Homebuilding recovery in Eastern Iowa under way, but will it hold?

Rich and Carie Hatch of North Liberty had a decision to make as interest rates crept into the lower reaches of the 3 percent to 4 percent range.

"With interest rates so low, do we refinance our house or sell it and buy something else?" recounted Rich, a Realtor. "We decided to sell and go ahead with the building process."

The Hatchs put their existing $300,000-plus North Liberty home on the market and, to their amazement, had it sold in three weeks. The Hatch family - Rich, Carie and three children - are now living with Rich's parents over the winter while they await the April completion of their new home a few blocks away from the last.

"There is a recovery happening," said contractor Mike Roberts, whose North Liberty-based Mike Roberts Construction is building the family's new home.

"I've got five pre-sold houses under construction now," Roberts said. "I've never had that many. I think that's pent-up demand."

A key housing construction indicator watched by state revenue officials is the 12-month moving average of building permits issued. In October 2012, the 12-month average of new monthly permit issues rose to 795, from 753 in September, and stood at its highest level since May 2008.

For the first nine months of 2012, residential building permits issued for the state of Iowa climbed 27.7 percent from the same period of 2011. Residential permits are up 22.3 percent in Johnson County during that same nine-month period, but down 12.5 percent in Linn County.

Overall, however, demand certainly hasn't come close to the levels it reached eight years ago during the peak of the housing boom, Roberts said. On the other hand, there are fewer contractors to split the pie of available housing demand.

Many competitors have gone out of business.

Mike Roberts Construction lost hundreds of thousands of dollars during the mortgage crisis and real estate downturn that began in 2008, Roberts said.

As with a lot of other builders, Roberts said he's grateful the market didn't collapse completely here. It was supported by a huge influx of government spending in the recovery from the June 2008 floods, and sustained by the strong Midwestern farm economy.

The 1,163 permits issued for residential construction in October 2012 statewide represented an increase of 77 percent from the October 2011 levels, according to the Iowa Department of Revenue. The 12-month moving average of residential building permits for the period ending in October was increased to 795 monthly permits from 753 in September 2012.

Linn County might be one of the few places in Iowa where home builders can complain about the industry trend. It remained one of the healthiest home building markets in the nation during the recession, due mainly to the flood recovery demand for housing.

Now that the flood recovery has peaked, new home demand is tapering off.

"Our business has been down significantly," said Drew Retz, vice president-operations for Jerry's Homes in Cedar Rapids. He added that the flood recovery demand has tapered off, but the fundamental underlying market hasn't increased enough to compensate.

In fact, Retz worries about a "housing hangover" in Cedar Rapids for the next several years due to the loan forgiveness feature of a program by the city of Cedar Rapids which offered incentives for construction of new homes after the 2008 flood.

The program gave five-year forgivable loans to home buyers of between $25,000 and $30,000. The loans were intended to bridge what's been called an "appraisal gap" between the cost of constructing new homes in areas that experienced flooding, and the valuation appraisers would place on the homes due to the flood's impact the neighborhood.

The loan forgiveness, phased in over five years, means some homeowners will be able to sell houses below market value without losing money, said Retz, who serves on the executive committee of the Home Builders Association of Iowa.

Paul Brundell of Allan Custom Homes in Cedar Rapids is more upbeat about the dwindling Linn County numbers.

"We're probably dropping back more to where we would have been had we not had that flood," said Brundell, second vice president of the Greater Cedar Rapids Area Home Builders Association. "Things are probably improving even though the permit count is down."

Randy Rempel of Rempel Construction & Cabinets in Iowa City isn't complaining, however.

"The past year, we were as busy as we ever have been," Rempel said. "Next year's on pace to be the same or even better."

Rempel sees an interesting trend in the market as younger buyers who purchased town homes as their first new house five to seven years ago during a boomlet in local town home construction begin to move up to single-family detached homes.

Interest rates remain near all-time lows. The website Bankrate.com said the average interest rate on a 30-year fixed rate mortgage last week was 3.39 percent, down from 3.42 percent the preceding week. The rate on a 15-year fixed rate mortgage was only 2.81 percent.

"The interest rates are certainly a driving factor," Rempel said. "The confidence seems to be up, too."

Rempel, president-elect of the Greater Iowa City Area Homebuilders Association, has noticed some subtle changes in home preferences since before the recession. The amount of space buyers want in their homes has moderated, but Rempel said buyers seem more interested in nicer interior finishes, energy efficiency and "comfort features" such as already-installed audio systems.

The moderation in size may have something to do with resale values, Rempel added.

Rempel Construction managed to get through the downturn by relying on fewer subcontractors and handling more work with its own crew. Doing more work in-house also allowed Rempel Construction to give better quotes on new home construction projects, Rempel said.

While there are strong signs of recovery now, builders said they really need to see sustained growth in the state economy to generate the kind of market they really want. That could be derailed by failure of Congress to agree on a budget compromise to avoid the so-called fiscal cliff, or in the view of some continued deficit spending that could fuel inflation.

"Unless we see job creation and job growth, I don't anticipate demand is going to grow," Retz said.

New home buyer Rich Hatch, however, sees brighter times ahead.

"I'm a Realtor," he said. "We're seeing houses getting moved and inventory going down. Business has been picking up."