance that isn't going away soon. But we can't force the consumer to buy an existing house if what they really want is a spec home in Avon. Only tremendous growth of higher wage jobs can get us out of the downward trend in housing values. A diverse and robust economy is more likely to burst forth in central Indiana than any other place in the state. But the near-term may be tough for some and for that we should be prepared to help.