New home starts in Chattanooga wither in the face of regulations, rental housing

photo Construction workers build the frame of a new home in North Chattanooga.
photo The number of home starts in the region are down.

Chattanooga's economic recovery is at a crossroads.

On one hand, home prices are rising and thousands more jobs are on their way to this area courtesy of an assembly line extension at the city's Volkswagen plant.

But the underlying economy is bucking the hype, and in the case of the housing market the trend line is headed in the wrong direction.

"We're just down for some reason; there's no easy way to explain it," said Jay Bell, one of the city's most prolific developers.

Housing isn't the only sector to struggle. Unemployment in Chattanooga rose to 7.7 percent in July, compared to a 6.2 percent national average that month, according to the Bureau of Labor Statistics. Chattanooga's new car registrations in August fell half of a percent over the year before to 1,025, even as sales are up 5 percent nationwide for 2014.

But housing is the elephant in the room, after home sales got off to a slow start in the first half of the year and new home starts, typically one of the strongest indicators of future growth, are slumping toward a relapse.

The persistent weakness in new home construction risks overturning the gentle housing recovery seen in the region since 2012, tipping the scales from stagnation into full-scale decline, according to data provided by research firm The Market Edge. Such a drop could spread like a virus, as economists believe that when the housing market sneezes, a great number of businesses stand to catch a cold.

Housing starts in Hamilton County have declined for two straight years, though the broader region has done somewhat better. It's a sign that both builders and home buyers are increasingly looking beyond the borders of Hamilton County in an attempt to find cheaper land, officials say.

Even so, sales in the five-county region are on track this year to fall short this year after a post-recession high in 2013 of 1,486 new residential building permits, according to The Market Edge.

TOP FIVE CAUSES

Builders on the front lines say there's no single cause for the worsening housing outlook, rather a number of market forces are hitting home builders at once:

• The perplexing millennial generation - Millennials have shown far less interest in buying single-family homes than those who came before, Bell said. Instead, young workers are increasingly pursuing rental or non-traditional housing, options that don't show up on building permits and contribute far less to the economy than new home construction.

• Tightening supply of homes - Though housing starts are falling, the demand for homes hasn't gone away, according to the Greater Chattanooga Association of Realtors. While year-to-date closings fell to 4,168 from 4,264 in the first half of 2013, the median price during that same period rose 4.4 percent to $146,000 as the number of homes for sale decreased to 5,321 in July.

• New mortgage rules - The tightening supply can be traced in part back to new lending rules created in the wake of the Great Recession that made it tougher for home buyers to qualify for mortgages. Those same rules also apply to developers, who must fight their own battle to secure financing for any project, said Ethan Collier, owner of Collier Construction.

• Regulatory costs - The large amount of land not served by the city or county sewer system, increased stormwater costs stemming from a $250 million EPA consent order, and even new building codes are adding expense and risk to projects in the region's core, said Collier, who leads the joint city-county zoning board.

• Rise of apartments - Even without the higher cost of development, the single-family home market faces increasing competition from thousands of new maintenance-free luxury apartments built over the last few years, many of which now offer the same amenities of owning a home without the weight of a 30-year mortgage.

Take Amberleigh Ridge, a luxury apartment complex on East Brainerd Road, which makes no qualms about its target market.

"Selling your home? Call us," reads its advertisement for a two-bedroom apartment at $1,200 per month.

That message could resonate with many potential home buyers who want to live in the city, but who can't swing a mortgage or are leery of commitment, Collier said.

"The stuff we're building in town is $400,000," he said. "There's nothing built in town for any reasonable amount of money for the average Joe. For them, multifamily does make more sense for them, and they're gravitating toward that."

And hundreds of new apartments units are on the way, at locations ranging from the former Cannon equipment site on Amnicola to the 700 block of Market Street in the heart of downtown's business district. Some of these "work-force housing" dwellings cater to millennials who don't desire lots of space, but for whom proximity to the city's vibrant downtown is paramount.

RISE OF THE REGION

But Hamilton County's loss is a gain for the region around Chattanooga, said Tina Frizzell, chief marketing officer for Pratt Homebuilders. Even as building permits stagnate in Hamilton County, Frizzell says the surrounding counties should continue to grow.

Pratt, which focuses on the nine-county region surrounding Chattanooga, projects that the region will hit 3,000 permits per year by 2019. That's a little less than double the current figures.

"We are growing outward because there is not a lot of raw land available close in to Chattanooga," Frizzell said.

Pratt is in the process of bringing five new neighborhoods online, split between Bradley and Hamilton counties, for a total of 300 lots next year. While Frizzell acknowledged the difficulty and expense of developing lots in Chattanooga, she pointed to gains in Walker and Whitfield counties in Georgia and Bradley County in Tennessee as evidence that home buyers are simply expanding their definition of what it means to live in Chattanooga.

"I think this is just a natural part of an area's growth," Frizzell said.

Frizzell, like many developers, views the housing market with an air of inevitability. Eventually, the young workers living in their parents' basement, on a friend's couch or in a small apartment downtown are going to get married, have a few kids and realize that 600 square feet isn't enough, she said.

"We're going to see a trend in a few years, when these people in their 20s start getting married and having children, it's going to lead to a housing increase," she said.

Such an occurrence, the thought of which carried many Realtors through the recession, has been oft-predicted. But if the coming wave of a dozen new apartment projects in Chattanooga is any indication, spurred in part by a package of tax incentives championed by Mayor Andy Berke, not everyone is betting on the roaring return of Hamilton County's single-family housing market.

Contact staff writer Ellis Smith at 423-757-6315 or esmith@timesfreepress.com with tips and documents.

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