foreclosure – Memphis Flyer

From South Memphis to Southwind, Memphis is losing value. Two people who ought to know say so. Both are professionals, and neither is an alarmist or a naysayer.

One of them is Shelby County asssessor Rita Clark, whose job is putting a dollar value on houses, buildings, and land for tax purposes. The other is auctioneer John Roebuck of Roebuck Auctions, one of the leading real estate auction firms in the South.

They calculate value differently. Clark and her staff use computer models, comparables, sales histories, and first-hand “windshield” inspections. Roebuck wields a microphone and a gavel and stands in front of a group of buyers and opens the bidding.

But they’ve come to the same conclusion: Real estate prices are declining, which reverses a long trend of increasing values.

“Memphis is a strange city that does not dip and rise like other parts of the country,” Roebuck said. “Right now, Memphis is down about as far as I can remember in 30 years.”

He said people are leaving the city, demand for housing is low, and there is a surplus of new homes and condos. Even the owners of some million-dollar homes are turning to auctions as a way to unload their property.

“Auctions get a bad rap,” Roebuck said. “An auction typically brings the true market value that day. Appraisals are just one man’s opinion.”

He expects to see “a substantial reduction” in home values in the next countywide reappraisal in 2009, leading to an overall decline in the tax base.

Clark doesn’t disagree with that evaluation.
“Absolutely,” she said, when asked if the tax base in Memphis could be shrinking, although she declined to put a number on it at this time. “We follow the market. We don’t predict the market.”

Clark will leave office next September after serving 10 years. In the 1998, 2001, and 2005 reappraisals, the total value of assessed property in Memphis increased an average of 14 percent each period. The suburbs were up even more, led by Collierville (up 24 percent in 2005) and Lakeland (up 30 percent in 2005).

Higher property appraisals are an indication of a healthy economy and provide a cushion for Memphis and Shelby County governments, which operate primarily on property taxes and sales tax. If housing prices continue to fall, lower appraisals will mean lower tax collections and less money for schools, police and teacher salaries, sports facilities, parks, and debt service.

There is also the prospect of no tax collections at all from some property owners. Memphis is one of the top foreclosure markets in the country. Foreclosures are expected to get worse in 2008 as subprime mortgages are reset at higher rates.

The usual way to balance the budget in Memphis and Shelby County is with a tax increase, but Memphians already pay the highest property tax rate in Tennessee. The smell of scandal is in the air. Houses aren’t selling. Values are declining. Mayor Herenton got only 43 percent of the vote. The 2008 City Council will have nine new members. And they’re going to increase taxes? Don’t think so.

Other signs point to a stagnant city that is getting poorer, not richer. In banking as in real estate, it looks like the big money has been made for a while. This has been an awful year for banks. The stock price of First Horizon, the last of the big Memphis-based banks, is $21 a share compared to $43 a year ago. The share prices of other regional banks with a big presence in Memphis, including Regions, Renasant, Trustmark, and Cadence, are all down at least 30 percent this year and are at or near five-year lows. FedEx, our corporate jewel, is off 15 percent so far this year.

At the risk of piling on, there is an unsettling tone in the public relations campaign to “liberate” the National Civil Rights Museum from “corporate interest domination.” Unsettling because it sounds like the preelection rhetoric of our soon-to-be fifth-term mayor who as much as wrote off the white vote. So much for public-private partnerships.

The $30 dinner entrée, the $570 a night hotel suite, the $140 Grizzlies ticket, the $45,000 SUV, the $40,000 a year college tuition, and a $30 million public boat landing look like relics of a golden age. Let’s hope Memphis can still support them a year from now, but I wonder.

On Laurel Lake Drive, a suburban street in Southeast Shelby County, a five-bedroom, four-bath brick home sits empty. Built last year, it has a three-car garage and is a spacious 3,836 square feet.

But this is by no means a model home.

The property, located near the new Shelby County high school, is one of about 5,000 homes that were foreclosed on during the last quarter.

Last week, a risk management provider listed Memphis as one of the top five markets for mortgage risk and fraud, with very good reason. According to RealtyTrac, an online marketplace for foreclosure properties, there’s one foreclosure for every 101 households in Memphis. Only Indianapolis, Atlanta, and Dallas fare worse.

“These are not only affordable, entry-level homes,” says Beanie Self, executive director of the Southeast Memphis Community Development Corporation (CDC). “These are $200,000, $300,000, $400,000 houses.”

The Southeast Memphis CDC is the only suburban CDC in Shelby County and was created, in part, after the University of Memphis identified a high number of foreclosures occurring in the Hickory Hill area.

“After the city annexed the area, there were a lot of significant problems,” says Self. “Property values went down because people were leaving and crime was up. When the property values went down, the homes were upside down. They owed more on their homes than they were worth, and a lot of people just walked away.”

Hickory Hill rivals Frayser for the most foreclosures, but since Self started tracking local foreclosures about three years ago, she’s seen the number increase 20 to 25 percent each year.

“What we see happening is that folks end up getting into a bigger house than they can afford and a larger loan than they can handle,” says Self.

As the former bankruptcy capital of the nation (read more in this week’s cover story), it’s not unheard of for Memphians to find themselves in financial trouble, but perhaps most telling is the scale of the current problem.

At the corner of Holmes and Hacks Cross, signs litter the roadways promising “New Homes! Zero Money Down!” But in neighborhoods still too new to be “mapquested,” banks are already foreclosing on houses: a $235,000 home on Maids Morton, a $100,000 home on Busy, a $168,000 home on Briona Cove — all foreclosures.

Because the housing market is saturated, many home builders offer special financing incentives. Mortgage brokers sell buyers on interest-only loans or Adjustable Rate Mortgages (ARMs) that can get them more house for the money, but it’s not always the best deal in the long run.

“There might not be a down-payment or closing costs. Two months later,” says Self, “the transmission goes out on the car and it’s, ‘Do I pay for that or the mortgage this month?'”

Residents can quickly find themselves owing more on their house than its market value, especially if they have an interest-only loan.

“Tennessee has been targeted by unscrupulous lending groups,” says Self. “We have not had the kind of regulations in place to tackle predatory lending.”

A new bill passed earlier this year will go into effect in January, but for some homeowners, it might be too late.

“Within the next year, it’s going to be really significant,” says Self. “Specifically with the ARMs or with the interest-only loans, when the principal payments kick in, it’s going to be huge.”

Not to burst your housing bubble, but this soap opera can have long-ranging effects.

The Southeast Memphis CDC is a HUD-approved housing provider, meaning it can buy foreclosed properties from the national department of Housing and Urban Development at a discount and then sell them to owner-occupants.

Only, other people are interested in the discounted property, too. “I can’t compete with the investor market,” says Self. “We have a very different cash flow.”

When investors buy property, it generally becomes a rental unit. And, nothing against renters, but rental property can contribute to a decline in the neighborhood. Especially if — as is often the case with rental houses — the landlord is not on-site.

Owning a home is the American dream. We’re a country that rewards citizens for buying a home with a tax break. Loans are available to help people buy a house who otherwise wouldn’t be able to afford one. The latest economic upswing was predicated on the housing market.

But the number of local foreclosures — and the variety of neighborhoods in which they occur — should be an eye-opener. If this is the American dream, maybe it’s time for Memphis to wake up.