8/17/2008 - Louisville's housing market

Gloomy portrait isn't justified

BY PAUL COOMES, JOHN BURGARD AND DAVID HEINTZMAN
SPECIAL TO THE COURIER-JOURNAL

The pop of housing bubbles in large coastal and other booming markets, combined with an associated financial crisis, have led to a daily blitz of negative reports in the national media. The rise in local mortgage foreclosures over the past few years, combined with the recent decline in new home construction, has contributed to a gloomy portrait in the Louisville media as well. Yet, national studies point to Louisville's housing market stability, and local banks report few problems with homeowners making mortgage payments.

So, what are we to believe? How pervasive are foreclosures in the Louisville market? Are there indeed thousands of families losing their homes each year due to financial hardship? Is there a shortage of affordable places to live? How bad is the general housing market in Louisville?

To learn for ourselves, we examined a number of rich data sets on Louisville's housing market. We found that the percentage of homeowners losing their homes to foreclosures is much smaller than previously reported. We estimate that in 2007, between 0.6 percent and 0.8 percent of Jefferson County homeowners endured foreclosure, a rate one-third the size reported in the media. Around one-half of the foreclosed properties were owned by real estate investors, presumably too highly leveraged to withstand the recent slowdown in home price appreciation. It also appears that low interest rates and loose credit practices lured a number of unqualified households to move from rental to owner status, a disequilibrium that has been correcting itself the past two years.

Moreover, we find that Louisville's housing market is performing well relative to most of the rest of the country. Homes here continue to appreciate in value, albeit at a lower annual rate than earlier in the decade. New home construction has slowed dramatically, allowing time for home demand to catch up with home supply. And Louisville has a large inventory of modestly priced homes, a very high percentage of homeowners who carry no mortgage debt, and the lowest monthly housing rental rates of any of the 15 metropolitan areas typically used in comparison studies of Louisville.

This is not to diminish the seriousness of someone losing their home due to unscrupulous lending practices, the effects of tightening credit conditions everywhere and the general slowing of the economy -- primarily due to national housing market and financial problems. However, the regional housing market so far appears healthy. Overly negative local reports can create a climate in which perfectly good investments are delayed, thus making the negative news self-reinforcing.

Paul Coomes is an economics professor, and John Burgard is an economics major at the University of Louisville. David Heintzman is chairman of Stock Yards Bank and Trust. Detailed data and discussion can be found in a white paper, entitled "Home Foreclosures and the Louisville Housing Market." The research was supported by a grant from Stock Yards Bank and Trust, and can be accessed on the internet at http://monitor.louisville.edu/region/region.htm.