A local non profit used the City of Minneapolis ‘First Look' program to purchase one of my foreclosure listings in June. They literally snatched it away from a couple that had made a full price offer on this home in a nice South Minneapolis neighborhood. After letting it grow for six weeks they finally cut the foot tall grass on the vacant property.
First Look is part of the Minneapolis Foreclosure Recovery Plan, the component used to "pursue aggressive property acquisition". The plan is for the city to purchase for itself and it's Coordinated Development Partners nearly one third (over nine hundred properties per year), of the foreclosures in the city. They have negotiated agreements with the major banks to have a ‘First Look' opportunity to purchase foreclosed properties before they are available to the public market.
As the foreclosure crisis unfolded city officials prepared their response. There were thousands of vacant foreclosed homes creating problems for neighborhoods. But markets can change faster than government can create and implement plans. And the lesson that markets have forever taught yet we never seem to learn is: "Markets always seek balance and thus, will correct imbalances if left alone".
As the media has continued to focus their reporting on next to meaningless price data, the important Supply/Demand Ratio (SDR) has been shrinking. And while the traditional market and median to upper price ranges have continued to be slow, the foreclosure market and lower price ranges are booming. New data fields are now used widely enough to provide reliable SDR data on foreclosures. As of July 27, 2009, the SDR for foreclosures in Minneapolis was a remarkably low 1.41 based on closed sales over the previous month. A balanced SDR is considered somewhere between 4 and 6. Assuming an average listing period of four to six months, there are currently three or more buyers for every foreclosure in the city. We don't need help selling these foreclosures!
The bright side of the foreclosure crisis is that prices have come down so low that there currently exists a window of opportunity for home buyers and investors. Many of the properties are in good condition or have the potential to be good quality homes. The City's intervention threatens to shut this window of opportunity.
Minneapolis and the non profits have a long history of positive influence in our housing markets. Other components of the foreclosure plan are beneficial and ‘First Look' can be, if used sparingly and selectively. The good people of this city wish to take advantage of today's opportunities. Here's a call to the city and the non profits to keep your hands off the good deals!
As we know, the Supply Demand Ratio (SDR), is perhaps the most important leading indicator for predicting future price movement in real estate markets. Sometimes, significant other factors such as foreclosures moving through the market or lack of quality Jumbo financing, can overshadow or diminish the SDR effect, but that's another story for another day.
Unfortunately, there is no formula to determine the exact influence the SDR will have on prices. We know that if it's too low, prices will go up; too high, they will drop; and balanced, prices will be stable. Opinions vary, but most observers consider a range of 4 to 6 months of inventory to be a balanced SDR. We also know that what constitutes balance, or high or low, and how it can affect prices, can change depending on area, price range or time.
Our Twin Cities market can be divided into many submarkets that are vastly different. There are areas with high numbers of lender mediated (foreclosure and short sales) properties, such as Brooklyn Center, representing 67.9% of its inventory. Other areas have low levels, such as Edina, with 5.4%.*
One recent trend has been the rapid change to a sellers market in the lower price ranges. An analysis of SDR's demonstrates this.
A selection of high foreclosure impacted areas, Brooklyn Center, Brooklyn Park, North Minneapolis, Powderhorn and Camden reveals the activity in the low price range market. The SDR in these areas for properties listed at $80,000 or below is an unusually low 1.35, based on Pendings and Solds with an off market date in the last month (March 28 - April 27, 2009). For properties in these areas with a list price above $150,000, the SDR is 5.81.
A selection of low foreclosure impacted areas, Edina, Eden Prairie, Minnetonka, and Plymouth, reveals similar differences based on price range. In these areas, the SDR for properties listed at $250,000 or below is just 2.55. For properties listed at $400,000 or higher the SDR sits at 9.95.
What this tells us beyond the fact that there are currently distinctly different markets is a matter of interpretation. It appears clear that the bottom of the market will be rising, but we are nowhere near any upward price pressure on the middle or upper price ranges. It also appears that the downward correction has overshot the target in the high impact areas and we'll likely see prices moving towards more balance relative to other markets in the future.
As always, money flows towards quality and value, and future movement in the markets will reflect this.
* Data from www.mplsrealtor.com, Lender Mediated Report, authored by Jeff Allen and Aaron Dickinson.
I was watching a Celtics/Lakers game when a commercial came on for a financial services firm. I was barely paying attention, but then I saw the phrase: "Time; Not Timing". Great advice.
Markets will always cycle up and down and their complexities make the timing difficult to predict. Real estate has real value, and with inflation engineered into the economy, it is destined to keep pace (upward) over the long term.
A critic once told me that stocks provided a better return than real estate, dating from the 1970's to now. I responded that "you can't live in your stock certificates".
The concept of "home as investment" is relatively new and not universally accepted in human history and culture. Investment value, if any, is and should be secondary to the primary purpose of a house. First and foremost, it is your home.
The investment advantages come into play over time. The focus should be on quality. Buy a quality property that will suffice as your home for the long term. Obtain quality financing that you can afford for the long term.
In my marketplace, the Twin Cities, the inventory of homes for sale, peaked about a month ago and is declining. Some say that now is the time to buy. But the best time to buy really is "when you are ready".
I had the chance to purchase a house for $25,000 in 1976. My friend decided to sell it to his sister instead. Three years later it was worth $50,000. I finally bought a couple of years after, but found myself wishing I had bought a bunch of property "back then".
I was fortunate to carry three properties during the recent boom, but wish I had bought more "back then" in the 1990's. Many people wish they had bought just one back then. The good news: It is back then. Prices in some areas and for some properties have rolled back seven or more years.
It's not well known, but if you examine statistics over time, you can see that some markets perform better in a "buyers market", while others decline. And while everyone does well in a sellers market, typically those "other" areas do best. I call this the "quality effect".
Buyers of any kind of product or service want quality (and value). During a buyers market, when there is a lot to pick and choose from, the money gravitates to quality, or what the public perceives to be quality. So those areas and properties that the market perceives as quality do the best, (or suffer the least) during a market like this. Conversely, during a boom, all real estate is considered a quality investment and money flows to the lower priced areas, causing a boom that can sometimes push prices too high.
This cycle has opened up some tremendous opportunities. In some of our areas that are not perceived as quality, there are great properties at great values. Some can be bought at 1990's prices. Even in some of the "so called quality areas", there are fixer-uppers at bargain prices.
We are about to reach the peak inventory level of this cycle in the Twin Cities market. Inventory will slowly decline from there on out. The window of opportunity is wide open to buy at "back then" prices. Some time in the future a lot of people will be wishing they had bought "back then" in 2008.
The first stage of the rebound is well underway in the Twin Cities real estate market. How it plays out remains to be seen but history and current trends give us good clues. Markets are cyclical and excesses, whether up or down, sew seeds bearing the opposite reaction. The harder the fall, the greater the rebound, be it in strength or length.
Anatomy of a Rebound
Stage one of the rebound is reduced seller activity. In 1989, listings processed began a ten year decline. This led to a real estate boom, starting several years later. In 1999, listings began a seven year incline. This led to the current down market, which began in late 2005. Listings peaked in 2006, and are steadily declining. This first stage of the rebound has been underway for over a year and will lead to the next important stage; reduced inventory.
Inventory will certainly peak this summer if it hasn't already last year. Active listings in the median to upper price ranges, condos, and non foreclosures are already down. New construction inventory is down considerably from peak levels. The all important "supply demand ratios" (SDR) will likely peak soon. There is a good chance they will be down in year over year comparisons by the end of this year or early next. The SDR is perhaps the most important leading indicator of where prices are heading.
The third and most important stage of the process will be increased buyer activity. When and how this occurs is the key statistic to watch. All eyes should be on year over year comparisons of pending and closed sales late this year and early next. This will be the first chance to see meaningful comparisons after the "credit crunch" hit in August of 2007. Sustained growth in buyer activity, combined with a declining SDR, will eventually put upward pressure on prices, the final stage of the rebound process.
Not So Fast
The rebound will be slow and gradual, with spurts and stalls. For those who see the world in "black or white", "right or wrong", "this way or that", the following concept may be hard to grasp. Although the rebound is well underway, the market is still declining. The two conditions overlap each other. In fact there are always upward and downward pressures acting simultaneously in all markets. In addition, market conditions are measured in different ways, each one peaking or bottoming out at different times. Seller activity peaked in 2006, inventory likely in 2007, buyer activity may bottom out this year, and prices this year or next.
But even if conditions consistently improve, we will remain in a buyers market for some time, as the SDR is far from balanced. For a more detailed explanation see last year's article "The Buyers Market, In it for the Long Haul". And as soon as there is hint of improved market conditions, sellers will try to jump on the bandwagon. In addition, there are a number of foreclosures still to come. So while the rebound will bring us an improved market, there is no sellers market or "boom" on the horizon.
So when is the best time to buy? That depends. If you're looking for a good quality property, that inventory peaked last year. But there still are and will continue to be good options. If you're looking for something cheap, it can't get much better than now. In reality, there are good buys in every market.
The best bet is to buy when you are most ready. Take your time, do your research, and choose quality, in property and financing. Most importantly, think of it as a long term investment, or better yet, don't think of it as an investment at all. It is, first and foremost, your home. And that is worth far more than what can be measured financially.
I was just plugging in addresses for fun to see what Zillow's Zestimate is. According to the Great Zillow, one property that just sold for $70,000 is worth $176,000. Another one listed at $159,000 is worth $246,000, and another one that was listed at $242,900 and has sold and closed, is currently listed for $276,000 according to Z. Not so bright, huh.
Any professional knows that you can't rely on a computer program for an accurate property value. But not all of the general public knows this, and in fact some otherwise bright young techies think the website is smarter and more trustworthy than us Realtors.
The website is pretty cool, however, and it will continue to improve as it gets more data. It's in our interest to know what the "Zestimate" is on the properties we're dealing with and to be able to explain why it's close to accurate or way off the mark. If you haven't heard, "but Zillow says it's worth...", you will soon. Will your response be intelligent and thoughtful, or will you just say, "Zillow is Stupid"?
The Standard & Poor's/Case Shiller Index was released Tuesday, January 29th, showing an 8.4% drop in real estate prices in November, 2007 from November 2006. Case Shiller is a highly reported index that is alleged to be more accurate than the statistics provided by the Realtor associations.
The argument is that the Realtors report the average or median price of all sales from one year to the next, which is a different group of homes each year. Case Shiller only uses cases where the same home has sold twice, using the apples vs. apples argument. There is logic to this argument, but there are significant problems.
The first problem is the small statistical sampling. In any given year there may be at most about 5-7% of all homes selling. It's a much smaller group that sells twice in a short period, which is what Case Shiller is looking for. To "keep sample sizes large enough to create meaningful price change averages", they use a "three month moving average algorithm". I would argue that this is still far too small a sampling.
The index construction methodology uses a weighting of sales pairs with less weight applied to pairs with longer intervals between sales. Excluded from the calculation are sales less than six months apart, as they are not likely to be arms-length transactions. The most weight is applied to sales about a year apart. Now let's think about this: Who sells their home after just one year? It's often a foreclosure or some other distressed situation. No wonder the prices are so much lower. In fact, per Case "Subsequent sales by mortgage lenders of foreclosed properties are included if repeat sales pairs, because they are arms-length transactions". Right...Ok
Imagine, someone buys a house for $200,000, loses it in foreclosure and the bank sells it for $160,000. An investor buys it, paints it and sells it for $200,000. Case Shiller index includes the foreclosure sale because it happened after one year and excludes the investor sale because it took place in less than six months. According to the index, the property value dropped $40,000. The point here is that most weight is afforded to sales that may be distress situations.
There are ten main statistical areas in the index plus ten other areas. Averages from the ten large metropolitan areas are then used to determine the U.S average. Again, this is another example of a small statistical sampling.
In addition, you have the same problem that exists with all methods of coming up with average sales increases/declines. What really matters in real estate is the status of a specific property rather than a whole area. According to Case Shiller, my area, Minneapolis dropped in value 6.6% last year. The actual drop in average sale price was 1.3%. But there were great variances within the area. On area within the metropolitan area dropped 33%, while another increased by 12%. What's most important to homeowners, sellers and buyers is the status of their neighborhood rather than national or even city averages.
Ultimately, all statistical measurements have their flaws, including Case Shiller. I give them credit for their creativity and the work involved in constructing their complex algorithm. But in the end, nothing replaces a good Realtor in understanding the pulse of the market.
The 2007 statistics for the Twin Cities real estate market were released at a press conference by the local real estate associations on January 16th, 2008. The highlights were as follows:
Listings processed, 105,004, down 2.8%
Sales, 40,055, down 16.4%
Inventory of homes for sale at year end, 26,675, up 16.8%
It was a disappointing year for many, but important for the long term health of the market. No one likes to see prices drop, but after ten years of rapid appreciation we need to reestablish affordability. In an ideal market, prices should rise at about the same pace as incomes, allowing for modest profits while maintaining consistent affordability.
In 2006, home prices stood at the highest level relative to incomes in modern history. A correction of this imbalance was needed. But drops in home values are unhealthy for homeowners and the economy. The ideal situation would be for prices to sit still for a few years while incomes rise to a balanced level. Assuming zero appreciation to be ideal for this time, a drop of 1.3% is not that bad, and helps us reach ideal affordability a little faster.
All real estate is local, however, and that's where things get complicated. While 1.3% may be tolerable, a 5% drop can be very uncomfortable. Many parts of the Twin Cities saw average price drops in the 3-5% range last year, and some much worse. One area hit hard by foreclosures dropped over 30% in 2007. Still, other areas saw price increases, as some Southwest suburbs rose by about 12%, leaving property even less affordable.
Like all markets, real estate goes in cycles. What comes down must go up. The question on everyone's mind is "where are we in the cycle"? Are we still going down, have we hit bottom, or have we started going up?
The Twin Cities real estate market tends toward long cycles. So although the market may start to rise, it will still be a "buyers market" for some time. In addition, different submarkets will bottom out at different times, and will sit at the bottom for differing lengths.
What we are seeking is stability, signs that the market has stabilized and has stopped its decline. And there are some positive signs:
New listings fell by 2.8% in 2007, the first drop since 1999, perhaps the start of a trend towards an inventory decline.
New construction inventory declined by 17.9% in 2007, as builders have reduced output in response to decreased demand.
Inventory in the $250,000+ price ranges remained virtually the same.
The area hit hardest by foreclosures and price declines, posted a large increase in sales, as investors decided it had hit bottom and now is the time to buy.
What to Look For
There will be no announcement that the market has hit bottom until after the fact. It may already be on the way up. The first sign will be a decline in new listings or improvements in the sales/listings and the supply/demand ratios. We can then expect to see declines in market time and increases in sales price to list price ratios. Following these indicators we will begin to see modest price increases.
The window of opportunity is wide open to buy a quality home at a good price. Quality properties are selling quickly, closing the window a little with each sale. A few years from now a lot of people will be saying, "We should have bought back then".
I just made an offer on a property today. After selling my house this summer, I'm trying to find a new home. This is my fifth attempt to buy something. That's right; I've made five offers on five different properties. I lost the previous four in multiple offer situations. Yea, I made low offers on two of them, but one offer was full price and one was $8,000 over list. Did someone say this was a bad market?
There are probably a number of lessons to learn here, but this has reminded me of one I've known for years: The power of story telling. What a great conversation piece. I always get the response, "But I thought the market was bad now?" Giving me the opportunity to be the real estate expert with a response like, "It's slow but not dead, and the quality properties that are priced right are selling fast." Telling a story builds rapport, adds credibility and can really help in making an important point.
Of course we don't always have an immediate personal story of interest, but I'm sure we all know someone who does, that we could share. I can't count the number of times where a situation has come up with a client, and a story of a similar past experience is helpful in the resolution.
So keep up the communication with your colleagues, and keep your ears open for those interesting, funny and unusual stories that will make for good conversation pieces. You may get a new client or put a deal together as a result.
And by the way, I'm in competition on this offer too. Wish me luck.
We are often asked if it's time to buy yet. Has the market hit bottom or is it still falling? The simple answer is: If you are ready to buy, now is a good time. "Maybe you're right Pat, but isn't that what you Realtors always say?" Perhaps, but then we're usually right. "Do I detect a hint of arrogance?" I prefer to call it confidence, but bear with me here.
In every market there are a number of fairly priced properties, some bargains, and some over priced dumps. Now is no different, except with a higher inventory and a number of motivated sellers, there are even more bargains out there. So yes, this is a good time to buy.
Still, many potential buyers sit on the sidelines waiting for someone (the media) to tell them that we've bottomed out and it's OK to buy. A quote from one of my favorite real estate writers contributing to Inman News, Lou Barnes, "Nobody's going to ring a bell when it's time to buy." If fact, when the media and Realtor associations report that the market has turned, the bottom will have come and gone. Good luck to those trying to time the market.
Truth is the market decline and rise is not shaped like a V, it's more like a U. We'll be sitting at what feels like a bottom for a while. What we are really looking for are signs of stabilization, that we're not facing significant worsening. And the Twin Cities real estate market is showing some signs of stabilization.
The sales to listing ratio is one of the most accurate indicators of market performance. This ratio has dropped considerably during the last two years, mirroring the market decline. However, one of the two components, listings, has started to move in the right direction, down 3% this year. The other component, sales, are down sharply (15%) this year. However, we started to see some improvement in July. But then the sub-prime crisis hit hard and August pending sales were down 18%, and September 24%. But October showed a surprising bounce back, just 12.6% down. If we include the sales of a large local auction, October was actually down just 4-5%. The effects of the sub-prime crisis will be long term, but hopefully the worst is behind us.
A number of local markets are doing well, including SW Minneapolis, Eden Prairie, Chanhassen, Plymouth, Minnetonka and Maple Grove among others. And the hardest hit local market, North Minneapolis, is showing a strong increase in sales despite a sharp drop in average sale price this year. Investors have decided that it has bottomed out and they are buying up the foreclosures, because the prices are too good to pass up.
These are all positive signs amid mostly gloomy media reports. And these are early signs of stabilization. But don't confuse these as signs that the market will be booming soon. We're in the early stages of this buyers market. See my blog "The Buyers Market, In It for the Long Haul." And don't forget the huge impacts from the macro economy (interest rates, inflation), demographics (gen X and Y, changes in household makeup, immigration) and cultural changes (we tend to move more frequently now). These factors are powerful and it's hard to measure their effects on the market.
I recall a "going out of business sale" at a big store once. "Everything 25% off." I ignored it. Then it dropped to 50% off. I thought, "Interesting, maybe it will drop further." I was right; it went to 75% off of everything. I hurried over, only to find that the good stuff was gone.
This buyers market is a tremendous opportunity to buy quality property at good prices. It will not last forever. At some point the good deals will be gone.
Notes: Excellent statistics and analysis of the local markets are available at the Minneapolis Area Association of Realtors and the Minnesota Association of Realtors. The "going out of business" story comparison to the market, and V and U shaped market declines are borrowed. I don't recall from whom, but thought they fit in well.
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.
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