UAFS Regional Economic Outlook 2nd Quarter 2011

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sCENTER FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

Vol. 2, Num. 2

2nd Quarter, 2011

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Fort SmithREGIONAL

Economic OutlookReport Sponsored by Arvest Bank

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Sponsored by Arvest Bank Fort Smith Regional Economic Outlook, 2nd Quarter, 2011

UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS

The Fort Smith Regional Economic Outlook Report is published quarterly by the College of Business and the Center for Business Research and Economic Development (CBRED). Subscriptions are available for $25 per year.

For more information, please visit us on the web at www.uafs.edu/cob/cbred, or contact us at:

Center for Business Research and Economic DevelopmentUAFS College of Business5210 Grand Avenue BI 218P.O. Box 3649Fort Smith, AR 72913-3649

Phone: 479-788-7938Fax: 479-424-6938E-mail: [email protected]

The Center for Business Research and Economic Development seeks to be the primary source of Fort Smith regional economic information, a catalyst for bold, innovative ideas and strategies for economic development in the area, and an active partner in the execution of sound, integrative solutions for regional prosperity and health.

Vol. 2, Num. 2 2nd Quarter, 2011

From the Director ........................................ 1

Second Quarter Summary of Regional Economy ............................... 2-3

Consumer Sentiment in the Fort Smith Region .............................. 4-8

Review of Regional Single-Family Residential Real Estate ............................9-16

Sponsors .................................................. 17

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UAFS College of Business Sponsored by Arvest Bank 1

FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

I am reminded that there are few things more important to our quality of life than the health of our economic system - locally, nationally, and globally. Our interconnectedness to these broader systems provides the Fort Smith region many benefits, but exposes it to risks that we have a difficult time even understanding, much less influencing.

As markets gyrate wildly upwards one day, then down the next, we feel our dependence on this great economic network. Some days we find that we are not in control of the very things

that determine our individual and collective future in this relatively obscure community located in west-central Arkansas. Globalism really does matter.

There are areas of improvement in our regional economy, but these improvements are overshadowed these days by national and global ills that have the potential to disrupt, even reverse, the little good news we have. In my last letter, I stated that “mixed signals are everywhere.” As I wrap up this issue of the quarterly report, mixed signals would be good news relative to the seesaw behavior observed in markets in recent weeks.

Last time we viewed inflation as a threat. Now it is recession which may be on the horizon. We’ve watched our national leaders nearly default on our debt obligations. Then we experienced our first ever ratings-downgrade of our nation’s debt.

The Dow has dropped below where it started 2011 and the S&P is down around 18% since April. A correction? Maybe. The beginning of a “freak out”? Possibly. The market is looking for leadership to address forcefully and with substantive clarity what the policy directions will be going forward. We’re still waiting.

But here are a few basic facts that we don’t want to lose sight of in all this turmoil. The recovery continues apace, albeit a slow pace. Business continues to record very solid results in this most recent round of reporting and the GDP limps higher. Most companies have significantly improved balance sheets and piles of cash. Employment growth is weak, but seems to be moving in the right direction. The consumer seems to be hanging in there, though clearly more hesitant.

With these factors at work, the prospects going forward continue to be murky. A QE3 of sorts is already in play, in my view, and will be even more evident should the volatility of markets continue to be the top story on the evening news and if key metrics weaken further. Until then, gold is shooting for the stars, and ironically, our downgraded U.S. treasuries look relatively as good as gold.

In this report, we review the highlights and lowlights of the Fort Smith area economy. Retail and auto sales continued to show progress in the second quarter, and employment turned in an overall uptick over a year ago. Residential real estate remained mostly negative. Our survey of Fort Smith consumer sentiment for June declined from last quarter to the lowest level since we started collecting data a year and a half ago.

In the final section we take a first look at what has been going on in the regional single-family housing market in recent years. We expect to look further at this sector in our next issue, focusing on the construction/builder side of the business as well as key issues that will mold the sector in the coming years.

As always and at every opportunity, I want to thank our sponsors, advertisers, and subscribers for their support. We appreciate our partners in the common cause of making the Fort Smith region the best it can possibly be.

To our future.From

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Kermit W. Kuehn, Ph.D.Director, Center for Business Research and Economic Development

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The Fort Smith regional economy continued a more mixed-bag performance in the second quarter relative to the same period a year ago. Employment was up for the quarter, the first time this has happened since we started tracking quarterly results in 2010. Residential real estate continued to produce rather dismal results relative to a year ago, but retail and auto sales numbers were up over the same period. The most recent economic activity index was for April and was estimated at 95.4, down nearly two percent from 2010 levels for the same period.

Taking a closer look at the quarter, retail and auto sales data continued to notch improvements over last year but at a more modest rate than the previous quarter. Retail sales were up 1.3% for the three-month period ending May 31, reflecting a more cautious consumer. In fact, results reflected a weakening retail picture as May sales were down 5.4% from a year ago.

Auto sales, on the other hand, continued to trend higher for the quarter relative to a year ago, up a slim .4% in the second quarter. However, the number of units sold actually declined in June relative to a year ago, reflecting a softening of buyer activity here as well.

To add more ingredients to this already soft consumer story, regional consumer sentiment declined 5.5% for the second quarter relative to a year ago and was lower than the first quarter reading, suggesting a more tentative assessment of consumer buying activity going forward. (See our full discussion of consumer sentiment in the next section.)

Employment activity posted modest but steady gains relative to the same period last year, recording a meager .3% increase over the second quarter of 2010. Total MSA employment was up an estimated 400 jobs from a year ago. Taking a closer look at Bureau of Labor Statistics estimates, we find that most of the jobs created were

in leisure and hospitality (633), business and professional services (367), and trade, transportation, and utilities (300). The main sectors to lose jobs include manufacturing (233) and government (833).

The 7.9% average unemployment rate for the MSA for the second quarter was unchanged from a year ago. But this number masked the relatively sharp rise recorded for June, which jumped to an unadjusted rate of 8.4%. The rise in the unemployment rate in June was largely due to a rise in the number of reported unemployed seeking work and not to any significant decrease in the size of the labor force. Recall that the unemployment rate is calculated by dividing the number of unemployed by the total civilian labor force.

Of course, job numbers are preliminary and are estimates based on BLS sampling. Overall current views nationally continue to support a slow-growth scenario. However, there has been increasing evidence this

Second Quarter Summary of Regional Economy

Table 1. Summary of Second Quarter Performance

2nd Quarter 2011Base Year - Q2 Last Year - Q2 This Year - Q2 % Change

2005 2010 2011* 2010-2011Sales Retail Sales (MSA, Dec, Jan, Feb, 000’s) $264,826 $295,882 $299,774 1.3% Auto Sales (Seb., Craw., Frank. Counties, AR, 000’s) $27,482 $24,403 $24,493 0.4%Residential Construction (MSA) Residential Permits 56 65 41 -36.9% Value of Permits (000’s) $6,570 $10,040 $6,012 -40.1%New and Existing Home Sales (MSA) Number Sold 250 210 184 -12.2% Value of Homes Sold (000’s) $28,840 $27,189 $21,603 -20.5% Average Price of Homes Sold (Q1 Avg.) $115,514 $129,677 $117,408 -9.5%Employment (MSA unless noted, Q1 Monthly Avg.) Wage & Salary Employment (Total Non-farm) 120,567 117,833 118,233 0.3% Manufacturing 29,033 21,633 21,400 -1.1% Trade, Transportation, and Utilities 23,600 24,100 24,433 1.4% Government 17,367 19,133 18,300 -4.4% Education and Health Services 13,900 16,200 16,167 -0.2% Professional and Business Services 11,267 11,600 11,967 3.2% Leisure and Hospitality 8,767 8,767 9,400 7.2% Natural Resources, Mining, and Construction 7,100 7,467 7,567 1.3% Financial Activities 4,133 4,100 4,200 2.4% Information Services 1,600 1,200 1,200 0.0% MSA Unemployment Rate (Q1 Monthly Avg., NSA) 4.5% 7.9% 7.9% 0.0% AR Unemployment Rate (Q1 Monthly Avg., NSA) 5.1% 7.7% 8.0% 0.3% U.S. Unemployment Rate (Q1 Monthly Avg., NSA) 5.0% 9.5% 8.9% -0.6%Airport Traffic (Fort Smith) Total Passenger Traffic (Q1 Monthly Avg.) 18,436 15,549 14,588 -6.2%* Data as of June 27, except retail sales which includes December-February. Dollars are not inflation adjusted. Data not seasonally adjusted (NSA). Auto sales Arkansas only. Prepared by the Center for Business Research and Economic Development, UAFS College of Business.


UAFS College of Business Sponsored by Arvest Bank

CENTER FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

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month that re-entering a recession is not completely out of the cards. Many wonder when we actually left the last recession, but the metric we use to determine that, GDP growth, has continued to slog upwards. It remains to be seen how this will play out in the Fort Smith MSA.

If we thought employment languished in the first quarter, then residential real estate remains the poster child for what ails our economy. Based on MLS data for the second quarter, the number of new and existing homes sold was down over 12% from last year, while the value of homes sold was off 20.5% from 2010 levels.

However, current results continue to be compared with the period when federal incentives for home buying were in full swing, artificially driving up home sales in 2010. Unfortunately, this distortion will follow us for the balance of 2011, likely creating a more positive picture going forward.

Yet, there is some good news in this sector, as unit sales for June were up 8% over 2010, though values continued lower. The 553 units sold in the MSA for the second quarter was below the 629 units in 2010, and well below the 749 units sold in the 2005 base year.

While many ingredients remain in place to support home sales, such as attractive interest rates and attractive inventory and pricing, buyers continue to face significant headwinds. Qualifying for loans continues to be challenging, but it is the dismal picture of the economy which keeps many buyers on the sideline. We review the residential real estate market in more detail in the last section of this publication.

Residential construction results continue to add two cents of pessimism to the sector, with the average number of monthly permits for new construction down 36.9% from the same period last year and over 26% below the 2005 base year. This is in stark contrast to the permit activity of the first half of 2010, again likely impacted by the federal support in place during this time last year.

To round out our review for this quarter, airport passenger traffic was lower each month this quarter compared to 2010. For the quarter, average monthly traffic numbers were down 6.2% from last year, a troubling reversal from the recovery we saw in 2010.

AnAlysisAs of the writing of this report, it is clear that we are nowhere close to seeing our way forward at this stage of the recovery. In fact, in many ways the situation is murkier than it has been in more than a year. The result is that investors are skittish, gold is rising, and financial markets have given up much of the gains for the year. Businesses are holding record levels of cash, while the overall economy seems to be stalling out.

Hence, consumers seem to be pulling back and waiting, business is largely waiting on the sidelines, and Congress expends considerable energy to accomplish little in actual policy that clears anything up.

On the monetary side, the Fed concluded its quantitative easing (QE2) at the end of June and the world did not come to an end. Fed Chairman Bernanke did suggest that the Fed will do what it takes to “support” the economy going forward, which many investors read as a QE3 by any other name was already in the cards.

So, what are some of the issues going forward? Why the jitters? On the fiscal side, the first item to fray investor confidence was the weeks of wrangling over raising the debt ceiling which played out each night on the evening news. While the last-minute deal struck staved off a default, few were impressed by the actual substance of the deal. Markets tanked and Standard and Poor’s downgrade of U.S. debt about sums up the response.

Overseas, E.U. political leaders seem no more capable of resolving ongoing debt problems that threaten to engulf European economies. Emerging economies have been putting the brakes on their economies in the hopes of containing sharp increases in inflation.

The list of issues goes on and on, but leaves us with the continuing sense of doubt as to whether this economy is going to continue to improve, slide backwards into another recession, or worse.

Recent national reports on manufacturing and service sectors add additional fuel to the already negative tone blanketing the economy. National manufacturing and non-manufacturing numbers for July, reported by the Institute for Supply Management, reflected some of the lowest scores in over a year. The PMI (for manufacturers) recorded a 50.9, while

the NMI, which includes such sectors as professional services, information, and wholesale and retail trade, came in at 52.7. Index scores that trend above 50 are interpreted as a growth mode for the sector.

Arkansas employers’ hiring intentions for the third quarter of 2011 improved from the last quarter of 2011, according to the most recent Manpower Inc. survey of Arkansas employers. The survey revealed that 15% of employers intended to increase hiring during the third quarter, up from 13% reported for the previous quarter. Five percent intended to reduce headcount versus 6% in the previous report. All told, there was a slight uptick in hiring intentions across the state as employers looked forward to the third quarter. No report specific to the Fort Smith MSA was available.

While last quarter the word sluggish was used to describe the first quarter economy, stalling seems the operative word for the second quarter. GDP expectations have been declining, unemployment rates have edged higher, and the sentiments of consumers and business alike are trending more toward the dark side. The downgrade of U.S. debt by Standard and Poor’s is just another piece of unhelpful news.

This is definitely not the picture we had hoped to be reporting at this point in the recovery, particularly considering the level of sustained government support of the past couple of years.

With election season starting in earnest next year, the dynamics associated with an election season do not typically lead to substantive progress on the rather serious issues we face. Don’t expect too much to be different this time around, unfortunately.

The regional economy cannot avoid the broader dynamics in Washington, but there is evidence to suggest that things are improving relative to a year ago. Don’t be surprised if residential real estate sales show year-over-year improvement. Expect the same for employment numbers, though individual sectors will continue to be sketchy. And finally, if the consumer hangs in there, retail and auto sales may very well eke out a plus for the coming quarter.





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introductionThe Index of Consumer Sentiment (ICS) for the Fort Smith region declined again in the second quarter to the lowest level since we started collecting consumer data in the first quarter of 2010. The index for June, which measures consumer confidence for the Fort Smith MSA, was 55.3, a decline of 5.5% from the first quarter result of 58.2, and lower than the 64.5 reported for the second quarter of a year ago. The decline was not consistent with national results of 71.5 reported by the University of Michigan (UM) for the second quarter, which was up 5.9% from the previous quarter.

The two sub-indices for Fort Smith were also lower for the quarter. The Index of Current Conditions (ICC) for the Fort Smith region, a measure of consumer attitudes toward their current economic situations, declined by 7.9% to 55.1, while the national ICC declined .6%. The Fort Smith Index for Consumer Expectations (ICE) score, which measures consumer feelings about future

economic conditions, recorded a 3.6% decline as well, diverging significantly from the 11.9% increase observed in national data.

UM national results have run generally higher than Fort Smith MSA scores since we started collecting these data, but the gap had been closing some during recent quarters until this one. The ICE sub-index score is essentially the same in the first quarter for both national and regional respondents. Overall, area consumers were noticeably more pessimistic than national respondents for the second quarter.

tAking A closer lookArea consumer sentiment scores revealed less optimism in the second quarter relative to the first quarter of 2011. (See Table 1.) While the ICS and both sub-indices recorded declines relative to the March survey, a closer look into local sentiment suggests the negative tone was across all items of the index.

Two items comprise the ICC: people’s ratings of their current personal finances and whether the time is right to make major purchases (referring to durable goods). Area consumers reported more negative attitudes this quarter regarding their personal finances, down 9.2% from last quarter. National numbers were up 5% from the previous quarter.

The second item in the ICC, which asks whether this was a good time to purchase durable goods, was 5.7% lower than last quarter (87 to 82). National numbers were also down 4.5% from last quarter. Area consumers appear to view their current economic reality in less optimistic terms this quarter relative to last quarter.

The ICE consists of three items and seeks to measure consumer attitudes going forward in areas of personal finances and national economic prospects. As to personal finances over the next 12 months, there was less optimism relative to last quarter,

Consumer Sentiment in the Fort Smith Region

1 Possible reasons for the relatively lower scores compared to the national results are discussed in detail in the first quarter 2010 report, which is available online under our Publications link: http://cob.uafortsmith.edu/cbred.




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with a 1.3% decline reported (78 to 77). National results were up 4.9% for this item. In percentage terms, 17% of respondents in the Fort Smith area felt their personal finances would be better off a year from now versus 40% who expected them to be worse.

When asked about prospects for the general economy over the next 12 months and over five years, Fort Smith area respondents reported more pessimistic views about short-term and longer-term prospects of the economy. Area consumer scores registered a 7.2% decline relative to last quarter when asked about prospects for the economy over the next 12 months (69 to 64). National scores recovered remarkably

from the 24% decline reported last quarter, up 23.3% from the first quarter.

When looking at the five-year range, area respondents again recorded less optimism than last quarter with scores declining 3.7% (81 to 78). National scores rose by 14.1% from last quarter, reversing a decline of approximately the same amount in the previous reading.

To summarize to this point, regional consumers continue to hold increasingly more pessimistic views of their own personal financial situations and weaker views of the national economy. This pattern was consistent across items and indices. Fort Smith respondent scores for the quarter reflected less optimistic

views of current conditions and for prospects going forward than those recorded in the first quarter. This was in contrast to national respondents, which generally held more positive views on these items.

results specific to the fort smith economyFor each survey we modify two items in the UM scale to focus participants on the Fort Smith regional economy versus the national. These two items ask respondents to rate their expectations about the business conditions in the Fort Smith economy over the next year and also five years from now. The overall FS ICS index and FS ICE sub-index are impacted by the change. As these items

INDICESQ2/2010 Q1/2011 Q2/2011 % Change Q1-Q2

UM* FS UM* FS UM* FS UM* FS

Index of Consumer Sentiment (ICS) 76 64.5 67.5 58.5 71.5 55.3 5.9 -5.5

Index of Current Conditions (ICC) 85.6 65.4 82.5 59.8 82 55.1 -0.6 -7.9

Index of Consumer Expectations (ICE) 69.8 64 57.9 57.6 64.8 55.5 11.9 -3.6

INDEx COMPONENTS

Personal Finances – Current (ICC) 82 65 80 65 84 59 5.0 -9.2

Personal Finances – Expected (ICE) 116 95 103 78 108 77 4.9 -1.3

Economic Outlook – 12 Months (ICE) 79 75 60 69 74 64 23.3 -7.2

Economic Outlook – 5 Years (ICE) 84 85 67 81 77 78 14.9 -3.7

Buying Conditions – Durables (ICC) 139 102 133 87 127 82 -4.5 -5.7

Table 1. June 2011 Index and Component Scores

*UM= University of Michigan Survey; FS = Fort Smith Survey

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focus on future expectations as opposed to current conditions, the FS ICC scale is not affected (thus, is the same as ICC results in Table 1 for Fort Smith).

As can be seen from Table 2, Fort Smith respondents rated the overall situation (FS ICS) and future prospects (FS ICE) of the regional economy somewhat higher than the U.S. economy on the same dimensions (UM ICS). These results continue to affirm earlier reports where there was noticeably more optimism toward the Fort Smith economy a year and five years from now than in the national economy as a whole. However, this gap has narrowed in recent surveys. Scores from the unmodified scale are restated from Table 1 and are presented in the column labeled UM ICS.

Results for the first quarter reflected a 4.3% decline in the overall index (FS ICS) and a decline of 2.5% in the FS ICE relative to last quarter. While the decline in optimism was consistent in direction with the ratings Fort Smith consumers gave the national economy, they were less pessimistic about the prospects for the Fort Smith economy going forward than they were about the national economy.

Beyond the core meAsuresSeven additional questions were asked of consumers in order to better understand their views and expectations about inflation, personal spending, jobs, and income. Three more items were

included which asked consumers about summer travel plans. The specific questions, comparative scores, and percentage breakdown of positive-negative responses for each are contained in Table 3.

generAl economy And consumption indicAtorsPerceptions of the current U.S. economy were lower than March ratings, with 11% of the respondents indicating they thought the economy was better now than it was a year ago. Sixty-four percent indicated it was worse. The decline from 57 of last quarter to 47 on the index score reflected a significant increase in respondents with more negative views of the national economy, increasing from 55% to 64% in the second quarter.

Consumers in this survey seem convinced that higher inflation will be the rule over the next twelve months, with 88% indicating this view. This perspective was lower than the 95%

who felt that way the previous quarter. Clearly, higher prices remain the dominant expectation among area consumers for 2011.

When asked about overall consumption expectations over the next three months, respondents in this survey indicated they intended to spend less than those from last quarter (109 vs 115). Thirty-three percent of respondents indicated that they would spend more overall in the first quarter versus 24% who intend to spend less. This was a six percentage point decline over the previous quarter.

When it came to specific purchasing activity, 12% expected to increase spending on such activities as dining out, while 51% indicated they would spend less. These results were largely the same as those reported last quarter. Ratings regarding intentions in buying large-ticket items declined again in the second quarter, with only 7% (versus 9% last quarter) indicating they expected to make such purchases in the first quarter

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Fort Smith Scores

UM ICS Survey (Q2/11)

FS ICS Survey (Q2/10)



% Change Q1-Q2

FSICS 55.3 68.6 62.2 59.5 -4.3

FSICC* 55.1 65.4 59.8 55.1 -7.9

FSICE 55.5 70.6 63.9 62.3 -2.5*Items included in the FSICC are identical to the ICC; thus, no change.

Table 2. June 2011 Index Scores of Fort Smith MSA




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2 Neutral scores are not included in calculating index scores.

3 Positive responses to item Q9 are reflective of negative sentiment regarding pricing; thus, scores are reversed to reflect sentiment-score consistency. That is, a pessimistic tone regarding inflation should score lower relative to a more optimistic tone, consistent with the other items in the table.

SURVEY QUESTIONS

Index Scores Qtr. 2Percentages2010 2011

Q2 Q1 Q2 % pos

% neg

Q8) Are current business conditions in the country better, about the same, or worse than they were a year ago?

56 57 47 11 642

Q9) During the next 12 months, do you think that prices overall will go up, go down, or stay the same?

26 6 143 2 88

Q10) Compared to the last three months, how much do you expect to spend overall as a household in the next three months?

100 115 109 33 24

Q11) Do you expect to spend more, about the same, or less per week in the next three months on dining out?

71 63 61 12 51

Q12) In the next three months, do you expect to purchase a major household item, such as furniture, appliances, or TV?

37 32 27 7 80

Q13) Thinking about the Fort Smith area, how would you describe the availability of jobs today?

47 52 47 1 54

Q14) A year from now, will there be more or fewer jobs available in the Fort Smith area than there are today?

95 73 71 14 44

Q15) When it comes to summer travel plans, do you expect to spend more money this summer than last summer?

NA NA 52 13 61

Q16) Do you expect to vacation closer to or farther from home this year versus last year? NA NA 44 63 7

Q17) Do you feel more comfortable or less comfortable about spending money for a vacation this year over last year?

NA NA 32 73 5

Table 3. Additional Consumer Sentiment Scores and Current Quarter Percentages





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and 80% (versus 77% last quarter) who did not, suggesting a general decline of purchase expectations over last quarter.

Consistent with the generally more negative tone revealed in consumer sentiment scores for the second quarter, spending intentions for the third quarter were lower. The overall assessment here is rather straightforward. Based on this data, consumers expect to restrain spending in the third quarter, though not aggressively so.

employmentFort Smith respondents reported somewhat less optimism about the regional job market than in the previous survey. Index scores of current availability of jobs and prospects for job improvement over the next year drifted lower than last quarter. While the index was noticeably lower, ratings of current perceptions of job availability in the Fort Smith area indicated that 54% of the respondents felt that jobs were hard to get now (versus 51% last quarter) and only 1% stated that they were plentiful (down from 3% last quarter).

When asked about their spending intentions on summer travel, 13% indicated they intended to spend more this summer than last while 61% indicated they expected to spend less.

Respondents were asked whether they expected to vacation closer to home this year relative to last summer. Sixty-three percent indicated they did, with 7% reporting they expected to vacation farther from home than they did last summer.

Finally, 73% of the respondents indicated they were more comfortable spending money on vacation this year than they were last year, whereas 5% reported they were not.

From this data, it appears that consumers did not expect to spend more on vacation travel in 2011, but felt better about spending what they intended to spend.

Further, most respondents expected to stay closer to home this summer. One wonders if that would have been the result if they had known that record high-temperature levels would blanket the region for the summer.

Generally, results for this quarter revealed weaker sentiment across all three indices. The declines were generally modest and reflected a broad decline in optimism for the period. Consumption intentions were generally weaker as were consumer readings on regional jobs prospects and prospects for the overall economy.

These results seem consistent with the more restrained consumption we are beginning to observe in retail and auto sales data relative to a few months ago. Though regional employment data reflects an improving jobs environment, consumers seem unimpressed, and for good reason. National media continues to report heavily on negative themes such as budget conflicts, debt issues here and abroad, and financial market jitters.

Unfortunately, not much will likely happen over the next few months to change a pessimistic consumer into an optimistic one. The dog days of summer don’t look to add any happy new flavors to our economic menu. And with the upsized temperatures outside added to the mix, we’ll be happy when summer just stops.

ABout the surveyOf the 3,000 surveys mailed to the five-county MSA, 128 were returned undeliverable and 383 usable surveys were returned, providing a return rate of 13.7%. The confidence level as a result exceeds 95% for this survey.

The University of Michigan’s (UM) Index of Consumer Sentiment (ICS) survey is used to measure consumer attitudes on several economic themes. Collectively, these represent consumer optimism or confidence levels for any given period and can be used to compare any one period with other periods.

The overall ICS score includes five core questions and constitutes a general measure of consumer sentiment for the period. These questions cover three general areas of consumer sentiment: personal finances, business conditions, and buying conditions. Two sub-indices within the ICS make up the Index of Consumer Expectations (ICE) and the Index of Current Economic Conditions or more simply, Index of Current Conditions (ICC). The ICE “focuses on three areas: how consumers view prospects for their own financial situation, how they view prospects for the general economy over the near term, and their view of prospects for the economy over the long term” (University of Michigan). The ICC focuses on consumers’ views of their current financial condition and whether they feel secure enough about their financial situations to engage in major consumption activity.

For more information on the Consumer Sentiment Survey, methodology used and discussion regarding results, a more extensive narrative is provided in the first quarter 2010 report that is available online under our Publications link at www.uafs.edu/cob/cbred.

“Unfortunately, not much will likely happen

over the next few months to change

a pessimistic consumer into an optimistic one.”




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There are few aspects of economic life that impact a community and its members more than real estate, particularly residential real estate. Within the American experience, owning a home has been one of the central aspirations of most households. This has been particularly true of the Fort Smith region, where owner-occupied housing was reported to be nearly 62% in 2009 for the Fort Smith MSA1. This was well above the national and state numbers of 57.6% and 56.7%, respectively.

Further, for many, home ownership is the basis for most families’ net worth. There is no secret by this time that recent years have seen significant challenges for residential real estate around the country, and the Fort Smith region has not gone unscathed by this trend.

In this report, we take a look at what has happened in residential real estate

over the period from 2005 to the current time. Our data for this review is taken from Multiple Listing Service (MLS) and as a result, has certain limitations we need to recognize at the outset. MLS data only includes properties that were contracted for sale through a MLS member realtor/broker, and as such does not include property sold directly by the property owner – referred to as FSBOs or “For-Sale-By-Owner” properties.

Depending on the data source, it is estimated that FSBO sales might be as low as 10% of total residential sales to as high as 20%. The 2009 National Association of Realtors study suggested that approximately 11% of home sales were FSBO transactions. For our purposes, we assume that MLS data is a good reflection of the broader trends in the overall regional residential real estate market, whether MLS or FSBO.

This review will look at unit sales by price ranges and counties and average

sale prices by counties within the MSA, changes over time between list and selling prices at different price ranges as well as days-on-market by price range. We’ll also look at per-square-foot rates over different price ranges during the period. We’ll conclude with a review of some of the key factors that will impact the sector going forward.

home sAles in the fort smith msAAccording to MLS data, the total number of residential units sold annually in the MSA during the 2005 – 2010 period has declined 32.3% from a high of 2712 units in 2006 to 1836 units in 2010. For the first half of 2011, 917 units have changed hands, a 30% decline from the 2007 high of 1311 units for the same period.

Figure 1 highlights the significant drop by county over the period. The decline has been nothing short of startling, particularly in the two largest counties

Review of Regional Single-Family Residential Real Estate

1 This information was discussed in our 2010 fourth quarter report of the Fort Smith Regional Economic Outlook Report, available at http://cob.uafortsmith.edu/cbred.2 Summary of the report, 2009 Profile of Home Buyers and Sellers, available at http://www.realtor.org/press_room/news_releases/2009/11/survey_record.

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1 This information was reported in the 2010 issue (Vol. 1, Num. 4) of the Fort Smith Regional Economic Outlook Report, page 12, table 4.





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2005 2006 2007 2008 2009 2010

MSA Home Sale Units by Price Range(2005-2010)

< $100,000

$100k-$149,999

$150k-$199,999

$200k-249,999

>$250,000

Uni

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Source: MLS

0200400600800

10001200140016001800

2005 2006 2007 2008 2009 2010

MSA Home Sale Units by County(2005-2010)

SEBASTIAN

CRAWFORD

LEFLORE

SEQUOYAH

FRANKLIN

Source: MLS

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of Sebastian and Crawford, where declines have been 32% and 44.3% respectively. In contrast, LeFlore County grew from 57 units in 2005 to 147 units in 2010.

Where these declines have taken place has largely been centered around the lower-end properties, most noticeably properties selling for under $100,000, where the number of units sold declined from 1403 units in 2005 to 801 units in 2010. This is a 43% decline.

The next level of property, the $100,000 to $150,000 homes, declined from 707 units in 2005 to 527 units in 2010, a 25.5% decline. These bottom two tiers comprise well over 70% of all homes sold in any given year, reflecting a significant impact on the regional economy. Homes priced above $150,000 have experienced much lower declines, even showing signs of stabilizing in 2010.

As can be seen in Figure 2, the pattern of sales over the 2005-2010

period was not the same for both of the lower tiers, however. In taking a closer look at the data for the period, we see that sales of properties in the under-$100,000 category dropped steadily and sharply over the period. Homes in the $100,000-$150,000 range remained relatively stable during the 2005-2009 period, averaging around 700 units per year. However, this changed dramatically in 2010 when sales dropped to 527 units. Even with the first-time home buyer incentives in place during the first half of the year,

Figure 1. MSA Home Sales by County (2005-2010)

Figure 2. MSA Home Sales by Price Range (2005-2010)




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which were most likely to impact these lower-tier first-time buyer properties, the market was unable to stave off the declines observed here.

A quick calculation of the amount of sales commissions lost in 2010 relative to 2005 just from the decline in properties priced under $100,000 is insightful. If we assume the average selling price of homes in this category was $75,000 and commissions were just 5%, the difference in gross commissions in 2010 relative to 2005 was over $2.25 million (1403 units - 801 units x $75,000 x 5%). Again, these are the losses associated for 2010 only using the lowest priced property category.

One other observation from Figure 2 is that the decline in unit sales of properties under $100,000 had already begun by the time the recession officially started in 2007, continuing unabated to the present time. What might explain this trend in the lower-tiered property? One explanation is that buyers qualified to buy a home at this level are the most vulnerable to economic shocks. Recall that manufacturing jobs, a key source of jobs for those qualifying for lower cost housing, have been declining since the 1990s. Most notable were the Whirlpool layoffs in 2006 and going forward.

It is also possible that during the relative house buying frenzy of the 2005-2008 period more properties

simply moved into the next higher tier as property appraisals supported higher values during the period.

prices of homesOne of the prime selling points for owning a home was not only that the tax code favored home owners through interest deductions, but also the belief that home prices tend to move higher over time, thereby strengthening the financial statements of those who owned them. This assumption has been seriously challenged during this most recent recession, as property prices not only fell but continue to fall in many markets.

Figure 3 presents the average percentage difference between the listing price of a property relative to the selling price over different price ranges. The ‘discounting’ of property was the largest for the lowest and highest tier properties. Further, we see that, in general, discounting increased starting in 2007 and 2008 as the recession began.

Properties under $100,000 were the most highly discounted, ranging from 5.3% in 2006 to 7.6% thus far for 2011. For properties above $200,000, discounts rose from just under 4% in 2005 to around 5% year-to-date. Discounting for mid-tier properties (in the $100,000 to $200,000 range) rose about one percent as well for the period, though from around 2% to 3%.

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0%

1%

2%

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5%

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8%

2005 2006 2007 2008 2009 2010 2011

Listing versus Selling Price(Percentage Difference)

< $100,000

$100k-$149,999

$150k-$199,999

$200k-249,999

>$250,000

Source: MLS

Discounting reflects relative negotiating power of buyers and sellers. Larger percentage discounts suggest that buyers have the upper hand in price negotiations, while lower percentages suggest the scale is tipped in favor of the seller.

In looking at Figure 3, we see that sellers are clearly weaker in the lower-priced properties, suggesting that more distressed sellers are in this segment of the market. The trend line jumped significantly in 2009 into 2010, stabilizing at these elevated levels. Discounting has steadily increased in properties in the $100,000-$150,000 range. These trends are again suggesting continued distress in those price tiers where over 70% of units sold occur.

In sum, we’re seeing a classic buyer’s market and this seems to be the case across price ranges, though some declines in discounting in 2011 seem to be occurring in properties over $250,000 and in the $150,000-$200,000 ranges.

In looking at the average selling prices of homes from 2005 to the present, we see that home prices held up reasonably well until this year. While results for 2011 are only through June 30, data suggest that lower priced homes are making up a larger proportion of homes being sold. This is particularly evident in results for Sebastian and Crawford Counties where average selling prices have declined 8% and 6.7%, respectively over 2010 averages.

Again, recall that home buying incentives were in effect in the first half of 2010. It is again worth noting that LeFlore County prices have shown some resilience, and joining Sequoyah County in actually reporting higher average home prices thus far for 2011 over last year.

Our last measure of what is happening with home prices is reflected in price-per-square-foot data (Figure 4). We’ll take a look at these data across property price ranges. Overall, current rates range from around $45 per square foot for low-end housing to near $100 per foot for upper-end properties.

In looking at Figure 4, we first note that as we move up each pricing tier of home

Figure 3. Percentage Difference in Listing - Selling Prices Over Price Ranges (2005-Current)

Year Sebastian Crawford Sequoyah LeFlore Franklin Average2005 $114,571 $113,052 $104,953 $65,416 $74,533 $111,9002006 $122,980 $119,751 $117,487 $85,720 $81,216 $120,1792007 $127,314 $124,222 $107,145 $82,158 $92,180 $123,4682008 $133,530 $123,142 $116,228 $75,911 $88,693 $126,4812009 $129,320 $119,907 $96,814 $94,898 $77,445 $122,4832010 $137,150 $119,011 $86,165 $83,092 $87,800 $125,546

2011* $125,748 $111,041 $100,517 $85,191 $70,060 $116,281

Table 1. Average Selling Prices by County (2005-Current)

*UM= 2011 data is through June 30. All other years are full-year results.




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2005 2006 2007 2008 2009 2010 2011

< $100,000

$100k-$149,999

$150k-$199,999

$200k-249,999

>$250,000

Source: MLS

Selling Price by Days on Market

Day

s-on

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$50.00

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$100.00

$110.00

$120.00

2005 2006 2007 2008 2009 2010 2011

< $100,000

$100k-$149,999

$150k-$199,999

$200k-249,999

>$250,000

Source: MLS

Selling Price Per Square Foot$

Per S

q Ft

values, the per-square-foot prices rise as well. While this is not surprising, of course, there are variations in per-square-foot trends across pricing tiers, suggesting that some sellers have been able to maintain pricing while others have given up considerable ground in pricing to sell their property.

In particular, homes in the $150,000-$200,000 range have shown a modest but steady increase over the period, in contrast to homes over $250,000 where rates have declined nearly 11% in 2011

relative to a 2008 high. Home sales in the $200,000-$250,000 range have also shown improvement recently.

AverAge dAys on the mArketWhile tracking pricing trends of property is one way of judging the health of a residential real estate market, how long it takes to actually sell a property provides additional insight into the relative buyer-seller interest in the market. These trends combined with inventory levels of properties for sale

will suggest future market directions as to prices and selling activity.

Figure 5 provides data as to the average number of days properties have been on the market per each pricing tier. In general, we see that the higher the price of the property, the longer it takes to sell. Further, we notice that the trend across all pricing tiers has been upward, reflecting the reality that it is taking longer for all properties to sell.

Figure 4. Selling Prices Per Square Foot Across Price Ranges (2005-Current)

Figure 5. Selling Price by Days on Market (2005-Current)

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Note that Figure 5 reflects the sale of property and how long it took for these properties to sell. It does not reflect property that is still on the market. We’ve perhaps seen properties in our neighborhoods that have been on the market well past the days noted here.

In looking at Figure 5, we see that the average days on market (DOM) for the upper two pricing tiers seems to be declining, while the remaining three lower tiers continue to reflect lengthening timeframes. This suggests that the backlog of property on the market is likely growing and the strength of the upward trends suggests that it will continue into the near term. In looking at the two upper-price tiers, the observed decline in year-to-date data for 2011 suggests some improvement in sales activity in these tiers with average DOM showing declines of about a month from 2010.

In looking at current inventory levels for June 2011 (Table 2), there were 1415 properties for sale through MLS in Sebastian and Crawford Counties. These two counties comprise around 85% of all properties for sale in the MSA. As would be generally expected, estimated months of inventory on hand increases as the price of the property increases.

Inventories have increased markedly during the recession, growing from three-four month’s supply in properties priced less than $150,000 in 2008 to eight-ten months in June 2011

(Table 1). At the other extreme, properties priced in excess of $250,000 have seen inventory levels grow during the same period from around a year to well into multiple years at higher levels. This information is extracted from data provided by Weichert/King Realty Group.

Even these inventory levels are likely understated when “shadow inventory” is considered. By shadow inventory, here we’re describing those properties that have yet to move to market, though the sellers intend to do so. Shadow inventory includes foreclosure properties not yet on market as well as those properties that are not distressed but have owners who wish to sell but are waiting for more favorable market conditions.

The real estate research firm Core Logic estimates that nationally there is approximately five months inventory of distressed properties yet to come online. While we would not expect such a level in the Fort Smith region, Realty Trac, another research firm which tracks foreclosure properties, lists 179 properties in the Fort Smith MSA that were in foreclosure proceedings as of June.

Kevin King of Weichert/King Realty Group sums up the current reality: “We are continuing to see additional inventory come on the market while the number of buyers remains low and stagnate with no significant entry of new buyers predicted in the near future.”

List Price Ranges

Units for Sale

Months Inventory* % of Total

< $100,000 504 8 35.6$101k-$150k 345 10 24.4$151k-$200k 239 16 16.9$201k-250k 110 13 7.8> $251,000 217 17+ 15.3

Table 2. Units on Market and Months Inventory

*Data is for June 2011 only. Months inventory estimates are based on previous period sales activity.

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summAry And discussionThe single-family home has played an important part of the housing landscape in our communities and has been viewed as a key component in developing the net worth of many households across our region. As a community, as noted earlier in this report, we have tended to favor home ownership more than most communities with ownership rates well above the national average. What is to become of this most prized asset?

Based on this analysis, three observations are made here.

1. While the recession has negatively impacted all pricing tiers of homes, the very lowest tiers have been hardest hit.

This suggests that not only have qualified buyers declined dramatically at the lowest levels, but these buyers are most vulnerable to economic downturns. Adding to this downward pressure,

qualifying for credit has become increasingly challenging for all price tiers but most dramatic for those buyers of lower-tiered properties.

2. Selling prices have declined, but the price-per-square-foot rates have shown considerable resilience during downturn.

This has been particularly true in mid-tier priced properties where per-foot rates have remained relatively stable or have even increased slightly. The highest and lowest priced homes have seen the greatest declines during the period examined here. This result has come at a cost – longer days-on-market and increased inventory.

3. The future will be difficult in the sector.

Aside from the obvious assessment that the single-family residential real estate

sector has been quite ill for years now, there is reason to believe that it may be that way for some time to come. Several factors are working against a return to the glory days of the past couple of decades. The brief list provided below will be examined in detail in our next report.

a) Lingering recession effects on buyer qualifications. Damaged credit of many during this recession, combined with higher qualifying standards for loans, makes for a slow recovery.

b) Distressed sales. Foreclosure and short sale activities will continue to increase inventory and push prices lower.

c) Restructuring of the financing mechanism for home buyers. The planned phase-out of Fannie Mae and Freddie Mac, institutions that backed around 50% of all mortgages over the years, will likely restrain access to favorable mortgage terms going forward.

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d) Downsizing of “Baby Boomer” population. This trend toward less consumption and more savings will constrain home buying going forward. Subsequent generations have shown less willingness to commit to home ownership and are expected to have less income to spend.

e) Long-term employment trends. First, the “new normal” of employment may well reflect an acceptance of 6-6.5% unemployment rate as normal. Second, there is ample evidence to suggest that not only will unemployment rates be higher going forward, but real household income will continue to be flat, if not declining (relative to inflation), over the coming years.

f) Change in tax code. The popular home interest deduction may well be at risk, reducing the value of home ownership. Federal revenue hunters have already identified this deduction

for modification or removal under a number of revenue enhancement proposals floating around Washington these days.

Our review of the regional single-family residential real estate market reveals a sector that has experienced considerable difficulties in the past three years. There is evidence to suggest that the difficulties will not be over any time soon. While we can expect some improvement in the sector over time, assuming the economic recovery continues, the barriers to any robust long-term recovery in the sector seem significant and many. Next time we will examine the sector from the developer-builder side and provide further discussion of the above factors on the regional housing market.

________________

Special thanks to Kevin King of Weichert/King Realty Group for providing data used in this report.




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UAFS Regional Economic Outlook 2nd Quarter 2011