The official word from the Madison real estate community is that houses are still selling and the deleterious effects of the national housing slump have largely passed us by. The truth is that the local market is hurting, and there's a deep and growing anxiety that things will get worse.
According to three local real estate agents (none of whom wanted their names used) with over 60 years of accumulated experience in local housing sales, home values are either stagnant or dropping, lenders are tightening credit requirements, and buyers are nervous about buying investments that may be headed down, not up, in value.
One agent reports about a 30% decline in business, although activity is now on the upswing, as it is every spring.
Local housing values in Madison held mostly steady in the city's recent assessments, but the prices many Madison homeowners are getting for their homes is falling. That could put homeowners on a collision course with local governments that depend on property taxes for most of their income.
A review of about 75 randomly selected sales (under $300,000) of west-side homes over the past 16 months shows that about half sold below the assessed value, by an average of nearly $20,000 for each sale. Selling below assessed value is becoming more common, and many new listings carry asking prices lower than the assessed value.
This is a tough adjustment in a market accustomed to increases in home values that for many years outpaced growth in income and inflation and where sale prices typically exceeded assessments. In hindsight, it was clearly an unsustainable trend.
Sales of more expensive homes have, in some cases, taken the biggest hits. A 4,500-square-foot home at 930 Hidden Cave Rd. in the swanky Blackhawk subdivision off Old Sauk Road was assessed at $841,700 in 2007 and sold for $675,000 in 2007, a hefty $166,700 below assessed value. Another similarly sized Blackhawk home at 729 Swallowtail Dr. sold in 2007 for $161,000 below assessed value. Holy disappearing equity!
Overall, about a third of Blackhawk sales in the past 28 months sold below assessed value, by an average of nearly $37,000.
Morris Davis, assistant professor at the UW-Madison's department of real estate and urban land economics, doesn't see a "disastrous" fall in home values, but believes further declines are likely: "In the short term, I expect house prices to fall, probably for about two more years."
Davis, who once worked for the Federal Reserve and briefed Alan Greenspan on real estate trends, cites another reason for sustained downward pressure on real estate values.
"Many households no longer have access to credit, or the credit is more expensive," he says. "At current price levels, fewer people can afford to buy when credit becomes more expensive. Therefore, house price levels must fall to clear the market."
Of course, falling prices are good news to homebuyers - assuming they can get a loan.
If home values continue to fall, things could get ugly for local governments. The city of Madison, as well as Dane County and local schools, have used an expanding tax base as a way to hold down tax levy increases. Some real estate agents blame city hall for making matters worse by taking an "overly aggressive" approach to raising assessments on residential property, leaving many homeowners with an unrealistic impression of real value.
But the marketplace will ultimately expose any gaps between assessment and true market value. And that could force local governments to choose between reducing spending (not likely) and hiking the mill rate (more likely) to make up for the decreasing value of real estate.
Pity the poor homeowners who see the value of their home fall 10%, 20% or even 30% with no corresponding savings in their property tax bill, or, worse yet, their tax bill goes up! Therein lie the seeds of a genuine taxpayer revolt. Brace yourselves. It's gonna be a rough ride.
