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Boom, bust or somewhere in between?

RIVER FALLS -- Area Realtors Reid & Jenn Ferguson say in an online real estate update: "The housing market continues to be strong in the River Falls, St. Croix/Pierce county area, although house inventories are slightly up compared to this time last year...making it an excellent opportunity for savvy buyers."

Their illustrative graph shows the 54022 market as a "3" -- with a 1 being a buyer's market and 5 a seller's market.

But Bob Casey, office manager for 13 years at WESTconsin Credit Union, 1207 N. Main St., says there's no doubt: It's truly a home-buyers' market.

"We've seen some definite changes this summer and even going back as far as 12 months," Casey said. "There's an abundance of homes on the market right now. The value of some homes has even depreciated. We've probably had an unrealistic expectation about how much the market will continue to appreciate."

Casey said this in stark contrast to past years -- since the late 1990s -- when property values were going up as much as 5% annually and even higher for the more popular, less expensive homes.

Casey said sellers, recently, have even had to pay money to make up the difference between what their houses sold for and what they first paid for them. In some of those cases, people had taken out a second mortgage to pay for a home remodeling project or for debt consolidation.

But, to the surprise of many, the current value of their home didn't fetch the price they'd anticipated.

Casey said higher mortgage rates are part of the problem. A 30-year fixed mortgage today may carry a 6.75% interest rate versus a 5.25% rate at its lowest last year.

"Historically, that's still not bad but we've gotten a little spoiled," Casey said. "It's been much higher. Since I've been here, we hit 9¼ for a 30-year mortgage in 1994."

Back in the 1980s, Casey said, he recalls interest rates at 12% and even higher.

"And that was during the time that people were refinancing so they could come down by two percentage points or more," he said.

Adjustable home mortgages, tied to the index of one-year U.S. treasury bills, have created another problem. In recent years many buyers used the low interest rate of the adjustable mortgage to purchase homes.

Now that interest rates are going up, so are these mortgage payments -- some by $150 a month, others by more than $400 a month.

"Between that and the rising energy and gas prices, it's been too much for some people. It's led to a lack of disposable income, and we've also seen an increase in home foreclosures," said Casey.

The foreclosures, he added, contribute to the complex web by adding more houses to a saturated market. Typically, an effort is made to sell foreclosed houses quickly at a discount. That puts more downward pressure on market prices.

Casey said that even though the sale of new housing lots around River Falls has slowed, it still offers another choice for home buyers and is a "competing factor with existing home sales."

Casey said a Helper Loan program last spring at WESTconsin Credit Union, offering zero down payment for first-time home buyers, was a huge success.

"We didn't even have to advertise for it, there was such demand," he said.

Casey predicts the robust housing market will someday reassert itself.

"I'm still bullish on real estate for the River Falls area," he said. "It's leveled off but it'll rebound. With our location and growth potential, River Falls is positioned well. We've just hit a stumbling block."

The stumbling block has affected local builder Cudd Brothers Construction.

Co-owner Doug Cudd says the home-building market is the "toughest I've seen since we started out in 1975."

For years Cudd Brothers has averaged building and selling about 20 houses. This past fiscal year that figure was down by more than half. Cudd said that for the first time in the business, he's even had layoffs.

"You can't keep putting up models and hoping someday someone will buy them," he said. "I don't want to make this sound doomsday, but it is a real concern. Not many people are buying houses right now"

Several factors, Cudd said, contribute to the downturn. Higher interest rates, higher gas prices and impact fees that many communities, included River Falls, now charge for home construction.

High gas prices dissuade some people, many who work in the Twin Cities, from moving out as far as River Falls.

"More people would like to come out and live here because of the small-town feel, but the long commute and the cost of gas are keeping them away," Cudd said.

Another issue is housing costs. Cudd said that condos his company is building in the Spring Creek Estates subdivision that are in the $150,000-range are "going well."

On the other hand, in the same subdivision are single-family homes in the $250,000-range, and "three of them are just sitting."

Another challenge for local builders like Cudd Brothers is competition from national builders like Lennar and D.R. Horton.

"They've come here and some guys may get shook out of this business," Cudd said. "There's pressure on the smaller guys, and they're going to squeeze us."

Cudd said about all a small, hometown builder can do is keep prices competitive and emphasize a quality product.

"Hopefully it's just a cycle we're going through," he said.

Local statistics

An online search at (official site of the National Association of Realtors -- NAR) in the 54022 zip code shows 509 properties for sale. Of those, 320 are twin homes or multi-family dwellings; about 170 are single-family homes.

Those properties range in price from $70,000 for a 676-square foot one-bedroom one-bath apartment on Bartosh Lane to a $1.6 million 2,800-square foot three-bedroom three-bath home on Glenmont Road in the town of Troy.

The least expensive twin home listed is $124,900, which buys 1,014-square feet of living space including two bedrooms and two bathrooms.

The least expensive single-family home listed is $139,900, which buys 1,336-square feet of living space with three bedrooms and one bath.

Other perspectives

Most industry experts agree that "affordable housing" is hard to define. Local real estate agent Roger Karshbaum asked, "Affordable for who?"

To find an area's affordable threshold, he said, look at the median income around town.

"It's a buyer's market," he said. "No doubt about that."

He attributes that to a big inventory of available homes and to sellers pricing their homes a little lower. Interest rates have risen but not drastically compared to the last few years.

Current interest rates generally run between 5.75% and 7% depending on the kind of loan and a person's credit rating. The national average interest rate as of last week was 6.7% on a 30-year fixed mortgage.

When Karshbaum started in the business 20 years ago, rates were around 17%.

He said the housing market set sales record after sales record in the past few years, but "Nothing can keep going that long."

He said he and his team are staying busy selling existing homes under the RE/MAX name. He perceives that the new-home industry has slowed the most due to high construction-material costs and because interest rates continue creeping up.

"It's not dead," explains Karshbaum about the new-home market. "It's just leveled off some."

The community features that help him sell River Falls? Good schools, the university, a distinctive atmosphere and "great" park space.

Karshbaum was asked about why there are twice as many twin and town homes offered in River Falls as there are single-family homes.

He said that's because the twin and town homes appeal to two markets: First-time home buyers looking for an affordable deal, and empty nesters or retirees who don't need as much space.

Local agent Terry McKay sells for ERA-River Valley Realty and agrees that it's a buyer's market now. She said it's not that sales are necessarily that slow, but inventory is way up.

People see that things aren't moving too fast and figure they can take their time making a decision. She thinks if people have extra cash, it's a good time to buy.

She said, "The only people who are moving are the ones who have to."

McKay said as always, what comes into play are the three Ds of real estate: Death, divorce and don't want to be here.

Todd Kuchera, owns Lund Builders, Inc. in River Falls, and said business hasn't slowed much. He realizes that may not be the case with all builders.

"The building environment now isn't as bleak as some people perceive it to be," he said. "Interest rates are still good."

He supposes that the national home builders that entered the River Falls market, concentrating on the new developments, are experiencing a slower pace than they were a few years ago.

Many anticipated pulling people in from other markets and selling a higher volume of homes than has actually sold.

Kuchera's company works mostly with people who own a country lot or other piece of land and want to build on it. He said his clients usually plan the new home then sell their other one, and not too many have problems doing that.

"We're actually quite busy," he said. "Most people we work with have sold their homes."

It makes sense to him that builders restricted to a development may be burdened by a high inventory that includes both land and houses. Kuchera perceives that slow sales in the industry probably result from a market correction, not necessarily a bad economy.

Earlier in the year, Lund was running even with last year's numbers but may end up closing the year with smaller numbers than 2005.

Kuchera said his company also does home improvement and remodeling jobs. It's pursuing more of that work to balance things out in case the market slows more.

City perspective

City Planning Director Buddy Lucero said home building in River Falls has, for decades, experienced ups and downs.

"It's slowed down again since the first of the year," Lucero said, attributing the latest drop to rising interest rates and "overbuilding on some areas."

Lucero said there is a lot of "spec housing" that's gone unsold. He also pointed to the changing size of local housing projects.

"It's such a difference in scale. Before you had developments of 20-30 acres, now you have 200-300 acre developments," he said, adding that the entry of national builders on the local scene has expanded the glut.

Lucero said that as a planner, he would like to encourage more local jobs and a greater tax base through commercial and industrial development instead of having more houses.

"If there isn't something unique, such as the new senior citizens complex at the South Pointe (subdivision), why support more of the same thing in housing?" he asked.

Joe Lenzen, local building inspector, said the housing slowdown actually began two years ago.

"That's when the bubble popped," he said. "What you're hearing now is the whistling of the balloon."

Lenzen said the number of housing permits his department approves hasn't changed dramatically, but something else has.

"The majority of homes are being built by the big national companies like Orrin Thompson, and they come in and do spec or model houses rather than custom built ones," he said. "There's a glut of those sitting empty now, including a few in Sterling Ponds that have sat empty for nearly two years."

Lenzen added that there are also plenty of undeveloped plotted lots in the new subdivisions. He pointed to Bright Keys out of the Twin Cities, which has slowed its town house construction in Boulder Ridge just east of the hospital.

"There's a big adjustment going on with home prices dropping and more houses available," he said. "What you're seeing is that these larger builders are cutting back their work here and even leaving town."

Lenzen said that vacuum should favor the local builders, who don't have many projects lined up anymore and are doing more remodeling jobs to fill a "niche market."

"The explosive growth that was predicted here just hasn't materialized," he said.

National snapshot

The National Association of Home Builders (NAHB) puts new-home sales for the first half of 2006 down by 11.9%. An NAHB economist said the slowdown indicates that the market has eased into a cooling-off period that many predicted would come.

Midwest new-home sales showed a decrease of 7.9%. Much of the inventory builders count includes homes still under construction.