Market would be worse without post-flood boost

While on the surface there appears to be a flurry of new home construction activity in the Cedar Rapids-Iowa City Corridor, looks can be deceiving.

Without the flood replacement homes under construction in Cedar Rapids, homebuilding would be substantially below normal, according to building permit data.

“It would have been really, really ugly since 2008 without the flood replacement home programs,” said Drew Retz, vice president in charge of the Cedar Rapids office of Des Moines-based Jerry's Homes. “If you take the 180 homes last year and the roughly 150 with building permits pulled so far this year, reducing the volume of construction by that amount would have been devastating to our housing industry.”

There were 394 building permits issued for new single-family homes, condominiums and duplexes in 2009, compared with 338 in 2008 and 350 in 2007. Through Oct. 5, the city had issued 254 permits, compared with 317 through the same date in 2009.

In 2009, the city and the Iowa Department of Economic Development were able to leverage $19.4 million of public and private investment to build 184 single-family houses and duplex-style condominiums through the first round of the flood replacement home construction program.

The program offers mortgage buy-down assistance to an income-qualified buyer for 25 percent of the purchase price of a home.

In the second round of the new single-family home construction program, the city and economic development department were able to leverage $27.2 million to build 254 housing units. The houses have kept subcontractors working through what would have been a very slow construction season.

Jim Sattler, president of Jim Sattler Inc. Custom Homes in Cedar Rapids, said the majority of the replacement homes are being constructed this year. He said Monday's announcement of $11.1 million of additional state funding will extend flood replacement home construction through 2011.

“The flip side of the program is that permit values are down about 25 percent from what they were three years ago due to the lower prices for these homes,” Sattler said.

At the southern end of the Corridor, new single-family home and condominium construction in Coralville, Iowa City and North Liberty has slowed despite a relatively low 5.1 percent unemployment rate and the economic stability of the University of Iowa.

For example, permits in Iowa City were 155 in 2007, 135 in 2008, 144 in 2009 and 95 so far this year.

“There's been no noticeable change from the past year or two. It's still really slow,” said Glenn Siders, vice president of business development for SouthGate Development in Iowa City.

Although it's a homebuyer's market with the lowest mortgage rates in 39 years - 4.19 percent for a 30-year fixed-rate loan - lack of consumer confidence and anemic job creation continue to put a damper on home sales.

“I think some people are saying that they're waiting for the next presidential election,” Siders said. “They're not willing to spend big dollars for a new home.

“Some people are being shut out of financing, but that's a relatively small number,” he added.

Robert Becker, chief executive officer of Guaranty Bank in Cedar Rapids, said tighter lending requirements are set by the secondary market for home mortgages, not the banks who originate the loans.

“Most banks do not retain 15-year or 30-year mortgages in their loan portfolio,” Becker said. “They sell them into the secondary market, typically to Fannie Mae.

“Fannie Mae will only buy loans where the borrower has a credit score of 620 or higher, and a debt-to-income ratio below 45 percent. Previously, the credit score cutoff was 580.”

When the jobless rate falls and consumer confidence rises, Sattler and other homebuilders believe there will be pent-up demand for new homes. But they're also prepared for a “new normal” in the short term that will require building fewer homes.

“It might not even be at 2001 or 2002 levels,” Retz said. “Without consistent job creation, there cannot be a housing recovery. The inventory on the market will continue to be higher than demand.”