The battle for new home buyers in the Wichita area is heating up.
The Wichita City Council fired the shot heard around the area last month when it signed off on a five-year, 100 percent property tax rebate for anyone buying or building a new home in a qualifying city subdivision, dubbed the “Thousand Homes Program.”
And the Wichita Area Builders Association upped the ante when it announced that its builders and developers will pick up the special assessments – charges levied for roads, sewers, etc. – for those homes for the same five years.
It’s the latest effort – but hardly the first – by area cities to get new home buyers paralyzed by the economic downturn back into the market, get builders back to work and help developers address a spiraling number of unsold lots accumulating taxes and special assessments. Several area cities are participating, including Maize, Park City, Bel Aire and Andover.
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“The industry has been suppressed by the downturn, particularly the new home segment of the industry,” said Wess Galyon, the WABA president.
And the numbers support his assertion: In 2006, 18 percent of total home sales in the Wichita area were new, Galyon said. Today, that number has slid to between 6 and 7 percent.
New home sales plummeted to 28 units in February 2011, the smallest number in years, and had rebounded only to 41 by December, according to figures from the South Central Kansas Multiple Listing Service. Meanwhile, new homes on the market have dropped from 871 in January 2008 to 321 in December 2011.
Tighter credit in the wake of the economic collapse drove the downturn in new home sales, for the buyer and for builders suddenly unable to find the financing to replenish inventories.
“It’s had a drastic effect on the cash flow of builders and developers, and we’re noticing an increase in the delinquencies on vacant lots,” Galyon said.
It’s a big increase, according to the Sedgwick County Treasurer’s Office, the city and WABA: about $3.3 million in delinquent special assessments on 2,600 vacant lots.
It’s an issue that is threatening to force builders and developers, including some of the city’s most familiar faces, out of the industry.
“What has happened is that when sales slow down, the builder’s inventory reduces down and the banks have tightened up,” said Wichita developer Jack Ritchie. “In areas where we had projected certain amounts of sales of lots, that has depressed because builders aren’t out there replacing their inventories. They can’t.”
“It’s been a perfect storm,” Galyon said, “one that has presented more challenges to the new homes segment of our industry than anything we’ve seen prior.”
The Wichita plan
The Wichita rebate plan has no up-front costs to the city because properties will be built in participating developments with all general and special assessment taxes current through 2010, city officials told the council last month. In addition, all special assessment and general taxes must be current at the date of a property’s sale and closing.
The program carries significant early costs in lost potential new property tax revenue to the city, according to city documents. The lost taxes would run $3,873 per house over five years for every new house valued at $200,000 with 2 percent appreciation, or a little more than $3.8 million if all 1,000 houses are built.
However, once the five-year waiver lapses, the city would gain an estimated $23 million in additional assessed valuation, or about $745,200 in new property taxes annually, according to city documents. City officials also think the program should accelerate the collection of delinquent taxes, given the qualification standards.
New home incentives are relatively unique across the country, said Walt Molony, a spokesman for the National Association of Realtors.
New home sales should be up significantly across the country in 2012, Molony said. But he acknowledged Galyon’s numbers.
“When you’ve been at 6 or 7 percent of total sales, it’s still not good,” he said about the 2012 forecast.
The city of Wichita is late to the party in becoming the latest city to offer incentives in a three-year battle to revitalize the area’s sagging new home construction industry.
And its arrival has some of the leaders in that battle rethinking their strategies.
“Our plan was working pretty good until everybody got onto the bandwagon,” said Jack Whitson, Park City’s administrator.
Park City, which implemented a direct home subsidy in partnership with developers of around $4,000, saw new home starts peak at between 80 and 100 a year.
In Maize, where city officials enacted a staggered property tax rebate incentive last August, new home starts have returned to pre-recession levels – about three dozen a year. This year, new home starts are on a blistering pace of about 60.
But the incentives game changed when Wichita came out to play, the other cities said. Now, Park City – with new housing starts in the single digits – is considering a shift in the new home recruitment strategy it launched in 2009, away from the direct subsidies to new home buyers and toward the Wichita program. Imitation is the sincerest form of flattery in the battle for new home buyers, Whitson said wryly.
“The problem as I see it is that unless everyone in the area does the same thing, we’re all forced into a situation where we’re trying to top the city with the best program,” Whitson said. “Everybody now agrees that there are only a select few new homes out there, and we’ve got to get a piece of it to stir new construction and get the jobs connected with a new home going. Unless everyone joins in, cities are going to try to top each other.”
The incentive programs are a “minimal down payment” on a “longstanding boost to the tax base,” the city officials say, while cleaning up a rising amount of vacant lot delinquencies.
“In our case, we’re picking up $500,000 a year because developers can’t move the lots and they’re not paying everything, and thanks to the Legislature and its laws we have to wait four years to move on them and go to a sheriff’s sale we don’t want in the first place,” Whitson said.
“That’s why we think this program is worth it. The delinquents are killing us. We either have to raise the mill levy or use reserves to deal with that.”
City officials are aware that they’re vulnerable to “handout hysteria,” which makes Maize City Administrator Richard LaMunyon a little bit angry.
“The big thing those people need to understand is that this isn’t a government giveaway. There’s no accurate way to spin this program like that,” LaMunyon said.
“I’m not giving you your neighbor’s taxes. Your neighbor is paying his taxes, and we’re reimbursing him the city part of that. This is not your neighbor’s money. It’s your money, and you’re simply getting it back. That’s a distinct thing people have got to understand.”
Galyon agreed, calling the Wichita program a “pre-payment plan.”
“We don’t think it’s a bailout plan for builders and developers, either,” he said. “We view this as the city, builders and developers working together to put all of our best feet forward, bringing these lots current, selling a minimal amount of existing spec homes and pre-selling these new homes, building them and giving the buyer on closing an opportunity to take advantage of the tax rebate.”
Ritchie thinks area cities will get the initial property tax losses back – and more.
“Short term you’re giving a little bit away, sure, but long term you’re building your tax base,” he said. “It’s an investment in your tax base and in the future.
“It doesn’t cost any of these cities much for what they stand to gain.”