New normal: Real estate market starts finding its footing in smaller homes
Premium content from Kansas City Business Journal - by Morgan Chilson
Date: Sunday, March 28, 2010, 11:00pm CDT - Last Modified: Thursday, March 25, 2010, 10:12am CDT
Jerry Reece, CEO of Reece & Nichols Realtors Inc., says that the "new normal" in the area's real estate market is less the "McMansions" and instead more modest homes, such as this one on the market in Prairie Village.
Midwestern roots and a housing market that didn't go insane will help the Kansas City area's residential real estate market find its footing faster than the rest of America, area experts said - even if that foot plants itself in a new normal.
"What always sustains the residential real estate business is: Life goes on," said Jerry Reece, CEO of Reece & Nichols Realtors Inc. "We're selling 45 homes a day right now, so it's not like it's not happening out there."
Reece said the company's sales volume in February was up 24 percent compared with February last year.
But he and others in the industry said they don't expect the market to return to previous conditions.
"We're not going back to 2005 and 2006," Reece said. "I do think that mind-sets play a role, and I think that someone who in 2005 went out and bought the McMansion might reconsider and buy more of a typical three- to four-bedroom home."
A study by the Urban Land Institute, "Housing in America: The Next Decade," predicts that consumer behavior is likely to influence buyers not only to go smaller but to eschew the single-family homes for apartments and condos.
Residential real estate will shift due to challenging economic times and demographics, where younger people will fizzle on the dream of home ownership, the study said.
Although those trends may occur in bigger cities like New York and Chicago, that's probably not the future for Kansas City, said Brenner Holland, director of residential real estate for Hunt Midwest Real Estate Development Inc.
"I think in Kansas City, not only do we have our agrarian roots and Midwest values, but we think there will always be a market for quality, value-driven housing in the close-in suburbs that are located in good school districts," he said.
John Wheeler, COO of Capital Equity Partners, said he thinks that any gravitation by young people to apartments or condos would take years, if it occurs at all. He cited a large downtown condominium that has struggled to get occupancy rates over 80 percent, saying "that right there speaks for itself."
Homes will continue to sell because the X and Y generations look to their parents for guidance, said David Cooper, CEO of Prudential Kansas City Realty.
"If their parents are baby boomers or beyond, they're going to say: ‘Rent for apartments goes nowhere, whereas at some point, you need to purchase a home because of the equity that you derive,'" he said.
Returning in mid-March from a national Prudential conference, Cooper said most attendees said they think the country hit bottom in the housing market and is in a recovery stage.
"It will be a slow recovery, but it will be in the upward, not flat-line, movement," he said.
At Prudential Kansas City, calls generated by yard signs are up 45 percent from the same time last year, Cooper said.
"Houses are priced right, and with interest rates as low as they are, it's a very good time to purchase," he said.
Holland said he expects to see a flight to quality by home buyers, who will look for homes in the $200,000 to $400,000 range.
"It's our belief that quality is dependent on the school district and the amenities in the subdivision," he said. "The recovery is going to happen on the A properties first. The lower-tier stuff is going to be hurting for a longer period of time."
Wheeler agreed that higher-end homes, $500,000 and above, won't be seeing as much action as in the past.
"I think the McMansions are never going to come back on a loan type of scenario," he said. "I think the housing market over the next 10 years is changing to what really Dave Ramsey calls the ‘act your wage.' I think if you really act your wage, people are starting to realize that they can't afford a $400,000 home."
Although positive signs of recovery are emerging, there still is concern about further challenges.
Foreclosures aren't over, Wheeler said. Capital Equity Partners buys homes from banks, rehabs and then resells them.
"You're starting to see the higher-end homes foreclose," Wheeler said. "Some people lasted just a little bit longer. They're so upside down a new bank is not going to refinance them. Their only option is to walk away. You'll see more and more banks fail when people start walking away from these houses again."
The key is that things will move slowly forward, said Dan Whitney, president and owner of Landmarketing Inc., which monitors a nine-county area around Kansas City. In the past year, there were more than 4,200 new home closings in the area, compared with 13,000 at the high point, he said.
"I think we're going to meet in the middle," Whitney said. "People will start to buy when it is not such a good deal. Historically, every housing downturn when it was a good time to buy, that's when people did not buy because they're worried about other things, like employment and economy issues in general.
"This year, I think, will be a better year than last year. I see a steady increase going forward, but this has been so deep that people are going to be pretty tentative," he said.
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