The Housing Panic Is Even Here In Iowa – An Update On The House Hunt

So many readers have been emailing me about our house hunt and have questions about the details of it that I thought I’d write a quick update about how it’s going, mostly because it’s interesting.

Housing prices in Iowa are very nice compared to other regions of the country. You can get a four bedroom house with 2,000 square feet of living space for $200,000 pretty easily, and this has made the house-hunting experience a lot of fun for us because we can look at some very nice houses.

We have an agent who is an older brother of a friend of mine who has been pretty involved in the process, and he flat-out told us at the start of this that this is the best buyer’s market he’s seen in his life. He’s not kidding, either, as we found out last night as we were touring houses and talking to people.

For one, there’s an unbelievable amount for sale. In one area, we walked down the street and were able to count, within our sight range, nine for sale signs. To me, on a normal street, that’s an incredible amount. Minimal research shows that the majority of them have been on the market for six months or more. These are nice houses. I’ll admit, I live in rural Iowa, so my perspective is probably skewed compared to the rest of the world, but this is what I see when I walk around.

As a result, many home sellers have a very strong hint of desperation to them. One agent flat-out told me that his clients would listen seriously to any offer, and we’re being shown houses that, on paper, are very far out of our price range, but they can and will entertain offers that are in our price range. Our agent is telling us to make an initial offer of 25% below asking price or 10% below assessed value, whichever is lower. These things tell me that there is some desperation in the air to sell homes, and it also means we may be getting an amazing house.

Of the houses we’ve visited, only one has struck our fancy, and interestingly it was the least expensive one of the lot. The other ones all had some basic structural features that turned us off, key things that were exposed by our house buying worksheet keeping us on task for what we are looking for.

These are interesting times, my friends. I’ll try to keep you up to date on what I observe, but I can say this for sure: rural Iowa is an amazing buyer’s market right now.

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  1. k says:

    I lived in Iowa for the first 25 years of my life, and still come back several times a year to visit family. Although I hope you get precisely the house you are looking for, the situation you describe would scare me. The decline of rural communities throughout the state–and the greater upper Midwet region–due to the rise of big ag, an unstable ag market, outmigration and an aging population has been well documented. I don’t know where you are looking, but in a lot of areas there is a reason so many people are desperate to sell: the fact that the community infrastructure is crumbling around them. It’s not a recipe for a home appreciating in value, or even holding its value over time. Now obviously, that’s not going to be so true in some areas of Iowa–Johnson County in and near Iowa City, Cedar Rapids and immediate surrounds, the Quad Cities, many areas of Des Moines and outlying Dallas County, and Ames proper and a smaller portion of Story County spring to mind as more stable markets. But the fact that you describe a looking in a rural area in Iowa sends up flags to me. I am a huge supporter of investing in your chosen community and putting down roots,and you may have very good reasons for wanting to live where you do, but in much of rural Iowa over the last 30 years, real estate (other than ag land bought by real estate developers advancing urban sprawl) has not been a wealth-building proposition.

  2. woody says:

    I too would be cautious about buying a house in an area where 8 or 9 other houses were for sale on the same street. One or two would be fine, since many people do put their houses up in spring (spring is classically a bubble for buyers). But if that many houses are up for sale, there’s a problem with something.
    It could be any number of things, but the end result is that neighborhood is going to change with so many people moving. It could go up or down, which is great if it’s a so-so to no so good area, but if it’s already a “nice neighborhood”, theres not a lot of room to go up, and a lot of potential to go down.

  3. You’re in an enviable position. A year ago we moved (job-related) and sold at the height of the market in our old area. We bought into a much slower market, which was good, but it was nothing like the market right now. We also live in a rural area, and last year there were about a dozen homes that fit our criteria (low enough price yet enough space to accommodate four kids). This year we were perusing the real estate listing out of idle curiosity, and the current housing inventory is staggering. Obviously, this will lead to some great deals to be had. Ah, well… We love our house, and we love the fact that we didn’t rent for a year, as we’d then be staring down the barrel of another move. Moreover, my employer paid for the initial move, so we’d be doing the subsequent move on our own dime.

  4. UncleOxidant says:

    For a look at inventories nationwide check out: http://www.housingtracker.net/

    Inventories are up all over the place. It’s not just rural Iowa. This is, for the most part, a nationwide phonomena. Lending standards have tightened quite a lot since late February and they’ll continue to tighten for the next few months at least.

    Countrywide, the nation’s biggest lender has just topped $1.5Billion in homes going to foreclosure (that’s homes that it has on it’s books right now awaiting sale) – and that’s only one lender. LendingTree laid off 20% of their staff last week saying that while demand for loans was still high, fewer loans are getting funded due to the tightening lending standards – less people are able to qualify for home loans now.

    I firmly believe that we’re not anywhere near bottom yet. Maybe next year. Historically, these sorts of housing slumps tend to last for several years.

  5. hickepedia says:

    Not being familiar with Iowa’s property tax laws, my caution to you would be against getting a house that you can afford from a financing perspective due to the desperation of the seller, but whose assessed value shoots up to the point where the annual property tax payments on it get too high. Since you’re not buying the house for investment purposes, this is one of those total cost of ownership things about which you occasionally write. :)

    Lots of houses in my area just recently had 18-10% hikes in their county-assessed values, and since that’s immediately reflected in the next year’s tax bill, plenty of homeowners are experiencing sticker shock…especially since the newly-flat real estate market means that they are going to have trouble getting rid of the tax liability if they want to move.

  6. Trent Hamm Trent says:

    The problem isn’t that people are moving out – the town I live in has had population growth in every census. The problem is that many people were working factory jobs and saw the 2000-2002 housing market as an opportunity to get into a nicer house than they could really afford, a house with a 5/1 or a 7/1 ARM paying for the whole thing. Now that rate is adjusting and they’re pretty scared. The lower end of the market right now (around here, that would be $80,000 to $120,000) is nonexistent – anything liveable in that range is bought immediately by people desperately trying to get out of their $220,000 homes with ARMs on them. My wife and I are in a financial situation where we can swoop in here and take advantage by offering $180-190,000 and seeing what happens.

  7. Tyler says:

    Trent, you ever do any pheasant hunting out that way? We go to ND every year and I would love to see what IA is like. I used to live in WI but the birds out there are nothing compared to IA, SD, ND areas.

  8. Jeremy says:

    I’m in my second house now, which is smaller and more centrally located than our last house. I wish I knew then what I know now.

    Our first house was a large, 2500 sq ft home in a new housing development. It was a much bigger house than we needed (young couple with no kids), but the price was attractive, and people told us to buy more house because of the “fact” that it would have greater appreciation. Because the house was so far out-of-town, it cost the same as a 1500 sq ft home in town would have cost, so it seemed like a great idea. Besides, it was only 15 minutes on the highway to get downtown.

    Here’s what happened, that we did not expect:

    1. Utility costs were sky high. Even though we paid extra to upgrade to every energy efficiency option available from the builder, air conditioning the place in the summer cost $400/month. This is double what I expected. A smaller house would have had much cheaper bills.
    2. Traffic. That 15 minute drive downtown was actually 1hr during rush hour.
    3. Gasoline. Gas prices doubled. Neither of us worked anywhere near where we lived. Our fuel costs went to around $400-$500 month. This drove down the value of our home because other suburbanites like us were hit by this cost, and started moving out of their suburban homes to live closer to work, to lower their fuel costs. (Also, we had to drive further to go to the store, to see our friends, or to do basically anything.)
    4. HOA fees increased.
    5. New development (big-box retail and apartment complexes) very close to our housing development surprised many of us, and many residents put their houses on the market to escape it.
    6. All that space to fill. We bought more furniture and stuff than we needed to fill the big empty house. Probably about $10k at the time we moved in.

    Years later, we now live in a 1250 sq ft home, much closer in. It’s an old neighborhood, so I don’t expect too many surprises about new development in the area. The place has plenty of room for us, reasonable utilities, and much lower property taxes (even though the price of the home was about the same than our last home). Our fuel costs are much lower now, and we have no HOA fees.

    I hope that helps you avoid making some of the mistakes we did.

  9. Jeremy, you just described our first neighborhood, although in our case our house was actually too small for our growing family. Still, I can’t help but be amazed that your electric bill topped $400 due to A/C. We live in a large (3000 sq ft) house in the South, where it gets very hot and stays very humid. Moreover, our house it completely electric (i.e., no gas), yet our electric bills for the first year have averaged in the $130 range/month (I’m thrilled by this, as electricity prices have gone up, but we’re still beating the former owner by about $35/month). And no, we don’t keep it hot in the house — we just don’t keep it overly cool.

  10. jake says:

    In southern california $200,000 is a down payment. The houses here, low is $300,000 and to be honest anything below that, you can almost say that its not worth living in because of the neighborhood.

    Gosh, I see your numbers of $180K to $200K and it makes me cringe at how expensive socal has become.

  11. Ted Valentine says:

    Jake I was just getting ready to say that I thought the housing bubble was going to pop in Cali. I can honestly say that Iowa was the last place I’d expect a real estate bubble bursting.

  12. Jeremy says:

    Five Cent, our house was in Texas. The thermostat was programmed for 73 degrees 6pm-7am, 78 degrees 7am-6pm. We changed our air filters monthly. Our bill included water, and we ran our sprinkler system once a week during this period. The house had 2 separate A/C units (one downstairs, one upstairs). The living room was open to the 2nd story, so this may have contributed to an lack of cooling efficiency (since both units were trying to cool a partially overlapping area).

    Before living there, I lived in a 900 sq ft rent house with window units, and my electric+water ran $90/month in the summer. I only ran the A/C while home, and never watered the lawn. The house was falling apart (50-60 years old), and up on blocks, so it was probably extremely lacking in energy efficiency.

    I have not yet spent a summer month in our new, smaller home, so I do not yet know what the utility costs will be, but I expect they will be somewhere in between, closer to what it cost when I was renting.

    I was just bringing this up to illustrate that there is much more cost to owning a home than the mortgage, and in my case, a larger home ate up alot more of my income than I expected.

  13. miguel says:

    It’s interesting to hear about seller’s desperation. I closed on the sale of my old house in mid April. The first thing our agent told was, not to worry about the market slump –it’s media driven she said. I don’t know if it was luck, or if my area wasn’t very badly hit, but we sold our house for exactly the price we wanted. We had an offer in 2.5 weeks! From my personal experience I tend to think that the housing market has cooled, but it’s not that bad.

    As for where we’re living now? We are house sitting for the next 5 years. We live mortage/rent free. In exchange we pay for up-keep, and utilities. We plan on saving at least 100K during this time.

  14. Jim Lippard says:

    I think there is a very high probability that 2008 will be even more of a buyer’s market for homes in the United States than 2007, based on when ARMs will be resetting. See the third chart on this blog post.

  15. Jeremy, we keep our house at 76 round the clock during the A/C season, and considerably cooler during the heating season (my wife stays at home with the boys, so we can’t really save extra during the day).

  16. Peter says:

    Trent,

    FOR GOD’S SAKE – DO NOT BUY A HOUSE IN TODAY’S MARKET!!! Are you aware that there’s an *EPIC* housing crash underway? And that it’s JUST getting STARTED? Are you paying attention to the news vis a vis the mortgage meltdown, bankruptcies, foreclosures, financial markets?

    I’ve been reading your blog now for about a month – you’re obviously a smart guy. But if you buy a house today, or next month, or within a year from now, you’ll be making the biggest financial blunder of your life – and you may NOT be able to recover from it ie. purchasing a depreciating liability while the prop taxes go up and up.

    Based on what I’ve read in your writings, you’re the kind of guy who REALLY hates to make financial mistakes. If you don’t believe anything I’m telling you, here’s some other places to go and read up on what’s going on in the real estate market:

    http://tinyurl.com/444qj
    http://tinyurl.com/7z246

  17. Jeremy says:

    I have to agree with k in the first response above (you need to look at the local economics)– what needs to be seriously taken into account is affordability – and you can only really calculate this by comparing the median income in a given area to the median housing price, or perhaps the average income to the average housing price.

    Is the median house where you are looking about 3x the median income where you are looking? If it’s not by a good bit, it’s out of proportion to its historical average.

    The other thing to consider is: is it really a good thing that so many houses are on the market? They are not selling for a reason, ie the price is too high. If you were shopping for milk would you rather have a pick of 9-10 overpriced brands, or just a couple (same quality as the 9-10 from before) for less money?

    Another calculation you need is to see how much a similar home rents for. If a fixed 30 year mortgage payment is similar, you are only paying a little bit more after taxes & maintenance. If there is a big discrepancy, wait for prices to come down and save the difference in the meantime.

  18. Trent Hamm Trent says:

    Peter, the Iowa housing market is not insane in the least. We just looked at a freshly built home with 4 bedrooms and more than 2000 sq. ft. of living space that was listed for $175,000. If you compare that to average Iowa wages, that’s completely reasonable and not really indicative of any kind of bubble. The only reason there are a lot for sale is because people with a $30K household income got into a house like that with a jumbo loan and it inflated on them and now they need to move down to a $100K home.

  19. plonkee says:

    I’m really pleased that your house buying worksheet has been helping you with your choices.

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