Isely, Paul

Ogura, Laudo M.

English

Scholarworks@GVSU

Seidman Business ReviewVolume 21 | Issue 1 Article 92015Housing Prices and Foreclosures in Grand RapidsLaudo M. OguraGrand Valley State UniversityPaul IselyGrand Valley State UniversityFollow this and additional works at: http://scholarworks.gvsu.edu/sbrCopyright © 2015 by the authors. Seidman Business Review is reproduced electronically by ScholarWorks@GVSU. http://scholarworks.gvsu.edu/sbr?utm_source=scholarworks.gvsu.edu%2Fsbr%2Fvol21%2Fiss1%2F9&utm_medium=PDF&utm_campaign=PDFCoverPagesRecommended CitationOgura, Laudo M. and Isely, Paul (2015) "Housing Prices and Foreclosures in Grand Rapids," Seidman Business Review: Vol. 21: Iss. 1,Article 9.Available at: http://scholarworks.gvsu.edu/sbr/vol21/iss1/9Seidman Business Review  •  Winter 201516 In 2014, U.S. housing prices, sales, and construction were at a higher level compared to the same period last year, reflecting the continuing recovery of the housing market. However, during the first 9 months of 2014, U.S. housing prices rose only 2% (seasonally adjusted S&P/Case-Shiller 20-city price index; Federal Reserve Bank of St. Louis) and existing home sales remained relatively stable at an annual rate of 5.3 million in October 2014 (National Association of Realtors). Private housing starts (construction) have also been stable at a rate of 1 million units per year (Federal Reserve Bank of St. Louis). This stability of the housing market in 2014 reflects economic conditions that are still unfavorable to the full recovery of the industry. For instance, unemployment rate has gone down substantially, but it is at 5.8% in November 2014 (Federal Reserve Bank of St. Louis). The delinquency rate on residential real estate loans was at 7% in the third quarter of 2014 (Federal Reserve Bank), which is decreasing, but much above the 2% rates seen in early 2000s. Strict credit requirements also make it harder for first time buyers to apply for mortgage financing, with homeownership rates having decreased to mid-1990s level (the national rate reached 64.3% in the third quarter of 2014; Federal Reserve Bank of St. Louis). On the positive side for housing markets, mortgage rates declined during 2014 after rising quickly during the previous year. The 30-year fixed payment mortgage rate went down from 4.5% at the end of 2013 to 4% in November 2014 as economic growth in foreign economies has slowed.At the regional level, our quality-adjusted housing price index shows average prices rising in the last 3 years in Grand Rapids. Figure 1 presents the indexes for Grand Rapids and for two nearby suburban communities (Georgetown Township and Cascade Township, which have higher income population). For Grand Rapids, an alternative index called the non-distressed is also shown, which excludes houses with sale prices below $50,000 (these are houses more likely affected by the foreclosure crisis). Details on the estimation of these indexes are discussed in a technical note at the end of this article. Based on the non-distressed index, prices of Grand Rapids homes sold in 2014 were 9% higher than in 2013, but the index was still below the peak in 2005. In comparison, price changes in Georgetown and Cascade Townships were larger, with increases of 16% and 21% respectively, reaching levels that are already above the peaks in 2006. The full recovery in these communities reflects their better income and employment conditions. As a result, construction has also picked up, especially in Cascade, where the number of building permits in 2014 is more than double than in 2005. See Table 1 for changes in building permits and a comparison of income and employment conditions across places.With higher home prices and a decreasing inventory of houses available, the volume of sales has stabilized in 2014. The Grand Rapids Association of Realtors reported a 3% decline in units sold in their area of activity until October, compared to the same period in 2013. The inventory of available houses has decreased quickly recently, reaching an inventory-to-sales ratio of 3 months’ supply in October 2014. With better price and sales conditions, foreclosure activities have also decreased significantly compared to last year. In Table 2, we show the number of Sheriff’s sales in Grand Rapids city decreasing from a monthly average of 75 homes in 2012 to 29 in 2014 (data available until October 2014). These changes have increased interest in building new residential properties. Local builders are finding it hard to take advantage of this change as there is a lack of skilled construction workers. This has made it particularly hard to find sub-contractors to work on projects. This has resulted in wages for construction workers increasing faster than inflation (3.5% increase 2013–2014 according to the Bureau of Labor Statistics). As workers are drawn back into the construction sector, it is likely new residential construction will increase at a faster rate.Housing Prices and Foreclosures in Grand RapidsLaudo M. Ogura, Ph.D., Associate Professor of EconomicsPaul Isely, Ph.D., Professor of EconomicsSeidman College of BusinessSee Technical notes at the end of the article for details. Source: Indexes computed using data from IS BS&A (accessmygov.com). CascadeGR (non-distressed) 6080100120140160GeorgetownCascadeGrand Rapids (Non-distressed)Grand Rapids2014201320122011201020092008200720062005GRPrice Index 2000 = 100GeorgetownFigure 1: Housing Price Indexwww.gvsu.edu/business 17 In conclusion, we have seen a substantial improvement in overall economic and housing market conditions in 2014 in the region. For 2015, we will likely see a continuation of increasing home prices due to further improvement in the regional economy and low inventory of homes for sale, although at a slower rate than in 2014. The weak recovery of foreign economies still poses risks to the U.S. economy growth, but the resulting lower interest rates and energy prices may be helpful to the housing industry. Credit availability is still an issue due to the strict lending requirements imposed during the foreclosure crisis, but there are recent signs that lending practices are starting to loose, which should bring more first-time home buyers to the market. Technical NoteThe repeat-sale housing price index shown in Figure 1 is set at 100 in 2000, so it can be interpreted as the amount of money needed to buy a house for every $100 that was needed to buy the same house in 2000. The index is computed by comparing sales prices of the same houses over time. The use of repeat-sales is a way to control for variation of quality and location across houses. Thus, the estimation does not include sale prices of houses that were not resold during the period analyzed. It also disregards the impact of renovation or deterioration of houses. Nonetheless, it is a widely accepted method to measure the average changes in prices in the housing market. Our indexes were computed using home sales from 2000 to October 2014, with sale prices as low as $10,000 and as high as $1 million (this value boundary is to better reflect changes in the prices of average homes). ■ReferencesFederal Reserve Bank of St. Louis (2014). Economic data [Data file]. Retrieved from http://research.stlouisfed.org/fred2 Federal Reserve Bank (2014). Delinquency rate. Retrieved from http://www.federalreserve.gov/releases/chargeoff/delallsa.htm IS BS&A (2014). Property Lookup [Data file]. Retrieved fromhttps://is.bsasoftware.com Grand Rapids Association of Realtors (2014). Monthly Market Update - Comparative activity report October 2014. Retrieved from http://www.grar.com/news-and-stats U.S. Census Bureau (2013). Longitudinal Employer Household Dynamics (LEHD) [Data file]. Retrieved from http://lehd.ces.census.gov/ U.S. Census Bureau (2014). Building permits [Data File]. Retrieved from http://censtats.census.gov/bldg/bldgprmt.shtml U.S. Census Bureau (2013). American Community Survey 2009-2013 [Data File]. Median household income. Retrieved from http://factfinder2.census.gov Data until October 2014. Source: Estimated using data from IS BS&A (accessmygov.com). Table 1: Building Permits, Income, and EmploymentTable 2: Sheriff Sales in Grand Rapids CityArea Building permits (annual rate)                           2005                            2009                             2014Median HouseholdIncome2013Worker Population Change2005–2011Grand Rapids 318 30 229 $39,227 -15.4%Georgetown 448 64 238 $61,504 -2.4%Cascade 167 139 382 $101,273 +28.8%Building permits data until October 2014. Median household income is based on the American Community Survey 2009–2013 estimates. Employment and worker population from Longi-tudinal Employer-Household Dynamics (LEHD) estimates. Source: U.S. Census Bureau.Year Monthly Average2012 75.12013 46.3  2014* 29.2

Housing Prices and Foreclosures in Grand Rapids

Seidman Business ReviewVolume 20 | Issue 1 Article 72014Housing Prices and Foreclosures in Grand RapidsLaudo M. OguraGrand Valley State UniversityPaul IselyGrand Valley State UniversityFollow this and additional works at: http://scholarworks.gvsu.edu/sbrCopyright © 2014 by the authors. Seidman Business Review is reproduced electronically by ScholarWorks@GVSU. http://scholarworks.gvsu.edu/sbr?utm_source=scholarworks.gvsu.edu%2Fsbr%2Fvol20%2Fiss1%2F7&utm_medium=PDF&utm_campaign=PDFCoverPagesRecommended CitationOgura, Laudo M. and Isely, Paul (2014) "Housing Prices and Foreclosures in Grand Rapids," Seidman Business Review: Vol. 20: Iss. 1,Article 7.Available at: http://scholarworks.gvsu.edu/sbr/vol20/iss1/7Seidman Business Review  •  Winter 201414U.S. housing prices have been rising since reaching a bottom in the first month of 2012. From that time to September 2013, prices have gone up by 23.6% (seasonally adjusted S&P/Case-Shiller 20-City Price Index; Federal Reserve Bank of St Louis). Housing sales have risen from an annual rate of 4.7 million in 2012 to 5.1 million in 2013 (until October; National Association of Realtors). Private housing starts have also increased from an annual rate of 783 thousand in 2012 to 919 thousand in 2013 (until November; Federal Reserve Bank of St. Louis). The main factors that have helped the housing market recovery were the improvement in the economic conditions (the national unemployment rate decreased to 7% in November 2013), mortgage rates kept low (reaching 3.4% in October 2012), and the winding down of the foreclosure crisis (delinquency rate on residential real estate loans was down to 8.6% in the third quarter of 2013, two percentage points down from one year ago, according to the Federal Reserve Bank).However, recently rising housing prices and mortgage rates seem to be slowing down the growth of sales and prices nationally. In addition, foreclosure filings rose in October due to houses with delayed judicial processes now being scheduled for public auction as lenders take advantage of the increasing demand.In Grand Rapids, our quality-adjusted housing price index shows prices rising since 2012. Figure 1 shows this index for Grand Rapids. For the sake of comparison, it also shows the index for the nearby Cascade Township, which is a suburban community with higher income households. The index is set at 100 in 2000, so it can be interpreted as the amount of money needed to buy a house for every $100 that was needed to buy the same house in 2000. The index is computed by comparing the sales prices of the same houses over time, which means that only the value of houses sold more than once are taken into account. The use of repeat-sales to compute housing price indexes is a way to control for the variation of quality and location across houses. Although the estimation does not include the sale prices of all houses and disregards the impact of renovation or deterioration, the index is considered to be a good measure of the average changes in local market conditions. The indexes were computed using home sales from 2000 to November 15th 2013, with sale prices as low as $10,000. For Grand Rapids, an alternative index is estimated that excludes houses with sale prices below $50,000 (these houses are more likely affected by the foreclosure crisis). In Figure 1, the alternative measure is called non-distressed index. As seen in Figure 1, housing prices have gone up in 2013, with the index in Cascade Township already higher than its peak level reached in 2006. In Grand Rapids, the overall market price index is still below the 2000 level. The non-distressed index shows a better recovery, being now slightly higher than the 2000 level. The difference indicates that the recovery is likely affected negatively by foreclosures, which impacted especially lower income homeowners. Foreclosures across Grand Rapids during the first six months of 2013 occurred at a rate below any year since 2004 and were 80% below the comparable period in 2008. Housing Prices and Foreclosures in Grand RapidsLaudo M. Ogura, Ph.D., Associate Professor of EconomicsPaul Isely, Ph.D., Professor of EconomicsSeidman College of BusinessFigure 1: Housing Price IndexSource: Indexes computed using data from Access KentCascadeGR (all)5075100125150175CascadeGrand Rapids (all)Grand Rapids (non-distressed)201320122011201020092008200720062005GR (non-distressed) Price Index 2000 = 100GR-SEGR-NW5075100125150175GR-SWGR-SEGR-NWGR-NE201320122011201020092008200720062005GR-NE GR-SWPrice Index 2000 = 100www.gvsu.edu/business 15 In order to better understand the impact of foreclosures on home prices, we divided the Grand Rapids city area in four quadrants (Northwest, Northeast, Southwest, and Southeast). In Figure 1, the right-side graph shows the differences in housing price indexes across these four areas. It is notable that the Southwest (SW) area had the largest decline in housing prices. Indeed, that area had the highest rate of foreclosure sales (see Table 1). The SW area also experienced the highest increase in prices during the housing boom. All neighborhoods with boundaries within the SW have median household incomes more than 25% below the citywide average, making them benefit the most from the ease borrowing standards prior to the recession and most vulnerable once the economy slowed. It is also interesting that the NE area, which had the smallest variations in prices over the last 13 years, was also the area with lowest rate of foreclosure sales in the period 2004–2012. This pattern shows the correlation between high housing price increases during the boom and foreclosure activity during the crisis. Then, large declines in prices were seen in areas of high foreclosure sales rate.To understand the difference in housing price changes in Grand Rapids and Cascade, first notice that households in Cascade are much richer and the population of workers have increased there since 2005 (Table 2). Employment opportunities have also risen slightly in Cascade, while dropping in Grand Rapids. These changes help explain why housing demand remained higher in Cascade, leading to a fast rise in home prices recently. Higher expectations on future prices and income also give home buyers incentive to bid more for houses in growing areas. On the other hand, greater supply of available housing makes it easier to buy homes at lower prices. The high rate of foreclosure home sales in Grand Rapids has kept this supply high in recent years. On the other hand, construction is still growing in Cascade, but prices are rising fast, indicating a lack of available houses. In 2013, we have seen improvements in employment opportunities, loosening of credit requirements, lower foreclosure rates, and rising home sales and construction. For 2014, rising mortgage rates, stricter mortgage regulations, and higher availability of newly built housing will likely reduce the pace of the housing recovery. In fact, the latest data on price changes and existing home sales already show a slowdown.ReferencesIS BS&A (2013). Property Lookup. Retrieved fromhttps://is.bsasoftware.com Community Research Institute (2013). Community Profiles 2.0. Retrieved from http://weave.cridata.org/communityprofiles Federal Reserve Bank of St. Louis (2013). Economic data [Data file]. Retrieved from http://research.stlouisfed.org/fred2 Federal Reserve Bank (2013). Delinquency rate. Retrieved from http://www.federalreserve.gov/releases/chargeoff/delallsa.htm National Association of Realtors (2013). Existing home sales. Retrieved from  http://www.realtor.org/topics/existing-home-sales/data U.S. Census Bureau (2013). Longitudinal Employer Household Dynamics (LEHD) [Data file]. Retrieved from  http://lehd.ces.census.gov/ U.S. Census Bureau (2013). Building permits. Retrieved from http://censtats.census.gov/bldg/bldgprmt.shtml U.S. Census Bureau (2013). Median household income. Retrieved from http://factfinder2.census.gov Area Foreclosure Sales (A) housing units in 2012 (B) rate (A/B)NE 2,212 15,344 14.4%NW 1,912 12,195 15.7%SE 4,026 20,112 20.0%SW 1,356 4,425 30.6%Source: Community Research InstituteBuilding permit includes data until September 2013. Median household income is based on the American Community Survey 2007–2011 estimates. Employment and worker population from Longitudinal Employer-Household Dynamics (LEHD) estimates. Source: US Census Bureau. Table 1: Foreclosure Sales during 2004–2012Table 2: Building Permits, Income, and EmploymentAreaBuilding Permits (annual rate)       2005              2013Median Household Income2011Employment Change2005 to 2011Worker Population Change2005 to 2011Grand Rapids           318                101 $38,731 -4.6% -15.4%Cascade            167   203 $98,273 1.1% 28.8%

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Housing Prices and Foreclosures in Grand Rapids

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