Allen & Cable report

Vermont Business Magazine, Apr 01, 1997 by Allen, Stephen, Cable, Davis

The single family residential market indicated flat price/value levels between 1995 and 1996. Both the median and mean prices of a single-family home changed only nominally.

Supplemental market data from area real estate brokers reveals that overall sales and sales volume are actually up by 14-18 percent for the year to date, although the activity has moderated in the most recent few months. The increase in market activity during much of the year has been facilitated by interest rates holding at favorable levels. Low rates stimulate demand at all levels of the residential market.

A review of residential condominium sales statistics indicates a slight increase in the level of market activity and price/demand patterns. The median price of a condominium is approximately 3 percent higher in 1996 compared to the prior year. The current median price is $91,250 which is the highest level we have recorded. Other data indicates that sales volume in the condominium sector is up in the range of 12-14 percent year to date, over 1995. Both sales volume ($), and the number of sales, is higher this year. Again, the increased market activity has been stimulated by generally favorable interest rates during this period.

INTEREST RATES

As of January 1997, a typical 30-year mortgage with 2 points is quoted at around 7.75 percent while a 15-year 2 point mortgage is around 7.25 percent. The rate levels are slightly lower than reported in June, but similar to the level of rates last winter. In June 1996 typical 30-year mortgage with 2 points was 8.0 percent while a 15-year mortgage with 2 points was approximately 7.5 percent. The accompanying graph illustrates the pattern of interest rates over the last few years. Current rates are favorable for the residential real estate markets. Any increase in rates could have a negative impact on residential demand/sale activity.

Although the likely future direction of interest rates s uncertain and the magnitude or timing of any change cannot be confidently predicted, there seems to be a consensus view that interest rates will be favorable for some time. Any increases in interest rates, and the correspondingly reduced housing affordability, will have a negative impact on the single family detached and condominium residential markets, as well as the residential land sector. Conversely, lower interest rates will support the demand side of the residential markets.

ELDERLY HOUSING

The elderly population represents one of the fastest growing cohorts and there will be a concurrent increase in the demand for housing this segment. The demographic shift is being anticipated by the market with several developments recently built or planned. Most of the units which have been built recently are rental units (apartments) and include both affordable and market rate projects. The Pines Housing project is notable as an illustration of the depth of demand in the affordable segment of the market. This 125 unit project was developed under the Low Income Housing Tax Credit Program (LIHTC) with the units offered at below market rental rates. The project has been an unqualified success in terms of absorption.

We expect continued activity in the elderly housing area, including both affordable and market rate projects. Other proposed developments, now in the planning stage, include projects in Colchester (4), Essex and Burlington. Although potential demand will increase by virtue of the demographic shift, project success is dependent on effective demand and close attention needs to be directed to the marketability of each project in this context.

APARTMENTS

For apartment owners, current market conditions are favorable in terms of occupancy patterns and the direction of rents. A survey of 1,998 apartment units in the Greater Burlington area indicated vacancy of 0.6 percent, unchanged from the last reporting period. This is a very low rate of vacancy, relative to historical standards, and underscores the supply/demand imbalance in this sector.

Both urban and suburban markets are strong. Over the last 12 months the average increase in rent has been in the range of 2-3 percent. The low vacancy rate should result in continued upward pressure on rents. We are beginning to see evidence that the strong demand for apartments is stimulating some plans for new construction.

In July 1996 Vermont's lead paint law went into effect. This law is intended to prevent childhood lead poisoning and places certain responsibilities on Vermont landlords. The law applies to apartments built before 1979 Apartment owners will be required to attend a seminar relating to understanding and managing lead paint conditions. The law also requires disclosure to prospective tenants and buyers of the potential hazard of lead paint. The impact of the new regulations on the apartment market remain uncertain. In other states where stricter lead paint laws have been enacted there has been some reported negative impact on marketability and pricing. The majority of rental housing was built prior to 1978, so the potential impact could be significant and this issue bars watching.