Top 10 Stories of the Year No. 3 Development slows : Real estate sales stall, building boom implodes in 2008
Posted on Wednesday, December 31, 2008
ANTHONY REYES Northwest Arkansas Times Bette Stamps, Washington County circuit clerk, oversees a foreclosure auction Thursday, June 12 in front of her office inside the county courthouse for the Timber Trails subdivision, formerly owned by SCB Investments and Brandon Barber. Such auctions became commonplace during the real estate foreclosure crisis of 2008.
The slow down in the Northwest Arkansas real estate market that began during 2006 ground to a near halt in 2008 as building permits fell and homes sale stalled.
Local economists say that Northwest Arkansas' economy is better off than the rest of the nation because it still enjoys positive job growth that brings people here to buy homes.
Still, Northwest Arkansas property owners, developers and lenders felt the sting as the local market followed the national decline of the real estate market. Because too many homes were built during the boom times, studies show it may take a while to go through the excess inventory of residential and commercial properties in Northwest Arkansas.
The large number of foreclosures has continued to impact the local real estate market by further increasing the supply of homes for sale in an already-saturated market, lowering property values and increasing loan losses for banks.
Some high-profile projects by well-known developers fell to foreclosure in 2008, including Brandon Barber's luxury condominium building known as the Legacy Building near Dickson Street and Ben Israel's Commerce Park II office building along Joyce Boulevard. Both are in Fayetteville.
Arvest Bank's quarterly "Skyline Report" offered forewarning of the growing oversupply of residential and commercial properties, but many builders and bankers failed to take heed or underestimated the severity of the coming fall.
One of the nation's real estate-related bank failures in 2008 involved Bentonvillebased ANB Financial, which was closed in May after federal regulators found "unsafe and unsound" banking practices.
ANB had approximately $2.1 billion in assets and $1.8 billion in total deposits at the end of January. Pulaski Bank & Trust Co. assumed more than $212 million of the failed bank's insured, nonbrokered deposits and will purchased about $235 million of assets.
Real estate loan problems forced two other banks - Metropolitan National Bank and Legacy National Bank - to sign agreements with federal regulators to continue operating under tighter regulatory scrutiny.
2009 could be as bad
Jeff Collins of StreetSmart-NWA said that he hopes people will look back at 2008 and say that's when the local economy hit bottom and after that things started getting better, but he's just not sure that's right.
"2009 could be equally as bad (as 2008), if not a little worse," Collins said.
His company prepares the StreetSmar t repor t which includes timely real estate research to its clients that include bankers, business owners and real estate investors.
The StreetSmart report is similar to the "Skyline Report" prepared by the Center for Business and Economic Research in the Sam M. Walton College of Business at University of Arkansas, where Collins served as director before leaving to form StreetSmart.
StreetSmart's third quarter report shows new construction activity is way down and not expected to pick up in the near term and describes sales activity as "exceptionally weak" with foreclosures, bankruptcy and litigation likely to continue through 2010.
The first signs of the slowdown in the Northwest Arkansas real estate market came in mid-2006, when the number of building permits fell dramatically, he said.
The number of new building permits in Benton County fell from a high of more than 1,300 during the second quarter of 2006 down to about 500 in the third quarter of 2006. Washington County peaked a little sooner with almost 500 new building permits during the first two quarters of 2005.
Both counties show about 200 new building permits during each quarter since the fourth quarter of 2007.
Springdale has seen its building permits fall from more than 90 in the third quarter of 2007 to less than 20 in the third quarter of 2008. Fayetteville has fared better, dropping from about 120 to 90 during the same period.
Residential home sales by real estate agents have fallen dramatically over the past year. Sales totals look even lower when compared to 2005, when home sales in Northwest Arkansas peaked.
A total of 1,843 homes were sold this year in Washington County through November. That's about 26 percent less than the 2,508 homes sold through November in 2007. Annualized homes sales through November are down about 35 percent compared to 2005.
'Not ready to listen'
The region's rapid growth rates in 2005 encouraged some investors to pour more money in the real estate market, even though the market was beginning to show signs of an imbalance in the supply and demand in 2004, Collins said.
"You had a lot of money flowing into the area. You had some big names (building here)," said Collins. "It became a bit of feeding frenzy."
Collins, who in 2004 was preparing the "Skyline Report," said "had people been listening and not over optimistic" they would have known the real estate market was headed for problems.
"People were not ready to listen," he said.
Still, the warning bell rang. Some folks wanted to shoot the messenger, while others pulled back.
Both Collins and Katherine Deck, the current director of the Center for Business and Economic Research and author of the "Skyline Report," said they have been wrongly blamed by developers and others for contributing to the weak real estate market by explaining their research.
Collins said that economists should tell the real story based on the data and not worry about spin.
Arvest Bank commissioned the "Skyline Report" to help the bank and its clients better manage risk by keeping a watchful eye on the local real estate market. Bank officials said that the investment in funding the report and paying attention to its findings have paid off.
"We took some heat for being cautious a few years ago, but we and our customers are thankful now that we listened to what the research was telling us," said Payne Brewer, executive vice president and loan manager at Arvest Bank, Fayetteville.
"Many people in the community have thanked us for the information and told us it was very useful in making decisions," Brewer said.
Collins said good, reliable economic data is always important but it's critical during hard times.
"It was important before, but it's critical information now," Collins said.
Worse than S&L crisis?
Collins said that the impact of the current real estate crisis is much greater than the savings and loan crisis of the late '80s and early '90s because it is "so much broader."
He said the current crisis is potentially much worse than the savings and loan problem because it affects so many more people. The current crisis has been aggravated by the large number of subprime mortgage failures, and the savings and loan fiasco is typically blamed on deregulation and lack of oversight.
Brewer said that this slowdown is equal if not worse than before but the big difference is its impact on Northwest Arkansas.
"I feel that I definitely think that it has hit Northwest Arkansas much harder this time because we had built so much inventory," Brewer said.
Arvest took some flack at the time for refusing to make the so-called subprime real estate mortgage loans that contributed to the current crisis, but it's paying off for them now. Arvest closed more than $1 billion in home loans this year for the sixth year in a row.
"It has helped us tremendously ... I think our lack of exposure in subprime lending has been one of the big factors in our ability to continue to help people finance their homes," Brewer said.
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