Settled in their jobs and outgrowing apartments, Kris Kazebeer and Elizabeth Squires are ready for a wedding and a white picket fence.
Major life changes that tipped the 20-something sweethearts into buying their first home this month will always keep a segment of consumers fueling home sales. But even during the national housing crisis and Great Recession, the Omaha area’s relatively steady economy helped insulate it from extreme real estate ups and downs felt in many bigger coastal, Sunbelt and desert cities.
Hitting a high in 2007, annual home sales in the Omaha area never bounced wildly and in 2012 surpassed that earlier peak. New statistics show the number of home sales closed so far in 2013 has reached beyond 8,000 — setting a new record for that eight-month period.
The Omaha market is in an expansion phase rather than recovery mode, one economist says.
The worry now is whether a soft patch revealed in August will continue and perhaps reverse the momentum if mortgage rates and home prices climb further.
“That is obviously a concern,” said Tim Underwood of MarketGraphics of Nebraska, whose company monitors housing and construction activity for the Omaha area. “Everyone is looking at interest rates, trying to figure it out.”
Nationally, the average 30-year, fixed-rate mortgage reached 4.8 percent last week, up from 3.3 percent in early May, which translates into higher monthly loan payments. While still low by historic standards, the sudden spike and looming expectation that the Federal Reserve will wind down its bond-buying program has ramped up concern that future mortgage rates could choke off sales, especially with more vulnerable younger and first-time home buyers like Kazebeer and Squires.
Signs of the recent slowdown:
>> August marked the first time since January that the number of home sales signed to a contract was lower than it had been the same month a year earlier, according to figures compiled by the Omaha Area Board of Realtors.
>> The 4 percent drop in contracts pending this August compared with August 2012 followed an erratic few months that started after mortgage rates suddenly spiked in May. May pending sales slightly outpaced April’s but fell in June, rose in July and then declined to a six-month low in August.
>> The pace of new home construction, while still robust compared with last year, has slowed. Greater Omaha Chamber of Commerce records show building permits issued for single-family homes falling from 283 in May to 271 in June and 238 in July — representing a 16 percent drop since May.
U.S. monthly home sales for newly constructed and existing houses also declined, although the National Association of Home Builders said that shouldn’t be viewed as a larger retreat for the overall housing market, which is still trying to recover after home values plummeted by 50 percent in cities such as Phoenix and Las Vegas following all-time highs in 2006.
In 2007, the national housing crisis hit in the wake of too much risky borrowing, lax lending practices and flawed financial modeling based on the assumption that home prices would only go up. Borrowers who had bought more house than they could afford stopped paying mortgages; foreclosure rates leaped; banks and investors lost money; and a recession gripped the country.
Vince Leisey, owner of Prudential Ambassador Real Estate and a former president of the local Realtors board, said Omaha’s crisis was less severe and its punch lagged the nation’s about a year. Depending on the neighborhood, he said, property values fell 15 percent to 30 percent.
“We’ll go oftentimes with the national trend, but never to the extremes,” he said. “Being part of the conservative Midwest, we’re less likley to overreact to swings.”
After a sales-plentiful two years, Leisey foresees a “fairly stable and flat” near future.
“The majority of the rebound we saw is past us,” he said. “It will be much slower moving forward.”
As mortgage rates rose again earlier this month, the Mortgage Bankers Association’s index reflecting refinancing and home purchase demand sank to its lowest point since November 2008 and the depths of the financial crisis.
The NAHB reported that in July, the annual rate of new home sales throughout the country dropped 13.4 percent, likely as a result of the jump in mortgage interest rates. At first, the rate rise caused acceleration in contract signing, as June sales were 3.6 percent above May. But buyers paused in July as the rates went higher, the builders trade association said.
Conventional thinking holds that every one percentage point increase in interest rates reduces affordability by 10 percent, making it more costly for buyers who need a loan to finance a house.
NAHB officials predict the dip in sales will be temporary as prospective buyers adjust to new financing costs. The association stands by its forecast that 2013 will end with new home sales increasing 23 percent over 2012. And it says demand for homes should continue to grow with labor market expansion, unlocked pent-up demand and a slowly improving economy.
In Douglas and Sarpy Counties, builder requests to construct single-family homes dropped 13 percent since May, at least partly the result of interest rates, Underwood said.
Still, the number of building permits issued was up nearly 40 percent since the start of the year. And compared with the 28 other markets that MarketGraphics tracks, Underwood said, the Omaha area is the healthiest.
Indeed, he said, Omaha is about the only market he works with that doesn’t have an excess of speculative housing stock, or homes built without a buyer. “If there was an overbuilding of specs, which means specs weren’t moving, you’d be concerned.”
Underwood said his firm’s economists predict growth in home sales won’t truly hit a danger zone until the 30-year, fixed-rate mortgage adjusts to about 6.5 percent.
While no one is immune to rising mortgage rates, Peter Muoio, chief economist with the national Auction.com., said he’d feel confident about buying a house in the Omaha area as property values have been less volatile than elsewhere.
He called Omaha’s recession relatively “benign” as its employment rate has been higher than average, its population growth has outperformed the nation, and its housing market “skipped the boom bust.”
“It’s been a steady Eddie kind of housing market that didn’t see a huge runup in prices” or foreclosure and delinquency rates, said Muoio, who described the Omaha market as in an expansion rather than recovery phase.
Andy Alloway, owner of Deeb Realty, is among local Realtors who are optimistic that momentum will pick up. Deeb had the best June and July ever in terms of sales, Alloway said.
He said people still bought homes in the mid-1980s, when interest rates were in double digits and up to 18 percent.
Any recent slowdown in the market might be more attributable, Alloway said, to other factors, including the typical back-to-school slowdown and builders taking a breath to finish jobs that have stacked up.
Another contributing factor to a soft patch, Realtors agree, is the supply of for-sale houses — about 6 percent less than last year — which keeps some lookers from finding a home they really want. Consequently, they don’t put their existing home on the market.
“Inventory is just so darn low,” Alloway said.
Deda Myhre, a CBSHome Realtor and the new president of the Omaha Area Board of Realtors, said increasing home prices combined with increased mortgage rates might have contributed to a temporary hiccup in the pace of home sales. But she said people haven’t lost interest.
“Open houses are still busy,” she said.
Derick Lewin of P.J. Morgan Real Estate said that if anyone is holding back, it is likely first-time home buyers who tend to be younger with relatively less down payment cash. Lewin said he has a few clients in that demographic who seem to have stopped searching.
He said that more clients, however, have hastened their search out of concern that they’ll “miss the boat.”
One client recently secured a NIFA loan and will pay $8,600 more in interest over the 30-year term because the interest rate jumped a half percentage point from the time he started looking. The home buyer went through with the deal, fearing that rates could rise even further.
Another first-time home buyer continues to look but lowered his price range about $15,000, even though he qualified for a higher loan. Like that client, Lewin said, he’s seeing a more educated and cautious clientele since the rash of underwater loans and foreclosures following the burst of the housing bubble.
“Just because the bank says they’re qualified for that amount, doesn’t mean they‘re going to go out and spend it,” he said.
Lewin, who has a finance degree, does not think he’ll see any sizable change in home-buying until the 30-year fixed mortgage exceeds 5.5 percent. “Under 6 percent is still historically low,” he said.
For Kazebeer, 28, and fiancée Squires, 27, the shift in mortgage rates was alarming — climbing from just over 3 percent when they started their search to 4.75 percent.
He works at PayPal and she owns Esquire Hair salon.
Ultimately, the couple was able to lock in 4.25 percent, and they hope to close this month on a $150,000 home near 144th Street and West Center Road.
While Kazebeer said the rising mortgage rates was an incentive to act, that didn’t necessarily push them into house hunting. They wanted to marry. Their finances were better. And they wanted to get the house squared away before incurring wedding debt.
Once they started looking, their choice homes quickly sold. “You weren’t able to sit back and ponder it,” Kazebeer said.
A price reduction on their Crescent Oaks home built in 1984 put it within reach. The couple wrote an offer the day after viewing it and are waiting to close.
Reflecting on mortgage rates, Kazebeer said he wishes they would have bought six months ago.
“But it’s still a good rate and we really can’t complain,” he said. “I don’t think we were ready before.”