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Memphis has protection against housing bubble

Modest growth in sector bodes well for city
By Carolyne Park and Christopher Sheffield
Memphis Business Journal
Updated: 7:00 p.m. ET Nov. 27, 2005

The future of the U.S. housing industry is being debated at all levels around the country -- from business to banking, and media to academia.

At the heart of the debate is whether or not the "bubble" of inflating home prices will burst, causing a sudden widespread drop in home values. It's a scenario causing anxiety among homeowners, investors and prospective home buyers, who fear owning a home may not be as safe an investment as it once was.

It is an issue especially hot in thriving metropolitan cities and coastal areas where home prices have skyrocketed in recent years in response to seemingly insatiable demand, spurred in large part by second-home buyers and investors hoping for big returns.

While there are some warning signs in select parts of the country, most agree that the Memphis housing market is immune from danger.

"There is no bubble," says Sue Stinson-Turner, president of the Memphis Area Association of Realtors (MAAR), who has been in the industry 27 years.

A recent report by the National Association of Realtors, Home Price Analysis for Memphis, supports arguments that Memphis, like many cities and towns across the country, is safe from a major market downturn. Key points of the report are that average home prices here have risen steadily rather than rapidly, the Memphis market maintains a healthy balance between supply and demand, and area homebuyers tend to buy what they can afford.

William Mitchell, vice president broker/manager with Crye-Leike, Inc., and MAAR's 2006 president-elect, says buying a home in the Memphis area is still a good deal. The market has a wide selection of homes at a full range of prices to meet the needs of almost any buyer. And with an average home price 30% below the national average at $142,400, homes here are affordable.

"If anything we are an under-valued market," Mitchell says.

Historically, developers have been conservative, and home prices in the Memphis area have increased steadily, rising 2% from 2003-2004, and 16% over the last three years. Like elsewhere in the country, the local housing market has seen a boon from 45-year-low interest rates in recent years. With lower monthly costs, those low rates meant more people could buy homes that couldn't afford them before.

Now those rates are starting to go up again. John Gnuschke, director of the Sparks Bureau of Business and Economic Research at the University of Memphis, says it is the rising interest rates that will have the most impact on the Memphis housing market. It is the first-time homebuyers with marginal incomes that will be affected the most. Instead of buying that first home, many of those people will have to remain renters.

But NAR expects demand for new homes here to remain strong as the local job market continues to grow, with 8,100 payroll job additions over the last 12 months, and another 10,000 predicted over the next 24 months. The association also predicts mortgage rates will hover around 7% by the end of 2006.

Charles Ricketts, vice president at Pulaski Mortgage, says Memphis' biggest protection from a housing bubble burst is its solid and consistent employer base. FedEx, with its 30,000 employees, and a large government sector, means wages are steady and moderate and thus housing prices are, too.

Ricketts says he has seen a slow down in mortgage activity in 2005 from previous years. Last year, Pulaski's Memphis operations finished with $217.7 million in mortgage volume. The company was budgeting for a 25%-30% drop for 2005, but Ricketts says it is no longer expected to be that significant.

Pulaski, which has been operating in the market since 1976, finished 2004 ranked sixth in loan volume, according to information from the Home Mortgage Disclosure Act report. First Tennessee Home Loans came out on top with $1.10 billion for 2004, less than a percent higher than 2005. Of the top 25 mortgage lenders in the Memphis Metropolitan Statistical Area, those that stayed on the list from the previous year still saw their loan volume drop, in some cases significantly from 2003 to 2004, and most expect to see a continued drop in 2005.

Millington-based Patriot Bank, which had total volume in 2004 of $89.2 million, held on to its 14 place ranking from 2003 despite a drop of $13 million in loan volume.

Of the top 25 mortgage lenders, Patriot Bank would rank as one of the smaller players. Patriot vice president Keith Barger says Patriot has a keen interest in what happens in the home financing market.

"As a small community bank, we tie a lot of our efforts into residential real estate," he says.

Patriot wants to be a major player in the local mortgage market.

Barger says his bank may actually see a 10%-15% increase in mortgage volume for 2005 over 2004. Much of that will come from the bank's lending in Tipton County and east Shelby County around Collierville.

Mitchell, of Crye-Leike, says higher rates may mean homes don't sell as quickly, but the demand will remain.

"I remember the days when we thought if it would just get down to 12%, we'd sell a lot of houses," he says.

Rapidly rising construction costs are another factor expected to affect the local housing market.

"It kind of puts a floor on how much housing prices can fall. In that sense, it provides some degree of protection," Gnuschke says.

For the future, NAR predicts Memphis' housing market will continue to benefit from baby boomers buying second homes, often as investments for retirement. The local market may also increase as a retirement destination for those seeking reasonable living costs.

"I think we're going to see a slow down," Gnuschke says. "I don't think the housing bubble will bust, I think it will deflate."