The future of residential: a roundtable on what to expect for the residential real estate market in the capital region

The Baton Rouge Trends Seminar is a great source for data, numbers and charts. But what about the big picture?

Over lunch on May 25, Business Report challenged five local real estate professionals--Scott Bardwell, Teynac Duncan, Darryl Gissel, D. Wesley Moore and Margaret Musso--to pull out the tea leaves and chicken bones and tell us where the residential sector in Baton Rouge is headed. Staff writer Hal Cohen moderated.

Interest rates and mortgages

Business Report: How is the market doing, and how much do interest rates have to do with that?

Margaret Musso: The market is doing great, and interest rates have everything to do with that. As gradually as rates are going up, the market is going to stay really good. If they get up to 10% or 13%; we might have problems, but if they stay rising like they are, things will be good.

Wesley Moore: And it's mainly the short-term rates that have been rising lately. Long-term rates are still low. A great number of mortgages are tied to long-term rates. Now, if you have an adjustable rate, you're tied into the short term. But housing remains very affordable for most people. You can move up without getting a raise.

Scott Bardwell: The move-up market will be the first to go when rates go up. Just think about what is affordable for a young family versus for an empty nester with a lot of equity in their home. Even if they don't get as much for their existing home, they've got more in it.

Where does that leave people who are buying more than they can afford, through adjustable-rate, 100% or interest-only mortgages?

Bardwell: Interest-only and ARM are the high risks, especially sub-prime. Those mortgages are already at a high rate, and an extra $50 a month for those homeowners might do it.

Musso: I keep hearing more and more people are doing that. People are safe doing that for now, because they have equity through appreciation.

Teynac Duncan: But you also see lenders causing people not to have equity. You've got so many lenders advertising to people to combine their debts, to over-mortgage their homes. Owners are going and pulling 110% of their equity out of their property, and they don't have anything left in it. And the asset is not necessarily increasing fast enough to cover that. The equity problem is going to create foreclosures, in my estimation.

Musso: I remember back in the early '90s, 85% or 90% loans were not even discussed. Now, I see 100% loans every day. With the continual appreciation in the market, lenders are just not scared anymore. A lot of cases don't even require new appraisals.

Are most people determining affordability based on the note, not the cost of the asset?

Duncan: Yes. Definitely.

Darryl Gissel: You probably see more of that in new construction.

So if, as result, more people are buying more house and holding less equity, is that a worry?

Musso: I see most of the 95%-and-up mortgages in the lower prices. Most of the higher priced houses are getting 20% down, so buyers can avoid mort gage insurance. So at least they're taking that 20% with them when they sell.

Duncan: I don't know that people are really being more conservative at the higher prices. Those people can also buy more house now, and they can afford to take more equity out. People want nicer homes, and we're seeing higher sale prices than I've ever seen. We're seeing people fight over million-dollar homes. I've never seen that here. We have a higher high end. We're flat in the number of transactions--up 2% from last year. But we're up 12% in volume, because the average sales price is up $15,000. There's more money going into these houses, but there are not more houses being sold.

If people are relying on increasing asset values for their equity, are they relying on value that might not be there in the future?

Gissel: The homebuyers I deal with are pretty conservative to begin with. The ones who are a little more out on a limb are the ones buying for investments--people calling up looking for a duplex or a triplex--and you can tell they're banking on that low interest rate staying there. The actual homebuyer I find to be fairly cautious.

Musso: I think it's in the new construction, where prices are higher, where you see people over-leveraged.

Gissel: When interest rates go up, in suburban markets there are a lot of houses that are very similar. That's where home prices will be hurt long-term. In a more established neighborhood, it's a smaller supply.

Moore: Short-sightedness is a term that comes to mind. People buying as much as they possibly can and leveraging as much as they can at these super-low interest rates. Investors are doing the same thing, thinking, "This thing will cash-flow wonderfully for me at today's interest rates."

Visions of a tract-home future

Are developers still able to sell their lots quickly to builders?

Bardwell: Builder demand is so strong that developers are now weeding out the builders and trying to get them to take more and more lots. It's more of a team effort now.

Musso: The builders I know will take every lot they can get.

Moore: You're seeing a lot of builder-developers now, especially out in Ascension and Livingston.

Bardwell: And you see builders just buying small tracts and developing them on their own, especially in East Baton Rouge, where there are not many big tracts left. That's more of a custom-builder model, whereas further out in Ascension and Livingston, it's more production-line.

Duncan: It's a very different market when you bring those guys (large-scale builder-developers) in. They control so much more. They control what you're going to get. They offer their basic five models of homes.

Moore: That's why they call it "tract building."

Duncan: Exactly. It's a cookie-sheet operation. One advantage we've had in Baton Rouge is that we haven't had a lot of cookie-sheet development. Here, developers and builders do 35 or 25 houses, and they take more pride in what they do.

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Moore: Another short-sightedness comes in with people buying those kinds of homes. The physical life might be shorter than their 30-year loan.

Duncan: That's one reason why Livingston has gotten the reputation it has compared to Ascension: smaller house, less average sales price and less quality.

Musso: Those (tract) subdivisions will always be self-contained, value-wise. As an appraiser, I'd never go out of that subdivision for comps. If there were no good comparables in that subdivision, I'd have to go into another similar subdivision. I would not go into a subdivision where they're putting 10-foot ceilings, crown moldings, granite countertops. It might be a half-mile down the road, but it's apples and oranges.

Moore: Common sense has to kick in. If you can buy a brand-new four-bedroom, 2,200-square-foot house with a garage for $150,000, and you consider that these guys have got to make money along the way, you should be wondering, "How wonderful a product can they be building?" Caveat emptor.

Where does that leave the tract-home homeowner, in terms of their house being an asset?

Gissel: The buyer just has to be sure they're in the best subdivision they can be in when the market tightens up. It all comes back to how well those neighborhoods maintain themselves.

Musso: There's not much room for appreciation in most of those homes.

Duncan: In some instances, we're building subdivisions where the value is actually going to go down. You're building a slum for the future in some instances.

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East Baton Rouge and the 'burbs

Permitting data from 2004 showed that East Baton Rouge had not only the most new houses, but also the greatest percentage increase in the area. What happened to everyone fleeing to the suburban parishes?

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Musso: As long as we have good land in East Baton Rouge Parish, I don't see why it wouldn't grow faster than the suburban parishes.

Moore: Out-migration is the reason.

Musso: But in Livingston and Ascension, we're having traffic problems and school problems and every other kind of problem now. I think the problem in East Baton Rouge is that we're going to run out of land.

Bardwell: Ascension and Livingston were a good product for the time, but as downtown continues to come back, as gas prices continue to rise, people don't have that preference for the suburban sprawl as much.

If Ascension and Livingston lose their draw, who benefits?

Moore: A factor that is huge for East Baton Rouge Parish was the opening of the Bluebonnet Extension and the opening of all the land there--Lexington Estates, Wampold's land. Even Iberville Parish is expecting growth near the parish line due to the proximity. You've got hundreds and hundreds of acres there, land that has essentially been off the market for years.