Pat's Blog

TIME; NOT TIMING

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Fri, 20 Jun 2008 15:59:53 -0500

Question: When is the best time to buy?

Answer: When you are ready.

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 Wish I Would Have Bought Back Then

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Tue, 29 Apr 2008 12:13:12 -0500

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

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Thu, 24 Apr 2008 14:44:56 -0500

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

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Thu, 07 Feb 2008 22:34:10 -0600

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)

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Thu, 07 Feb 2008 21:53:42 -0600

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

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Tue, 29 Jan 2008 16:27:30 -0600

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

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Fri, 14 Dec 2007 16:04:55 -0600

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

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Sat, 24 Nov 2007 15:53:50 -0600

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

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Tue, 07 Aug 2007 15:41:35 -0500

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?

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Sun, 29 Jul 2007 13:20:54 -0500

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

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Wed, 04 Jul 2007 19:28:31 -0500

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!

The Greatest Investment

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Sat, 30 Jun 2007 14:20:10 -0500

It may seem strange during this time when all we hear is "Buyers market" to call real estate the Greatest Investment. But it has been and will continue to be the best tool used by most Americans to build wealth. There are two primary reasons why we rate this as the greatest investment.

Home and Investment

Real estate is one of few consumer products that doubles as an investment. It is an investment that has utility. You can live in it or rent it out. Shelter is a basic need - we all have to live somewhere. It has a usage, or rental value. And as rents rise over time, the usage value increases.

A large portion of your cost is for using the property, making your actual investment cost small. Over time, rents will rise faster than your payment and the home's rental value will exceed the payment. At this point, your home investment will be making (saving) you money even before you sell.

The Federal Reserve

The Federal Reserve is our banking system and has the authority to create money, manipulate interest rates and thus control our money supply. By using these tools, they can create an economic expansion, increasing inflation, or a recession, reducing inflation. We think of them as the inflation fighters and they are, but their task could more accurately be described as keeping prices stable. They actually want a small amount of inflation, but not too much. Slow steady money supply growth, leading to low level inflation is necessary to grow the economy. The growth is especially imperative now since we (government and individuals) are deep in debt. As a result, the Fed must continue to engineer a low level inflation for decades to come.

Inflation means the cost of real estate and everything else will continue to rise over time. Real estate can rise (appreciate) faster than overall inflation as it did during the boom, or slower, and it can even go down. But over the long term it will always go up. When you buy, you lock in your payment or cost, based on the price at that time. Over time, as you build equity paying down your mortgage, the rental value of your home and the resale value will go up because of inflation.

Real estate is land, which always holds value, unlike a stock or bond which is a piece of paper. It is the "American Dream". Like food and clothing, it is a basic necessity. People immigrate here to get jobs and buy real estate. People refuse to leave their homes in the face of hurricane, floods and great danger. Their home is that valuable.

There are other investments that do better than real estate at certain points of time. But in the long term, very few can match real estate as an investment. And since it's the most widely used wealth building tool, we call it "The Greatest Investment".

Commission Rebates

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Fri, 29 Jun 2007 16:17:55 -0500

If you are in a battle but don't realize it or refuse to acknowledge it, you are sure to lose. Underestimating your competition can prove fatal. For years, real estate commissions have been under attack. Historically, FSBO's and discount brokers have been a small share of the market, while full service brokers have made a comfortable living. But some powerful forces (information age, the market, the US Department of Justice, and the maturation of the X & Y generations) have descended on the battlefield and put downward pressure on commissions.

Commission rebates are one battle in the war. Marcie Geffner writes in an Inman News article that Tennessee has passed a new law banning cash rebates to buyers and seller. The ban was favored by the Tennessee Association of Realtors and opposed by DOJ. Ms. Geffner calls the law "protectionist". She makes some strong arguments.

I have worked at a "full service brokerage" for 20 years. I have benefited from the system, but I must admit the disconnect between what I do when representing a buyer, and what I get paid for. I act in my buyer's best interest, find a home that suits their needs, and make sure they don't overpay. I get paid (by the seller's broker) because I caused them to buy a specific house. It makes sense that buyers should have the right to negotiate the cost of the service we provide to them. Rebates allow that negotiation.

But there is another issue relating to rebates that rarely gets discussed. That is lender disclosure on the HUD settlement statement. There are some mortgage programs that may not allow buyer rebates and others that require a minimum buyer contribution. For this reason, rebates must be disclosed on the HUD and down payments may have to be increased to offset the rebate. Failure to do so may be mortgage fraud. I have heard this from a RESPA official at HUD and a leading real estate attorney. However, our Minnesota Association of Realtors and the Minnesota Department of Commerce have yet to render an opinion to my knowledge. If anyone has a definite answer on this, please let me know.

Disclosure issues aside, I'm sure buyer negotiation will only grow. If not rebates then it could be MLS's dropping the offer of coop pay for the buyer's agent. Imagine a world where your buyer not only has to negotiate with the seller on price, but with you on commission. This world may be coming to a real estate market near you.

Market Needs to Find Itself

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Mon, 25 Jun 2007 16:47:52 -0500

The National Association of Realtors reported today that sales of existing single family homes dropped to an adjusted annual rate of 5.99 million in May, the slowest pace since June 2003. Pardon me, but I thought 2003 was a pretty good year for real estate sales. The median sale price was down 2.1%, and the average price was down .8% from May of 2006.

"I think psychological factors are currently the biggest drag on the housing market, in addition to disruption from tighter credit for subprime borrowers," said Lawrence Yun, senior economist with NAR. I couldn't agree more.

Yes, the boom is over, and key indicators point towards a long term buyers market, but the market is not dead, and it's not crashing. Yet the media is focused on the negative news of the day.

A recent quote from one of my favorite writers, Lou Barnes, a mortgage broker in Colorado, writing for Inman News, goes something like this: "Humans, as a species are hardwired to get the badger out of the cave now. We don't spend much time discussing wild animal experiences of the past". Yes, the market is down now, but history shows that despite occasional downturns, real estate always does well in the long term.

Home buyers need to remember that this is a long term investment. And that a down market is a great time to buy. Once the media and the public realize that this is not a crash, and the boom isn't coming back soon, but this is just the normal cyclical pattern of the market, the market should pick up. In other words, the market needs to find itself, and get comfortable again.

Seeing What They Don't See

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Sat, 23 Jun 2007 22:16:10 -0500

It's time to discuss what we Realtors do for our clients. Why do we get paid as much as we do? Why do our clients keep coming back to us, and send us referrals? Answers to these questions and more after a commercial break from our sponsor.

It's not really a commercial break, just a game. Can you see the common symbol within the logo? We've all seen the logo thousands of times. Raise your hand if you can see the symbol. We play this game when we teach homebuyer workshops, during the discussion of what a Realtor does. For those who still can't see it, it's the arrow, between the E and x.

So that's what we do. We find the arrow. Our clients describe the logo to us, how many bedrooms, baths, neighborhood, style of home they're looking for. We listen, for we want to meet our client's needs. But we also look for what they don't see. The newly renovated house, with the seller offering a nice appliance allowance. The buyers think, "Great, we get brand new appliances". But it's the Realtor who notices that there really isn't room for the refrigerator. I'm sure we can all think of many examples. And it's not just the house, but what an experienced eye sees in the purchase agreement or the market. It's our business to look at real estate all the time. We know what sells at a premium, and what must be discounted to sell. This is how we provide value to our clients.

Our clients are looking for a home. It's up to us to make sure it's also a good investment.

Credit to Emily Green of Sandy Green Realty, my partner in the homebuyer workshop presentations and co-creator of the FedEx logo game. Emily is a Realtor who can see the arrow.

Same Game, Different Name

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Fri, 22 Jun 2007 18:00:14 -0500

A recent article in the Minneapolis Star Tribune, "Straw Buyer deals fuel tidal wave of foreclosures", discusses a problem that has been big for over a decade. Back in the 1990's, it was called the "Flipping Scandal". It involves property sold at inflated prices to unsuspecting buyers

In this story, a 22 year old woman was sold 10 houses in 90 days, with none of her money down, accumulating $2.4 million in debt. Less than 18 months later, she was losing all the properties to foreclosure.

Flipping became such a bad word that it seems to have dropped out of the local vocabulary. I've seen "flipping" defined as "buying a property and then selling it at a profit in a short time period. If you think about it, despite its negative connotation, there is nothing wrong with that. However, it becomes unethical if it is sold at above fair value. It becomes illegal if fraudulent loan documents or appraisals are used.

Every Realtor knows that the problem would be prevented if buyers were represented by a good Realtor. Unfortunately, not all buyers realize this.

Things to look for:

If seller, Realtor, mortgage broker, title company etc..., are related or all know each other, this is a red flag. But it is common for professionals to refer you to other professionals they know and trust, so it doesn't mean you should avoid the deal, just keep your eyes open.

If the seller recently acquired the house, it is a red flag, but again, it may be a perfectly good house at a fair price, so don't run, just keep your eyes open.

If you are asked to sign any documents that are incorrect, or if any financial part of the transaction is not reported or is misrepresented on the HUD settlement statement, this is a big red flag. Run! And then contact the authorities. In Minnesota, that would be the Department of Commerce.

In all cases, it's a good idea for buyers to seek advice from their own Realtor.

Minneapolis Condo Conversion Boom; Why it Happened and How it Helped the City

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Fri, 15 Jun 2007 15:50:03 -0500

Minneapolis has seen an unusually high number of rental apartments converted to condominiums in the last few years. This has received considerable negative attention, since some tenants have been forced to move and some affordable rental units have been lost. But the conversions came at a time when they were desperately needed, and provided a near perfect remedy to market imbalances. A report prepared by a Minneapolis CPED intern identified 1,252 units converted from 2001 through 2005. As of the 2000 census, Minneapolis had a total of 168,624 households. The units converted amounted to less than three fourths of one percent of the households in the city. Although these are not huge numbers for a city of this size, it exceeds anything that we’ve seen before.

To understand why this sudden conversion boom occurred, one must understand the basic traits of markets. Markets are always in a state of change, and they are always seeking balance. In the case of the conversion boom, imbalances in both the housing rental and housing sales markets converged to create ideal conditions. The boom was a natural and needed free market response to the imbalances.

The rental market in the late 1990s and up through the first half of 2001 was tilted in favor of the landlords with low vacancy rates (under two percent) and rising rents. The market response to the situation was twofold. First, prospective tenants started to buy instead of rent, and second, new rental apartments were being constructed. A third factor, a recession, reduced rental demand further. These factors combined to quickly and significantly change the rental market. Vacancy rates rose to above seven percent in the metropolitan area and average rents leveled off. Landlords suddenly had difficulty finding tenants and had to reduce rents.

In the meantime, the rental market of the late 1990s and early 2000s was one of several contributing factors to a major boom in the housing sales market. But as the rental market was changing quickly in 2001, the housing sales market continued to boom in a high demand state until mid 2005. The supply of properties for sale in Minneapolis reached an extreme low of 271 units in February of 2001. There was a several year period where demand to purchase homes greatly exceeded supply, leading to rapidly rising prices. The average sale price in the city rose from $161,020 in August 2000 to $248,131 in August 2005. The supply/demand imbalance and soaring prices were threatening to make housing unaffordable for many families.

For the four years from late 2001 to mid 2005, the imbalances in the housing rental and sales markets created the ideal conditions for the condo conversion boom. An owner of rental units during this time found it very difficult to find good tenants, and as a result, the rents were in decline. But units for sale, including condominiums, were selling quickly, at rapidly rising prices. The markets created an opportunity, and practically demanded that the owner convert the units to condos. As a result, 1,252 rental units were converted to condos during this time. And these conversions were one of several factors that have helped to bring both markets back into a more balanced state. This has been beneficial to existing tenants, landlords, homebuyers, the neighborhoods, and the long term stability of the markets.

Of course the conversions have led to some problems, including tenants being forced to move, and the loss of some affordable units (283 of the 1252 units were previously affordable). These losses were significant to the people involved. But construction of new units is occurring. According to Minneapolis Multi Family Housing Development Reports, 5,255 units were developed and completed between 2004 and the first three quarters of 2006. Of these, 3,387 were below market, including 2,347 that were affordable for families under 30% median income. And since the markets have balanced, the conversion boom appears to be winding down. Units converted dropped from a peak of 756 in 2004 to 279 in 2005 and have continued to drop.

In summary, the condo conversions helped resolve serious housing problems facing Minneapolis. Homeownership ratios increased a full three percent in the Twin Cities (71.4% to 74.5%) from 2000 to 2005. This is a large and long term trend that affects Minneapolis significantly. The conversions helped to partly accommodate that trend. We should not be surprised and we should not fear the conversions. When markets are left alone and not manipulated by outside influences, they usually do what’s best for the majority of the participants and stakeholders.

Notes: This article was written in January 2007 and used in arguments against proposed restrictions on Condo Conversions in Minneapolis. There are strong arguments on both sides of this issue, and there continues to be shortages in rental and ownership housing opportunities for our lower income population. The Minneapolis City Council voted against the proposed restrictions. Data referenced in this article comes from GVA Marquette Advisors, City of Minneapolis, US Census Bureau, The Metropolitan Council, and Minneapolis Area Association of Realtors.

The Buyers Market, "In It for the Long Haul"

Pat Paulson, Realtor, Minneapolis, Minnesota (Exit Lakes Realty) — Wed, 06 Jun 2007 21:06:19 -0500

The Buyer's Market

"In It for the Long Haul"

The spring and summer months are typically the busiest time for real estate, but the hoped for rebound in the market has yet to occur. Many had suggested the rebound would occur this year, but now that it's obviously not, next year is the favored target. While we will likely see a rebound in the number of sales, I would suggest that the Twin Cities' buyer's market may be here for a long time.

A buyer's market literally means there are more sellers than buyers. A buyer's market does not necessarily mean a "bust" or "crash", which would involve significant value declines. In fact, the Twin Cities and national markets have a history of buyer's markets that do not involve significant (or any) value declines.

There are some strong indicators that point to a likely long term buyers market. Over the past 40 years the Twin Cities real estate market has moved in very clear price cycles, from boom to down (buyers) market to boom. These cycles have tended to last ten or more years. We are in the second year, or early stage of the current buyers market. During the last buyers market, average prices rose just 23.88% from 1981 to 1991. Some submarkets showed comfortable increases, and some lost ground.

The primary fuel of the recent boom (that ended in 2005) was a supply/demand imbalance. The relationship between the supply/demand ratios and price appreciation has followed a clear pattern for nearly two decades. Taking the ratio of sales to listings, you will see a strong growth pattern beginning in 1990 and then peaking in 1999-2000. The ratio then started a steep decline in 2001, and has been dropping since. The peak was extremely high, holding above 80% for two years. And although the decline has been steep, it wasn't until 2006 that it dropped below 50%. These supply/demand dynamics have been the dominant factor affecting real estate prices during this time. The pattern since 1990 is that the price growth trend follows, or responds to the supply/demand trend.

The sales to listing ratio is still in decline, for the seventh straight year. When the ratio hits bottom and starts to increase, it may take a few years to reach a high level and have a positive effect on prices. If the ratio remains low, prices will likely remain flat. It is important to note that when the ratio declines or is at a low level, price growth slows or stops, but prices do not necessarily decline.


Twin Cities Real Estate History
Year	# Listed	# Sold	% Sold/List	Average Sale Price	Appreciation
1989	89,170	33,962	38.09%	$96,658.00	2.85%
1990	78,548	34,496	43.92%	$98,016.00	1.40%
1991	71,850	35,598	49.54%	$99,402.00	1.41%
1992	72,730	41,944	57.67%	$103,264.00	3.89%
1993	70,685	39,842	56.37%	$107,569.00	4.17%
1994	63,369	42,454	66.99%	$111,806.00	3.94%
1995	64,556	42,310	65.54%	$117,053.00	4.69%
1996	73,433	46,949	63.93%	$124,022.00	5.95%
1997	63,189	41,441	65.58%	$137,085.00	10.53%
1998	64,280	47,836	74.42%	$147,346.00	7.49%
1999	57,573	46,675	81.07%	$163,277.00	10.81%
2000	59,618	48,208	80.86%	$181,605.00	11.23%
2001	71,861	50,298	69.99%	$203,136.00	11.86%
2002	73,940	51,212	69.26%	$221,275.00	8.93%
2003	86,378	56,528	65.44%	$238,446.00	7.76%
2004	97,737	58,233	59.58%	$256,252.00	7.47%
2005	99,211	57,283	57.74%	$272,522.00	6.35%
2006	108,022	47,906	44.34%	$278,462.00	2.18%

Real estate and other free markets follow certain economic rules or universal laws. Included is the law of supply and demand, which relates to the powerful principle of balance. Markets seek balance. This doesn't necessarily mean that prices must come down after huge increases, but it does mean that excesses created in a boom must be worked out. This working out could be rapid or it could spread out over a long period. Real estate is not a liquid asset like currency or stocks, it's a much slower market, and excesses tend to be worked out over a longer period.

Another indicator pointing to a long term buyers market is the home price to income ratio*. Home prices rose so much faster during the boom than inflation, leading to historic highs in the home price to median income ratio. This ratio must retreat to a reasonable balance. This will occur by either a drop in home prices or an increase in incomes. Since the Housing Affordability Index (HAI) is in a reasonable range due to low interest rates, my bet is that the balancing will occur primarily by rising incomes. In other words, incomes and rents have to catch up to home prices before prices can start rising again with any significance. Since wage inflation is tame due to overseas competition, this process could take a long time. So while prices don't necessarily fall after a boom, their ratio to median income will fall if it becomes excessive.

The principle of balance will never change, but the numbers that represent a balanced supply/demand or price to income ratio can change. For example, if interest rates stay low for the long term, than perhaps the price to income ratio will be in balance at a point that is higher than historic norms. So while the price to income ratio is clearly excessive and must come down, the point that it must reach for balance is unclear. My guess is that it will take at least five years of relatively flat prices to work out this excess. Whenever we reach that point, price appreciation will likely resume a more normal pattern (not a boom).

*The MSA Twin City average home price to Hennepin County median household income ratio reached 4.63 in 2004. By contrast, it was at 2.8 in 1993. (Unfortunately I don't have historical Twin City MSA income data, so I used the highly populated, income diverse, Hennepin County)

Conclusion

Predicting the future isn't easy, and as time goes on, factors that were previously unknown or underestimated become important. The real estate market in the Twin Cities currently has no significant upward price pressure. The price to income, and sales to listings ratios both indicate that we are years away from any real price appreciation. We are in the early stages of this cycle and the decades old pattern is for the cycles to last ten or more years. Housing affordability is still reasonable due to low interest rates, and combined with inflation, should keep home prices from falling. Barring a significant change in interest rates or inflation, we are likely locked into a pattern of low to no appreciation for the foreseeable future.

This is a much healthier and more stable market than the boom of a few years ago. The correctional period we are going through and the ensuing buyers market should set the stage for long term, slow and steady expansion. Buyers have many options to choose from and time to make decisions, and prices are not likely to increase too fast and become unaffordable for future buyers. A few years ago many people bought poor quality houses because they felt compelled to invest in real estate. Now and in the future, people will buy houses for the right reason. Your house is your home, your abode, your sanctuary. The fact that it is one of the few personal possessions that doubles as an investment is a side benefit. No one should expect to make quick money from their home. But if you're in it for the long haul, the rewards should be great.

Pat Paulson, Realtor

June, 2007

P777p@aol.com

612 386-8902

Most of the data cited in this article and used by the author to draw conclusions comes from the Minneapolis Area Association of Realtors. Other sources include the Census Bureau. The opinions stated and conclusions drawn are solely those of the author.