Local, Local, Local: The New Mantra of Real Estate.

By Tom Steele
August 28, 2007

These days it's next to impossible to avoid the bad news about rising foreclosure rates, the sub-prime meltdown, declining home values and sensational reports about the real estate market woes in California and Florida and Massachusetts.

But do real estate markets in other parts of the country really affect your property value in Greater Cincinnati? Do the sub-prime loan defaults and rising foreclosure rates spell gloom and doom for everyone? Absolutely not. That's because All REAL ESTATE IS LOCAL. Employment rates and economic growth vary from region to region, and the same is true for real estate-right down to your neighborhood and even the street you live on.

Much of the bad news we hear about the nation's real estate market is accurate, but a lot of it is broad-brush and doesn't distinguish one market from the next. So, to help you put things into perspective, here are several facts for you to keep in mind. They'll make you feel more assured about the overall state of the Cincinnati real estate market today.

Fact #1: Cincinnati: Safe and Sound.
Recently, the PMI Mortgage Insurance Company of Walnut Creek, CA, a firm that provides lending data to mortgage companies, said in its Summer 2007 report that the Midwest is the least risky region in the country in which to make a loan. And out of the 50 largest metropolitan statistical areas (MSA), Greater Cincinnati ranks 7th as least risky. Not bad news at all.

The report further explains that based on our LOCAL economy, employment rate, price volatility, appreciation and affordability, when you buy a property today in Greater Cincinnati, you have a 92 percent chance that the property value WILL NOT go down over the next two years. By contrast, if you were to buy a home in Riverside, California, West Palm Beach, Florida, or Boston, Massachusetts, there's a 65%, 61% and 50% chance respectively that the value WILL depreciate over the next two years.

Fact #2: The Sub-Prime Wound: Barely a Scratch.
You've been hearing a lot about the sub-prime meltdown. These loans made to less than qualified borrowers over the last five years are now starting to drive up the foreclosure rate. But will these defaults significantly impact the Cincinnati real estate market and the overall economy? Absolutely not. Ben Stein, the high profile lawyer, economist, and financial commentator recently put the issue in perspective:

"Sub-prime is a mess-but it's a small mess. These mortgages account for roughly 20 percent of mortgages even in the most heavily exposed states. Only about 20 percent of them are delinquent. That's 4 percent of total mortgages. Of these, maybe 2 percent will go into foreclosure; and there will be roughly 50 percent recovery on sale of these. This translates to a loss of 1 percent in the total mortgage market-a sum the lenders have already made many times over because of the hefty fees tacked onto to those deals".

When commenting on the real estate market and the economy, Stein further said:

"Within context of the total U.S. financial sector, it's nothing. Housing is only about 5 percent of the total economy. If housing falls by 15 percent, that would represent a fall-off of less than 1 percent of the total. That's not trivial, but it's also not the stuff of which recessions are made."

Fact #3: Foreclosures are Up: But Mostly up North.
No doubt you've heard about Ohio's foreclosure rate - reportedly one of the highest in the nation. In general, the reports are accurate - but not totally accurate for Cincinnati.

Admittedly, the increasing foreclosure rate is a problem for the Cincinnati market, but not like the northern part of the state. A report published in Policy Matters Ohio (March 2007), revealed that foreclosures in Hamilton County in 2006 increased 90% since 2001. But when you look at the foreclosure data on a per capita basis, Hamilton County still doesn't even make the top ten worst counties.

In July of this year, CNNMoney.com published the 500 U.S. zip codes with the most foreclosures. Ohio topped the list with more zip codes (49) than any other state. But not a single Cincinnati area zip code made the list. The foreclosure rate in Ohio is a major problem up north where the region suffers from higher unemployment and a weaker economy.

Fact #4: The Real Estate Market Correction: It Had to Happen.
To understand where we are today, you'll want to look at our current market from a historical perspective. Think about the 2000-2005 real estate boom years. During this period sales and sale price records were set every year. Investors got into the market and "flipping" - buying homes and reselling them for a quick profit - helped fuel the boom. The growth was so phenomenal, that eventually the market, like any other, had to correct itself. Our correction began in May, 2006 according to data provided by the Multiple Listing Service (MLS) of Greater Cincinnati.

For the first time in many years, the number of homes sold in May 2006 was less than the previous May. For the next fifteen months (through July 2007) the same pattern has played out. What happened? In simplest terms, if you were to map out the process, it would look something like this:

• Absorption: From 2000 - 2005, about 140,000 families bought homes in the Cincinnati area. As homeowners continued to sell, the number of prospective buyers diminished. By 2005, most buyers had already bought.
• Supply and Demand: Sellers kept listing and asking prices kept going up. But there were fewer buyers (demand) to absorb the inventory (supply), so the basic law of supply and demand took effect. With the 'double-whammy' of down demand and rising supply, the prices simply had to go down. Note: Greater Cincinnati has not seen a bubble burst. Our correction is more like a slightly deflated tire-you can still drive on it; it's just not the ride you're used to.
• Obstinacy: At first, most everyone failed to see what was happening. Sellers (and some REALTORS) refused to acknowledge a market correction was under way. Stubborn sellers refused to adjust and properties stayed on the market for longer periods. The average market time to sell a property swelled from 60 days (July 2005) to a record 88 days (March 2007). Note: It's currently down to 74 days.
• Investor Bail Out: Investors who bought, rehabbed and resold properties for a quick profit saw the oncoming correction. They tightened the reins and took with them a considerable number of would-be first time home buyers. Note: Market analysts estimate as much as 10% of all sales during this period were investor sales.
• Fear: Today, as the market recovers, many prospective buyers are hesitant to test the water. They grapple with the question: "If I buy now, will my house be worth less next year?" According to the PMI research, odds are very good that the answer is "no".

Fact #5: 2007 Sales: Not a Record - But 4th Best Ever.
Everyone was ecstatic about our real estate market in July, 2003. A lot of people refer to it as the good old days. But when you compare the July, 2003 data with July, 2007, you'll see that, overall, the news isn't bad:

!!!NEED CHART HERE!!!

Eventually the market will normalize and prices will stabilize. The fact is, this will likely be the fourth best year ever for our market.

Worlds apart from Riverside or Boston.
There you have it-key facts that will help you to be more informed about our real estate market. Now, next time you hear a horror story about real estate values rapidly dwindling or lenders closing their doors, you can weigh the story and decide if the news specifically relates to the Cincinnati market and even more specifically, your neighborhood, or your very own street. Remember, when it comes to real estate, the Cincinnati market is a world apart from Riverside, West Palm Beach, or Boston. Not bad news at all!

Tom Steele is president of the Cincinnati Area Board of Realtors (CABR). Among its many goals, CABR strives to promote pride and interest in home ownership, paying special attention to property rights and legislative issues. The board is the region's largest trade association representing 5,000 members involved in the real estate industry.