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Foreclosures slice values for new homes

By Sean Ryan

The health of Milwaukee’s residential construction market can be gauged by a proposed project’s proximity to the foreclosure hot spots in the city.

The closer proposed home construction is to foreclosed properties, the less likely the homes will get built. Generally, the central part of the city is most affected by foreclosures.

Cindy Kuhs, owner and president of Kuhs Quality Homes Inc., Greenfield, is experiencing the construction drop-off firsthand. Her company has built homes on three of the 31 lots in the Walnut Circle project, which is near 20th and Walnut streets. She said she cannot sell more houses.

Although there have been fewer foreclosures around Walnut Circle than in other parts of the city, the foreclosure problem is driving down the value of proposed houses in the area, she said.

“There’s interest out there,” she said. “Obviously, everyone would be interested in new construction if the price is right. The problem is our costs are not going down, but the appraisal values are.”

Foreclosures are having a less severe effect on overall property values around the Oak Hill development at 91st Street and Good Hope Road, where Waukesha-based Tim O’Brien Homes Inc. built seven homes in 2009 and started construction of another house this year.

“That is, definitely I think, probably better for us and Cindy,” said President Tim O’Brien, “because we are a little farther away from the foreclosure areas.”

Kuhs said that when she faces a $215,000 construction cost for a new house, but banks appraise the property at $189,000, potential buyers in Milwaukee cannot make up the difference without public subsidy.

In Oak Hill, O’Brien said, some appraisals came in lower than the construction cost, but he was able to lower the cost by cutting amenities such as energy-efficient fixtures.

“In some situations,” he said, “they have to remove the benefits that appraisers are not going to value.”

The city has faced the problem of low home values in the past. Through developments such as City Homes and Lindsay Heights that received tax-incremental financing support, the city raised the value of homes in the neighborhood around Walnut Circle, said Maria Prioletta, redevelopment and special projects manager at the Department of City Development.

Kuhs said those efforts narrowed the financing gap between construction costs and market values from $40,000 per lot in the late 1990s to roughly $10,000 by 2007. But the troubles in the lending market and reduced home values have undone that work, she said.

“It’s like back to 10 years ago,” Kuhs said, “and they’re going to have to start all over.”

The city does not want to dive back into providing subsidies for new housing, Prioletta said, because it could further damage the housing market. If the city starts paying for home construction, the new homes will have a lower appraised value than existing homes in the city, she said.

That could be solved, O’Brien said, if the appraisal industry distinguishes between new home and foreclosed home sales. Although foreclosed homes are cheaper, they need maintenance and repair work, and do not have the same value as new housing, he said.

“Should you be looking at a foreclosed property as a comparable?” he said. “That’s a big debate right now.”

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