Friday, January 11, 2008

A Look at the Real Estate Market in Minnesota

Not optimism, not pessimism, but REALISM….
January, 2008
By Glenn S. Dorfman, Minnesota Association of REALTORS®

There is good news for homebuyers and sellers and it is not b.s.: Not optimism, not pessimism, but REALISM (facts seasoned with a heavy dose of common sense ---realistic thinking).

Salespeople, business people, politicians do not create trust by “blowing smoke,” in the form of uniformed, self-benefiting opinions at the public. The public wants and deserves the most accurate assessment of current economic and housing market conditions as possible coated with a heavy dose of common sense. To suggest, that this housing economy is terrific and that, were it not for the media’s negative sentiment all would be well, is just plain wrong and has no basis in fact. We cannot expect the public to see REALTORS® as professionals with integrity, if during market weakness, we tell them untruths. If REALTORS® care about their status in the eyes of the consumer, if we are in this business for the long haul, facts and language matter in our marketing, in today’s market, more than ever.

How we arrived at this place and time in the housing market (a brief and necessary understanding of the facts).

We have arrived at this housing market as a result of three principal factors coming together between 1999 and 2005. They are discussed in order of importance. First, compliments of the stock market debacle and 9/11, we benefited from the Federal Reserve “cheap money”--- lowest interest rates in forty-five years policy. Low carry costs, inflated home values to unsustainable levels. Second, in order to participate in the low interest rate borrowing and re-financing frenzy, Wall Street helped to create an array of CDO’s (collateralized debt obligations) that expanded the number of mortgage products that consumers could choose from (though few understood how they worked). Third, were two intersecting demographic trends---huge immigration to the U.S. as a result of the strong job creating economy and the baby boomers reaching their peak earning years. These factors helped Minnesota REALTORS® raise the homeownership rate in this state from 68 to 78% by mid-2005.

Realism (Facts + Common Sense) in the current housing market

Despite all the serious negative news that almost always follows the deflating of an “asset bubble”, there are several pieces of very positive news that only a few of the smartest, generally wealthiest people, understand about an economic downturn. These need to be carefully and completely explained to potential buyers individually and through advertising.

Economic downturns provide significant opportunities for making money.

While unsophisticated sellers tend to focus on their competent REALTORS® suggestion to reduce price, forgetting that they too will be “buying” in a declining house price market. Further, they also forget that most sellers, who are not house flippers, saw their house values rise 50-85% from 1999-mid-2005! So, considering that Minnesota home values have averaged approximately 4% a year increase for the past 60 years, a modest cut of 10-20% in a 50-85% 6 year increase is still a great deal by historical standards. If sellers do not want to listen to the sage advice of competent REALTORS® in today’s market to sell with a nice profit, they may end up losing much more than they bargained for---after all, the point of putting a house on the market is to what is necessary to sell it, not to list it and waste a competent REALTORS® time and resources. For those who borrowed against equity, refinanced or just plain bought at the top, there is little that can be done for them. More importantly to the seller, may be the microeconomic truth that inventories are bound to rise this spring (as they have historically) and together with the foreclosures from the 2008 mortgage resets of 2005/06 adjustable rate mortgages, will push supply higher the longer they hold off price reductions. Without some fantastical and unrealistic massive wave of buyers, additional inventory in 2008 must suppress price more the longer a unit sits on the market. Also, the seller incentives of recent years have done nothing except obfuscate the actual reductions and kept values higher than they would have been without them. This means that many buyers may be paying higher property taxes on a phantom value into perpetuity. Not exactly the ethical high ground!

For buyers, well it is a strong market with great selection and lots of negotiating room on price and terms. However, no one knows when the turn will come and some buyers may find themselves wishing they had decided to make that offer. I do not say this as a REALTOR® advocate but rather as a seasoned investor who invests in good companies when their price is “falling” and sells them when their price has risen 10% or so. While Minnesota housing may have some more room to fall, buying today allows for fabulous choice at good fixed rates for homebuyers looking to buy and live in their home for 5 or so years. Things will improve and looking for the bottom is like selling at the top, it rarely works. Greedy people generally get their due. Capitalist markets are great levelers and cannot be predicted with any level of certainty.

The best investors in the world buy on weakness, hold and sell when they have made a reasonable profit. And homes have the added advantage that you can live in them, fix them up to suit your tastes, enjoy them, deduct their mortgage interest and property taxes (if, of course, you itemize your taxes ---30% of Minnesotans) and, best of all, you get the keep the capital gains free from taxation.

Finally, residential homes are long term investments in the same way that stocks are…flipping, greed, and making fast money is mostly myth and professional REALTORS® deplore the practice.

Comments to:

Glenn S. Dorfman
Chief Operating Officer, Minnesota Association of REALTORS®
direct cell: 612-719-6541
direct office: 952-912-2662

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