Market shift: What is the culprit?

Jeff Allen is one of the great staff members we have at the Minneapolis Area Association of Realtors.  He’s very articulate and has a great ability to analyze dynamics in our market.  He recently wrote another great article to local Realtors and I thought it would be a good read for all of you too.

Market shift: What is the culprit?
by Jeff Allen, MAAR staff

As the Twin Cities residential real estate market enters the busy spring season, it’s becoming apparent that buyer activity will not rebound from its post-boom recess as quickly as many of us had projected and nearly everyone had hoped.

No one should assume that a return to boom-level activity will be quick and easy. After all, we’re fresh on the heels of several consecutive years of unmitigated market expansion. But indicators of buyer demand have begun to noticeably decline again after a brief relative uptick this past winter, with newly signed purchase agreements (pending sales) in March 2007 falling 18.9 percent behind March of last year, and weekly April sales figures reflecting the same decline.

What is the culprit for this sluggish buyer showing? Let’s start by defining what the culprit is not.

Not affordability. After reaching a decades-low point in the middle of 2006, the affordability of our region’s homes has made dramatic improvements due to stubbornly low interest rates and slight declines in home prices. Our market, like the rest of the country, does face some remaining price-to-income disparity issues and will into the foreseeable future. But the simple truth is that homes in the Twin Cities have not been this affordable in two years.

Not interest rates. The popular media has been quick to highlight increases in interest rates, but they are slower on the draw when rates are on the decline. The cost of borrowing money to buy a home remains low—holding steady at 6.1 percent in April.

Not a lack of choice. At the end of March, there were 19,776 single-family detached homes, 5,703 townhouses, 3,281 condos and 540 twin homes on the market for buyers to choose from. While the growth of inventory appears to be slowing as builders and consumers adapt to a changed demand landscape, it’s still setting monthly records.

Those looking for a simple answer to the question of why buyers remain on the sidelines despite an environment that sits so firmly in their favor should look elsewhere. There is no silver bullet, no single or definitive cause. There are many interdependent factors at work. But two such factors are having the largest effects upon our discernibly muted spring home sales season, and likely will into at least the summer.

Consumer confidence. The public’s perception of the housing market is anything but certain right now. Housing is on the tip of everyone’s tongues, but the conversations aren’t usually positive. With overwrought analysis in the popular media, it’s hard to blame them. While affordability is improving and choice is excellent, housing market psychology is immersed in a contrary perspective for now due to a barrage of stories on bursting bubbles, foreclosures, mortgage fraud and subprime lending.

A return to tighter lending standards. New uncertainties in the lending industry brought upon by excessive exuberance in the subprime mortgage market have created a renewed sense of caution to the mortgage community and a new round of hyperactive government legislation. “Riskier” loan applicants are facing a tougher road to financing their home purchases. The net results are a decline in qualified buyers and undue caution from those who are qualified.

It is important to keep perspective and recognize the diamond in the rough. Much like declining home prices leading to improved affordability, a market-wide recalibration period will cause some uncomfortable months ahead but will ultimately benefit our market in the future as consumers, lenders and REALTORS® have their expectations realigned.

Time will tell how prolonged the correctional pause will be, but regardless, be assured that it will not be as severe as market declines seen in decades past that were fueled by recession. The long-term health of the Twin Cities housing market is being strengthened as we speak by the current market experience that some find disconcerting.


  1. Brian says

    As a current prospective buyer, I am a little put off by the phrase “undue caution”.

    During the RE mania that was some other markets Vegas, CA, PHX, etc., I think that caution was completely absent. While a house might always be a sensible PURCHASE, the notion that ANY house is a good INVESTMENT does not necessarily hold. Is a house an investment asset class, or is it a living expense? I say both. Therefore we must separate the cost portion from the speculative portion.

    The whole overrun in RE pricing and the mortgage debacle was largely caused by a lack of cautious behavior, driven by a can’t-miss attitude.

    In this market, telling someone that they are exhibiting “undue caution” to me sounds like someone who wants to sell me something, more than someone who is advising me.

    You may disagree, but I am a non-contigent buyer with cash to put down and no personal debt. I didn’t get that way by “jumping in” willy nilly.


  2. says

    I agree that “undue” is not the right word; maybe “substantial” is a better choice.

    If I or the association were trying to simply sell you, why would we even mention anything about the bad side of this market?

  3. DAL says

    Brian sounds like a responsible consumer. Some numbers are now possibly coming into focus regarding the subprime debocle. The next two paragraphs are from today’s Star Trib.

    Supporters of the free-market approach to lending boast that the surge in subprime loans helped a record number of Americans buy their own homes in recent years. But the nonprofit Center for Responsible Lending offers a sobering counterpoint.

    The center, which tracks abusive lending practices, estimates that a million more people will lose their homes to foreclosure in the coming years than were added during the boom times.

    Back to my comments.

    The government reaction to mortgage fraud has been late, but not hyperactive. You can’t have thousands of foreclosures/short sales hit the market and expect to understand where the market is at. Supply is being fueled further with a continued lessening of demand due to nonqualified individuals previously receiving mortgages. Not so tough to understand.