Market shift: What is the culprit?

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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.

This is as Good as it Gets

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If you’re a seller or planning to be a seller yet this year, this is the best this market is going to get so you better get going!  Here’s a summary of things to keep in mind.

  • You have to be the best price and best condition.
  • Talk to your agent.  If you’ve got questions or concerns, ask them!
  • If you’re not getting any showings, check your marketing, check your competition, check your photos, then drop your price.
  • Agents can’t make your home sell if you’re overpriced… price is still the #1 determination on saleability.
  • Market times are averaging 80-90 days right now… if you’re at that you need to sit down and go over things like you did before you listed.
  • If you want to talk to other Realtors that’s fine, but you cannot sign a new listing agreement until your current one is cancelled or expired.  Post-dating the contract doesn’t make a difference… it cannot be signed at all until you are clear of your current contract.  This is a state rule.
  • Agents cannot openly solicit you for a listing if you are currently under contract, but can respond to any inquiries you make.

Bad Ideas in High-End Homes

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I’ve recently been working with a couple buyers in the $1M-$1.5M range and we went out this week to look at a few homes in Eden Prairie.  While they all were very nice and had some great finishes, they also had some bad features too.

#1 – Combination lock boxes.  Agents are securing a home with a $30 manual lockbox that can be opened by anybody with the code and leaves no trace of accesses?  Some of the homes we saw were very nicely furnished… I’d hate to hear that a home was burgularized and then be a suspect simply because at some point I had shown the home.

#2 – Master bathtubs that face the front of the house.  Honestly – there was a house that had a 1/2 acre back yard looking out onto open fields and they put the master bath in the front of the house looking over the rest of the neighborhood and the street.  That’s just a bad decision.

#3 – Skimping on kitchen storage.  Few of these homes have dedicated pantry space, which seems odd given that these kitchen often have $50k+ into them.  What good is it all without enough storage?

#4 – A picture window in the main floor bath overlooking the front entry.  This is true as well – a full-size window, right next to the toilet, which overlooks the front entry to the home.  Don’t know about you but I don’t think that rooms should be designed with windows that always need to have their blinds down!

#5 – Small master bedrooms.  One of the houses we saw had a master bedroom space that couldn’t have been more than about 13′ x 12′, while the bath and closet were at least that size.  Today’s bedroom furniture is typically oversized and consequently the room should be sized appropriately.

$11 Million Pledged to Help Renovate Foreclosures

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Startribune reports that the Minnesota Housing Finance Agency has offered an $11M loan to the Family Housing Fund and the Greater Metropolitan Housing Corporation to purchase, renovate and resell foreclosed homes that have fallen into disrepair.  They are hoping to targt approximately 70 homes with this financing.

I applaud this as a great step towards improving a situation that is still worsening… large numbers of home in Minneapolis are vacant/foreclosed homes… but more help is needed, and fast.

According to the article, in just the first 3 months of this year Minneapolis had 678 foreclosed homes sell at sheriff’s auction.  70 homes is barely 10% of that figure… while a very good start, it will take a larger effort to make a significant difference in this market.

New Term: Proceedings Subsequent

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I’m currently working with 4 different banks on offers for homes.  Two of the homes are owned by the bank through foreclosure and the other two are subject to a short sale.  Well, today I learned a new term: Proceedings Subsequent.  In this case, the bank acquired a property through foreclosure however the Registrar of Titles is still showing the home owner who had the bank loan as the “fee simple” owner of the property.  So in this case the bank has to file a motion with the court and have a hearing to determine the validity of the foreclosure and assign title to the bank, this is called a Proceedings Subsequent. 

Well, normally this is all done well before we get to closing however in this case the bank waited till two weeks before closing to get title work ordered, which means I got to learn a new term and my buyers and I got to worry about whether we would close on time or not.

Twin Cities Housing Market Improving?

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Over the last couple weeks I’ve done showings with several different buyers in different price points and areas of the Twin Cities and the one common thing I’m seeing is that anywhere from 10% to as high as 30% of the houses my buyers want to see are “sold subject to inspection” by the time we call to set up the showing.  Granted, many of these houses have been on for quite some time, but the sheer number of houses with accepted offers on them is a very encouraging sign for the coming months.

Houses priced right and in the right condition are selling quickly again… some in as few as 3-4 days in certain areas of the Twin Cities.  This doesn’t mean an end to the housing slump, but it does suggest we’ve turned the corner.

Not all REALTORS are Republicans, I'm no Dummy, and I Hate Looking Stupid

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I attended my state association’s Legislative Impact Day on March 15th at the Xcel Energy Center near the state capitol.  Over 5 hours we discussed demographic changes coming to and already occuring in Minnesota, and spent a long time discussing housing and tax policy.

I’ve been to this event in previous years and so I’ve come to expect that parts of the day would be slow and that I wouldn’t agree with all that was said in the room, but that in general we are all aligned with the same common goals.   Unfortunately my association embarassed and disappointed me a little this year…

As in previous years, we invite members of the governor’s administration as well as elected representatives from the capitol to come to discuss their views on housing issues and to open up a Q&A section.  This year we were skunked by the governor again but did get the director of the Minnesota Housing Finance Agency (MHFA), several other members of the administration and several elected officials from both sides of the aisle to come in and speak to us.  The speeches were great and the Q&A’s for the most part were done well too.

So how did I get embarassed and disappointed?  Well this year my state association decided it would be really neat to make big signs and put them on sticks and have REALTORS hold them up while their guests were speaking.  The signs had to do with “living within our means” i.e. don’t raise taxes on the state deed tax or expand the sales tax to include services… both of which are on the table. 

These signs seemed to be a pretty tacky way to reinterate to our guests a position they are already well aware of, as we have a kick-ass team of lobbyists on the capitol.  This was a conference, not a two-bit rally, and to hold these signs up when our guests were speaking seems inconsiderate and unprofessional.  To make matters worse, several of the signs had the same message misspelled!  There was a sign at each table and someone at my table held ours up, much to my disdain.

This alone was enough to get me a little miffed that I paid $50 to be a part of this spectacle, but it got a little more annoying when Chris Galler, Senior VP of MNAR and a great guy, was going over the results of a survey that the association had commissioned regarding taxes.  They asked citizens how they felt about their state government and their current tax burden and then put the results into some great pie and bar charts.

I thought, “hey, this is great to get some feedback.”  Then Chris continued and explained what some of the questions were.  This is one that was asked: “do you think you pay too much , just about right, or too few taxes?”  Can you guess how people responded?  Yep, most said too much or just about right.  Another question asked “State and local government costs you about $.16 out of every dollar you make, do you think this is enough?”  What do you think they said here?  Again, the clear majority said it was enough.  Well crap, the association could have given me the $10k-$20k they paid to get those answers!

When I’m talking to sellers and we’re discussing the commission rates that are available to them, I don’t say to them: “Mr. and Mrs. Seller, I can charge you 6%, or I could charge you more if you’d like… what would you prefer?”  That’s a question alright, but it doesn’t educate them as to why a higher commission brings additional benefits that may have significant value to them.  Without knowing the added benefits, I find it hard to believe that anyone would want to be charged more “just because.”

I sit more in the middle of the road politically, vote Democrat on most issues, and do think that sometimes increased taxes can be justified.  It would have been great to see a report that really probed constituents on their beliefs about taxation for things like affordable housing, healthcare, transportation, etc.  Instead all I got to see was a report that catered to the 80% +/- of my peers that are Republican.

I want my $50 back…

Mortgage Solicitation

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I recently got pre-approved with my loan officer in preparation for an offer I was planning to make.  I applied on Friday, by Tuesday of the next week I had an offer in my mailbox from a mortgage broker in town that assured me that he could get me a better deal on my mortgage with what he said was my credit score of 735 (which it is).

When I got this I immediately realized this was a solicitation that was fired off because my credit was pulled by my loan officer and therefore shows that I’m in the market for a home loan.  While she had warned me about this months before, it was still a little surprising and made me feel a little violated too.   I don’t want people to solicit me when I make an inquiry with someone else… it’s none of their business.  Further, I would never do business with someone like this, or with someone who spams me.  Just won’t do it.

If you don’t want to receive similar offers, contact the credit bureaus and ask to be removed from their “prescreened offers” list.

Bank Owned, REO, Foreclosure, Pre-Foreclosure, Short Sale, Sheriff's Sale – Explained

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Buyers are seeing many more homes for sale today with terms like REO, foreclosure, short sale, and others.  All these terms have something to do with a bank, but here’s an explanation for each:

  • Bank Owned
    • The bank has aquired title (ownership) to the property.  The bank is the seller.
  • REO or “Real Estate Owned”
    • Can be read simply as “bank owned”
  • Corporate Owned
    • Many times this is just another way to say “bank owned”
  •  Foreclosure
    • This is the process by which a lien holder aquires the property through court procedures.  Each state operates a little differently, but this process can typically take several months once started and typically does not start until the owner is 60-90 days behind.
  • Pre-Foreclosure
    • This is commonly referred to as the time during the foreclosure process but before the sheriff’s sale.  In this time period you are still negotiating with the seller but the bank may have to be consulted in cases where a short sale is needed.
  • Short Sale
    • When a seller is in a distressed situation and the offer that is submitted does not cover the expenses to sell the home and pay off the lender, the seller may ask the bank to take a “short payoff” on the loan, meaning to accept less than what was owed.  Banks will sometimes do this because they do not want to own homes, they want to make loans.  Each circumstance is different and the bank is not required to accept any short payoff.
  • Sherriff’s Sale
    • In Minnesota, the foreclosure process finishes with a “sherrif’s sale” of the home.  The county sherriff holds an auction where all interested parties make a bid for the home.  Most often a representative of the bank is the only bidder for the home.
  • Redemption Period
    • In Minnesota, this is a 6 month window from the date of the sheriff’s sale that the property owner can still occupy the home and if they can get the cash or funding, they can pay off the entity that bought it at the auction (most often the bank) and keep the home.

Townhomes and Condos – They can be Easier to Sell Right Now

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With the dramatic increase in inventory in recent years, the number of townhomes and condos for sale has risen dramatically.  Where once there may have only been 1-2 units for sale in a development, there are now likely 1-2 other units (or more) with the exact same floor plan.  Given that builders typically do several developments in the same or neighboring cities, there can be a large amount of competition within just a couple miles.

While everyone would agree that it is a boon for buyers, almost all of those people would also say it is a detriment to the seller.  While the competition is high, that also means that it should be much easier to determine at what price a seller’s townhouse or condo will sell for, given its current condition, view/location, and updates.

In this market sellers that try to argue that their’s is worth more than the one next door because of XYZ will struggle but those that look at the competition and the comparable solds and price accordingly will find that the sales process isn’t as bad as they thought.  Buyers can choose the house in the best condition AND with the best price.  If you’ve got that, you’re home free.