THU AM News: UW real estate expert says state creating too few home lots; Panelists weigh in on recession potential

April 11, 2024

— UW-Madison Prof. Mark Eppli says a lack of new home lot creation is a top challenge for Wisconsin as housing demand continues to outstrip supply.

Eppli, who directs the university’s James A. Graaskamp Center for Real Estate, was the keynote speaker for yesterday’s 2024 Wisconsin Economic Forecast Luncheon in Madison. It was organized by WisPolitics, WisBusiness and the Wisconsin Bankers Association.

He noted the state’s housing inventory for sale is between 60% and 80% lower than 2016 levels, and many homeowners in Wisconsin with favorable interest rates aren’t looking to move anytime soon.

Seventy-one percent of mortgages in Wisconsin have less than a 4% interest rate, Eppli said, well below the current rates near 7%. At the same time, the average mortgage payment in the state is well below the national level, at $1,058 versus $1,358.

“Which is pretty great, okay? So we’re still a low-cost alternative,” he said.

Still, he said the state’s already tight housing market is being harshly constrained by the rate of new lot creation. Between 1994 and 2007, the state was creating about 14,000 new finished lots per year on average. Since that time, that figure has plummeted to around 3,500 per year.

This trend has been driven in part by federal regulations enacted after the Great Recession that put additional guardrails on bank lending, particularly on land loans, Eppli said.

“So those land loans are very, very hard to come by, and therefore we’re not developing enough land for new housing … We don’t have housing in the places people work,” he said.

Since the state is adding about 15,000 households per year, Eppli said Wisconsin should be creating about 10,000 or 11,000 annually to match that growth. To move toward that figure, he said “we need to somehow reduce the risk” of getting those lots developed, by having municipalities work directly together with developers.

He also referenced the Board of Commissioners of Public Lands, which he said could provide funding in lieu of bank sources to municipalities to kickstart the development process.

“The other challenge we do have though is, we have modest income in most parts of Wisconsin … those folks can only pay so much for housing,” he said. “And so that makes it difficult, so we’d have to probably — not unlike what Sheboygan’s doing — working with the corporate community to support that type of development and support housing.”

— Panelists during the economic forecast event agreed a recession isn’t likely in the near future, though expectations for next year differed.

Forward Analytic’s Dale Knapp yesterday said he doesn’t see a recession happening this year or in 2025 given how the Federal Reserve has been handling inflation via higher interest rates.

“There will be one at some point, but at this point, I guess I don’t see it coming within the next year or so,” he said.

Johnson Financial Group Regional President Doug Nelson also said another recession is somewhere over the horizon, but doesn’t expect it this year or the next. Fellow banker Mike Olson, president and CEO of the Bank of Brodhead, emphasized the uncertainty factor in such predictions but said he could see a recession arriving sometime next year.

“We’re kind of in a weird spot right now,” he said. “Employment is so strong, it’s keeping that up … but there are other metrics we haven’t talked about yet, like delinquency on credit cards and credit card balances.”

Meanwhile, Department of Revenue Senior Economist Romina Soria predicted “not a huge recession, but a recession in the next two years” or so.

The panel discussion also highlighted the strain consumers are feeling in the current economic environment, with Knapp noting the latest inflation figures “are a little big scary.” He said the 2% target rate regulators are seeking “seems a lot further out of reach today than it did yesterday.” Federal officials yesterday reported a 3.5% increase in consumer prices for the 12-month period ending in March.

“Households are feeling very uncomfortable … Over the last three years, food at home is up 21%. So they’re going to the grocery store and they’re seeing a big increase over the last three years,” he said. “Energy at home is up 28% … gasoline, 23%.”

Knapp noted income growth isn’t keeping pace, leading to people spending down their savings that were stockpiled during the COVID-19 pandemic. Eppli said in his presentation that all of those savings have now been spent. As a result, Knapp argued consumers will need to reduce spending by necessity.

Soria also said income and wages aren’t keeping up with inflation.

She said the figure reported yesterday “is not good, but it’s not that bad either. It’s not going in the right direction.” She emphasized the loss in purchasing power experienced by consumers over the past two years, later contrasting that with rising corporate profits.

“Corporate taxes in Wisconsin doubled in three years, and not because of a change of rate, but because profits just skyrocketed,” she said. “And that’s happening not in all states, but in several other states.”

She questioned why wages aren’t also increasing apace with corporate profits, but Nelson countered “there is an interaction between what companies can make and then what they’re willing to pay” in wages.

“I think it does keep people in the state, it keeps companies in the state,” he said.

See the latest economic forecast report from DOR.

See slides from Eppli’s presentation.

— The EPA has issued the first national drinking water enforcement standards for PFAS with a limit of 4 parts per trillion — about 17 times lower than the state’s standard.

The state’s 70 ppt standard for perfluorooctanoic acid (PFOA) and perfluorooctanesulfonic acid (PFOS), implemented in 2022, will remain in effect until DNR completes rulemaking to align with the EPA requirements.

The EPA also established 10 ppt standards for PFNA, PFHxS and GenX, and a hazard index for when PFNA, PFHxS, GenX and PFBS are present in a mixture.

The announcement comes after Gov. Tony Evers this week vetoed a GOP bill aiming to combat forever chemicals and called on the GOP-run Joint Finance Committee to meet and release the $125 million set aside in the budget to fight PFAS. JFC co-chairs quickly shut down the call.

The state will have three years to comply with the federal standards, which do not apply to private wells. If the state fails to comply, the EPA will implement the limits in the state by working with public water systems as required under the Safe Drinking Water Act.

Steve Elmore, director of DNR’s Bureau of Drinking Water and Groundwater, in a statement said overall, the state’s public water systems are well-positioned to comply with the standards.

About 95% of the state’s nearly 2,000 public water systems have PFAS levels below the EPA standards, according to the DNR release.

Sara Walling, Clean Wisconsin water and agriculture program director, noted the state doesn’t currently have groundwater standards for PFAS.

“So that means no real protection for rural families from these dangerous chemicals,” she said, calling for the state to approve groundwater standards as quickly as possible.

DNR’s groundwater rulemaking process was put on hold pending legislative approval after DNR projected the costs would exceed statutory limits by more than $23 million.

Peter Burress, Wisconsin Conservation Voters government affairs manager, hailed the announcement as “an exciting victory for public health.”

“These standards will help get PFAS out of Wisconsin drinking water, and ensure Wisconsin communities are protected from a host of serious health impacts associated with PFAS contamination,” Burress said.

Burress argued the news underscores the need for action at the state level, urging JFC to act on Evers’ request to release $125 million and to allow the DNR’s groundwater standard rulemaking to continue.

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