Real Estate: Continued Appreciation; Retirement; Expensive County Homes
Housing Prices
The general price appreciation of real estate appears to be disinflating in the Stateline Region. While 2005 continued the pattern of real estate appreciation in the Stateline Region, there are emerging signs that the market has crested. This is not to say the market is declining; rather, it is a slowdown in appreciation. It is critical to state early that a slowdown in appreciation is different from a reduction in value: overall price levels have not been falling; they simply may have been increasing at a slower rate. This is the definition of disinflation, rather than deflation. The single indicator of this situation is the number of homes sold in Walworth County during the fourth quarter of 2005.
While Walworth County is the hot market in the Stateline Region, it is notable that only 385 homes sold in the fourth quarter of 2005, compared to 466 in 2004. This was also exceeded by the 420 and 403 sold in the fourth quarters of 2003 and 2002, respectively. This may display some possibilities of a slowdown in the overall market. However, prices in Walworth County were higher year-to-year in the fourth quarter (average sales price of $189,000 in fourth quarter 2005 compared to $169,000 in the fourth quarter of 2004). In addition, while overall home sales declined in Walworth County in 2005 (from 1,898 in 2004 to 1,873 in 2005), this pattern was not repeated in Green, Jefferson or Rock County. Those counties witnessed both record numbers of home sales along with record average prices. Walworth County also experienced record average prices (Figure 1).
As a result, it is important to discount claims of a bursting bubble. What is more likely (especially noticeable in anecdotal observations of for-sale signs) is a slower market with gradually rising or stagnating prices. While price appreciation is an important current fact for parties buying and selling homes, it is not paramount to the current homeowner intending on staying in their present home. Since most single family homes are not sold, nor on the market in any given year, the present price is a concern when calculating wealth with long-term expectations.
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However, there is some room for moderate concern. The reality of housing prices is that they are controlled by affordability. Since the run-up in prices has far exceeded increases in per-capita income, it is clear that this trend is not sustainable (note that there is a slight discreptency in the year of income and housing price due to different governmental units collection systems-- however, this table intends to show the trend to higher price/income ratios). Using Jefferson County as a simple example, in 1990 the median value of an owner-occupied home was $59,800 while per capita income was $16,861. This resulted in home prices being 3.55 times per capita income. By 2000, this ratio was 4.43. By 2003, this ratio was 4.74 (see Figure 2). Given, the recent price increases in home sales prices, the per capita income in Jefferson County would have needed to rise by 12.5% since 2003 to support the prices at the same price/income ratio. However, it is clear that per capita income in Jefferson County has not risen by an average of 4% per year. As a result, the burden of home prices has increased more in recent years. Given this situation, it is reasonable to anticipate that home prices may stagnate as income levels attempt to catch up.
Housing Construction
There are about 37,000 single family homes in Walworth County. During the past five years, the cities of Elkhorn and Whitewater, plus the unincorporated portions of the county have added over 2,500 housing units to the market . While many of these new homes are not included in the home sales data available from the Wisconsin Realtors Association, it is notable that their MLS service reports sales of about 8,408 homes in the same period. If we expect that these other communities also witnessed growth in home building, it can be argued that the vast majority of home sales were correlated with the increase in supply. As a result, the vast majority of homeowners did not have to pay inflated prices for their homes: they already owned one. The outcome of this would be a situation where home price stability will have little effect on the current homeowner.
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When we match construction numbers with the recent history of the retirement of housing in the marketplace, some explanations for development appear. While homes are perceived to be long-term assets, their use often evolves throughout their life. Housing, originally built as single-family structures, is often converted into other uses. This is considered the retirement decision. The retirement decision for housing provides for several options. First, older housing may be converted to other uses (some single family homes may be subdivided into multiple rental units). Other properties may be torn down or abandoned. In any case, housing has a lifespan that is not limitless. Due to this retirement process, it is often necessary for communities to build housing simply to keep their stock stable. For example, during the 1990s, Green County witnessed the creation of 2,218 housing units. However, it only received a net increase of 1,791 units due to retirement. Walworth County witnessed the creation of 9,951 units. However, Walworth County only had a net increase of 6,846 units (Table 4). Interestingly, the loss of housing units was dominated by housing added in the 1960s through 1980s. While some of the housing retired is older stock created in the 1930s and earlier, it is primarily post-WWII housing that is being retired .
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In terms of homebuilding, the trend continued to be strong in 2005. Communities continued to witness increases in their overall housing stock (Table 5). Population pressures, exurban sprawl and housing retirement are fueling this construction. Without making value judgments regarding the appropriateness of this shift, it is a current fact that the housing stock of these areas continues to increase. A noteworthy trend is the fact that higher-valued homes are being built in the townships while multifamily homes are being concentrated in cities. This continues to aggravate the exurbanization trends of income segregation and the lack of affordable housing options throughout the marketplace.