I Wish I Would Have Bought Back Then

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.

What Comes Down Must Go Up

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.

Zillow is Stupid

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 Case Against Case (Shiller)

The Standard & Poor's/Case Shiller Index was released Tuesday, January 29^th, 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.

Seeking Stability

Seeking Stability

The 2007 statistics for the Twin Cities real estate market were released at a press conference by the local real estate associations on January 16^th, 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%

Average sale price, $274,767, down 1.3%

For excellent, detailed reports on the market, go to the Minneapolis Association of Realtors website: http://www.mplsrealtor.com/Segments/Realtors/Research.htm

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".

Telling a Story

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 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.

Signs of the Bottom

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.

Minneapolis Bridge Tragedy Gets Close and Personal

I learned over the weekend that a friend, Vera Peck, is among the missing in the aftermath of the 35W bridge collapse.  Vera was with her 20 year old son, Richard Chit, who has Down's syndrome.

Vera is a wonderful person, sweet and kind, respectful and respected.  You just feel good in her presence.  She will be missed by many.  After hearing that she is missing, I have been following the story more closely.  I went to a touching memorial service Sunday, and later viewed the site from the neighboring Stone Arch Bridge.  I've lived in this city all my life and have crossed that bridge many times.  It's all so hard to believe.

I've read about all of those lost and missing.  They were all very special.  And then everything changed in an instant.  Let's be thankful for the lives of Vera and the others.  Many were blessed to know these people.  And let's be thankful, because we could have lost many more.

People in Minneapolis have been asked to observe a moment of silence tonight at 6:05 pm. CST. (the moment the bridge went down last Wednesday).  Please join us in remembrance, this evening.

For those interested, The Minneapolis Fund, http://www.minneapolisfoundation.org/mnhelps/bridgedisasterfund.htm

is collecting donations for victim of the tragedy.

I'm lucky to have known a special person like Vera.  It's hard to believe I may never see her again.

Marketing; Does it Still Matter?

We all know that to sell our listings, our marketing must reach the serious buyers (those that may buy in the near future at a decent price).  But beyond putting the listing on the MLS, is any additional marketing beneficial?

The vast majority of serious buyers are working with Realtors.  The primary search tool for us Realtors is the MLS.  The MLS is and always will be the best tool for searching for real estate (another blog, another day).

In our market, and I think most others, we have broker reciprocity, meaning all listings on the MLS go onto all broker's websites.  So the public has access to all of the listings on thousands of websites, including the highest traffic national sites like Realtor.com.  So all serious buyers will have either their Realtor searching the MLS for them, and/or will be searching on some of the thousands of websites that include 100% of their market area.

The point here is that all a Realtor has to do to expose a listing to the serious buyers (the only ones that matter) is put it on the MLS.  There is no such thing as a serious buyer who cannot be reached by the MLS or MLS fed websites.  Craigslist, Homes.com, print advertising, are all extra marketing, but extra marketing does not necessarily equate to extra exposure to serious buyers in a saturated market.  ALL serious buyers will gravitate to sources that have ALL of the inventory.  Is there really a difference between having a listing on 1,000 website vs. 1,003 websites, especially when the first 1,000 include the highest traffic websites?

Realtors and Brokers who try to stand out by selling their marketing plan to prospective clients may not like to hear this, but for reaching serious buyers, all Realtors are equal in quantity of marketing.  That said, the quality of marketing really does matter.  It is important for the Realtor to recognize the appealing features of the property, and effectively communicate these with photos and words on the MLS, to attract the serious buyers.   This is where the good, experienced Realtor stands out, when it comes to marketing.

But in this market, the quality or quantity of marketing will be of little import without the right price.  With seven, eight, or more sellers for every one buyer this month, an average property in an average location will not sell at an average price, PERIOD.  These days, the property, location or price must be enticing (borrowed quote) for the property to sell.  And it's communicating this kind of advice to our sellers, that's far more important than any extra marketing.

The American Dream, Let's Share It

Owning your home is the American Dream.  Nearly everyone shares the dream, and wants a piece of land and a home they can call their own.  And it's not just us citizens.  Since the birth of this nation and before, people have come from all over the world to make this their home.  And they keep coming.  And that's what makes this a great country and will keep America great.

People come here for education, working opportunities, and to buy real estate.  They come to create a better life.  For every job an immigrant takes, they create two or three jobs, because of the velocity of money.  When they spend their money on goods and services, the providers of the goods and services have money to spend and so on.  When an immigrant buys a house, the seller can then buy another house, and so on.

The first time home buyers market is where it all begins.  When they buy, the seller can move up to another home.  During the boom, immigrants made up a huge portion of the first time buyers.  But things have changed in the last couple of years.  Congressional debate on immigration legislation caused many immigrants to stop buying for fear of being deported and losing their property.  In addition, it's now more difficult for immigrants to get mortgage financing.  It's no coincidence that the housing downtime occurred during this time.

We need more immigration, and to find ways for those new to our country to buy real estate.  Our housing market, and in fact our whole economy depends on it.

Our diversity is our strength.  Happy Independence Day!