Minneapolis in a Housing Crisis

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While this housing market has been tough on many communities, parts of Minneapolis are being hit extremely hard.  The foreclosure and short sales taking place in Camden, Phillips and North Minneapolis are not only often becoming eyesores in the community, they are also dragging average sales prices down substantially.

Based upon MAAR’s Top 100 report for Minneapolis for December 2007, I was able to construct the following chart of average sales prices in Minneapolis communities:

Average Sales Price Change in Minneapolis from 2006 to 2007

I wish this chart was wrong, I wish it didn’t show such a disparity amongst neighborhoods, and I wish I didn’t have to talk about it.  Alas, not talking about it will not solve the problem and this is an issue I simply could not be silent on any longer.

I have been working on some figures showing the number of homes for sale in these communities that are either in a short sale or foreclosure situation but the data isn’t complete yet and I want to make sure it’s right before I release it.  What I can tell you though is that these communities have been hit hard by the rise in short sales and foreclosures, as can be seen by anybody showing houses in these neighborhoods.

While there are still many homes for sale that are owner-occupied and in great condition, the sheer number of distressed properties for sale have a hugely negative effect on the market for the following reasons:

  1. Competition – Simply having so many homes for sale increases buyer’s options, which puts pricing pressure on sellers.
  2. Impression – Some homes in a short sale situation and a majority of bank owned properties have been neglected or even boarded up… having a few in a neighborhood brings down the perceived character of the neighborhood.
  3. Comparables – Eventually these distressed properties sell and then become comparables for appraisers and future buyers.  Though the condition may be terrible, that isn’t readily apparent in most MLS reports and therefore the appraiser or buyer may believe the home was in better condition that it actually was, thus pulling down the value of homes it is compared against.

As we are still in the middle of the subprime and ARM mortgage fallout, the high inventory and pricing pressure in theses neighborhoods is not likely to moderate for quite some time, which could lead to further price erosion this year.

While this is terrible news for the current homeowners in these neighborhoods, there is supposed to be a “silver lining” to this market downturn: housing affordability in these neighborhoods has headed substantially higher in the last year to the point that many people who could not afford to buy a home years ago can get into a home today.

I just recently closed on a deal with a 1st time buyer who purchased a 3 bedroom, 1 bathroom home with 1 car attached garage just a few blocks off the Parkway in North Minneapolis.  This home had quite a few cosmetic issues to fix but had a new furnace and newer roof and some great built-ins and woodwork.  Her total payment is under what she was paying in rent and her home has a lot more space for her family!

While she was successful, it was a big struggle to get her into the home, mainly because of the catch-22 on the only loan we were able to get for her:

  • Like most 1st time buyers, she had little cash upfront.
  • 100% financing is almost completely gone, so the next best thing is FHA financing, with a 3% downpayment requirement and upfront Mortgage Insurance Premium.
  • This buyer was able to secure some downpayment assistance money and we had the seller pay the closing costs, so her total out of pocket cash to close was approximately $1000.
  • To meet FHA guidelines, the home had to be livable at closing.  This means the plumbing, electrical and heating all had to be in working condition and operating for the appraiser’s inspection.
  • Like a large number of homes that are bank-owned, the utilities were off when we saw it, but we were able to get the seller(bank) to agree to dewinterize and turn on the heating and water.
  • There were items that needed repairs to get it to pass the FHA appraisal and most banks do not permit a buyer to complete any work on the property prior to close, but we were able to secure permission from the listing broker to make minor repairs.
  • When the water was turned on we found out that that the water heater was broken and we had to have a plumber install a new one, which was an unexpected expense.
  • There was exterior paint on the foundation that was peeling (an FHA issue) but since it was too cold to fix it the money had to be set aside at closing for the repairs.

While this buyer was able to get into this home, most other first time buyers will not be as lucky.  As I said above, most banks will not let anyone do anything to repair the home prior to closing and so if the home is out of FHA compliance for almost anything, the buyer will not be able to purchase that home.  Homes that are in a short-sale position are typically in better condition and sellers would work with a buyer on repairs but if it is anything costly no one will have any money to fix it!

The other issue is the 3% downpayment… many buyers simply do not have that saved, but are more than capable of making the monthly payments.  There are some downpayment assistance programs available but they are a small share of the total market and many loan officers are either unaware of them or in the case of government-sponsored programs, are not approved to use them.  This will put many of the rest of the homes that are in good condition still out of reach.

If a 1st time buyer does have cash, they can go with a Conventional loan & eliminate most of the lender required repairs but most of those loans need a minimum of 5% down payment and if the appraiser or Fannie Mae or Freddie Mac describe the neighborhood as a “declining market,” then the down payment requirement would jump from 5% to 10% for most and the zero down payment loans would go to 5%.

What this all means is that only a limited number of 1st time buyers will be able to take advantage of this “silver lining.”  The rest of this inventory will need to be acquired by buyers who have significant cash: typically rehabbers and landlords.  Rehabbers are likely to remain on the sidelines for a while longer simply because the fundamentals of the market in these areas are still softening and that makes it risky to go in and try to fix it up and sell it for a profit.

That really leaves us with landlords.  As with my buyer, these landlords can come in and buy these homes for less than their rental value and make great cash flow off them.  While that will mean the neglected exteriors of many of these houses will likely get some attention, it could take largely owner-occupied neighborhoods to largely rental neighborhoods and I believe that most people would agree that strong neighborhoods are those that have a good balance between owner-occupied and rental.

This situation needs immediate attention by the community.  In the best of circumstances, a public-private partnership would be formed to help assist more 1st time buyers in acquiring these affordable homes and try to help keep these communities occupied and maintain the balance between owner-occupied and rental.  This assistance could be in the form of additional downpayment assistance or nonprofit rehabbers turning around and selling it to eligible buyers.  Either way this takes money that doesn’t appear to be just sitting around, so this will take a considerable effort to achieve.

Earnest Money in Purchase Agreements

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Earnest Money and its role isn’t always understood, so I felt it would be good to give a quick overview:

What it Is
Earnest Money is effectively a deposit by the Buyer that is offered at the time of the offer. 

How Much
Earnest Money is often 1% of the sales price, but can be significantly more or less depending on the situation.  A quick closing may need less cash, a longer closing more.  This is also a great way to show strength in a low offer as it shows a strong financial position and confidence in the transaction.

Where it Goes
Upon acceptance of the offer, the money is deposited into the listing broker’s trust account where it is kept until closing or until cancellation of the Purchase Agreement.  At closing, the money is credited back to the Buyer on the HUD-1 Settlement Statement.

It’s Purpose
Earnest Money is used to assure the Seller that the Buyer is serious about consumating the transaction and gives them consideration in the event that the Buyer does not complete the transaction, assuming that they did not cancel for reasons permitted in the contract.

How a Buyer can Lose it
If a Buyer cancels the offer due to problems from their inspection or from failure to secure financing, they almost always have their Earnest Money returned.  In condos and townhomes, a Buyer has 10 days from the date they received the association documents to review them and cancel the offer and get their money back if they desire.  If a Buyer gets cold feet and wants to cancel well after completion of an inspection, they may lose their Earnest Money.

Twin Cities Homes for Sale Under $190,000 Explode

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While the Twin Cities Market as a whole in December 2007 had approximately 10% more listings than it did in December 2006, this increase in inventory is substantially skewed towards the 1st time buyer side of the market.

Below you will find slides from the Minneapolis Area Association of REALTORS December 2007 Housing Supply Outlook.Housing Supply Outlook - Inventory by Price

When you look at the numbers, the largest increase in inventory is at the lowest end of the pricing segment.  We see that in just 12 months we’ve over doubled the number of homes for sale under $120,000.  Even $120,000-$150,000 saw a 56% increase and $150,000-$190,000 saw a 24% increase.  When you hit $190,000-$250,000, inventory is only up 2.5% and from $250,000-$1,000,000 inventory has actually shrunk!  The 10.5% increase in $1,000,000+ homes is such a small number of units (74) that statistically I don’t think its too significant to the market as a whole.

This is a huge contrast!  The month of supply has also increased, but not nearly as dramatically, as seen below:Housing Supply Outlook - Months Supply by Price Range

If you look closely at what’s happening in the above charts, you’ll find another trend that’s shown in this chart:Housing Supply Outlook - Sales by Price Range

Sales in the last 12 months have grown strongly on the very low end of the market (under $150,000) and have fallen at all higher price points.  Metro-wide, sales are down 16%+ so any increase in sales shows a segment clearly bucking the trend.

What does all this mean?  Though the subprime market is supposed to have hurt the 1st-time buyer market, the sales from 2007 show that buyers in this range are more active than they were in 2006.  Does this mean the 1st time buyer is alive and well???  I’d love to hear comments from the peanut gallery.

One thing I’d love to see is a distribution of homes in foreclosure on this price graph… it would be very interesting to see which price points have the highest foreclosures… are you reading this Jeff Allen? :-)

Minneapolis/St. Paul Median Home Sales Price Falls

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The October 2007 Median Sales Price for Twin Cities homes fell 3.5% from a year ago and 4.3% from two years ago, to $220,000.  The Median Sales Price is the price at which 1/2 of the homes sold for more and 1/2 of the homes sold for less.

While this sounds like negative news, pricing is all relative.  The only people who suffer in a falling real estate market are the downsizing & downpricing homeowners.  For those who bought in the last few years that are trying to sell today will see red ink on the sell side but will see savings on the purchase of their new home.  Most of all, first time buyers and move-up buyers are definitely winning in this market.

Foreclosed Homes Need Interior Photos

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I wrote in June about agents who still had snow pictures on the MLS.  Today I mention another thorn in my side: agents who represent bank-owned foreclosed homes that do not take photos of the inside.

In the Twin Cities, as in many other large metro areas nationwide, we have seen a sharp increase in foreclosures over the last year.  This has been a boon to the business of agents that work with the banks carrying this inventory.  Unfortunately, some of these agents are either too busy or feel they are getting paid too little to take the effort to snap interior photos of the house and also often do not measure room dimensions.  Sometimes the house’s interior is in bad condition, sometimes it is in remarkably good condition.  Either way, consumers want to see layout and general condition before they make the trek out to see the home.

When we have record levels of inventory on the market and many investors waiting on the sidelines, the consumer looking for a home for owner-occupied use is still the best buyer for most homes.  Since these consumers have so many choices, they narrow down their options using the photos and other MLS information provided online.  Fewer buyers seeing the home means less potential to sell the home quickly and at a good price.

Until banks wake up and demand the agents selling their inventory to do more to market the home, they will find that they are not receiving the full benefits of the MLS and are missing many potential buyers.

Twin Cities New Construction Down 31% Over 2006 Through August

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Based upon numbers provided by the Builders Association of the Twin Cities (BATC), new construction unit permits have fallen 31% through August 2007 vs. last year.  Units through August totaled 6,408 permitted thus far, down from 9,402 units permitted through the same time last year.  In fact, in 2004 there were a total of 12,191 units permitted through August, which means we’re near half of the number of new units from just three years ago!

This is a favorable trend for our market and shows that builders continue to scale back their building from the record levels of a few years ago.  While the new construction market is still weak, this dramatic reduction in new construction will help reduce inventory over the long run and sets the stage for a recovery in the future.

Edina Realty Leads the Twin Cities Market

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Edina Realty posted a market share of 19.8% for closed transactions in the 12-month period ending September 31, 2007.  That means that there’s an almost 1 in 5 chance that a home sold in the Twin Cities will be sold by an Edina Realty agent.

In this slowing market, where inventory is at record levels, Buyers have almost too many choices to make and Sellers have so much competition for each of those buyers, make the same choice that nearly 1 in 5 customers in the Twin Cities make, work with an Edina Realty agent.  Since 1955, Edina Realty has helped Buyers and Sellers through both good and bad markets.

Edina Realty – Now, more than ever.

Aaron Dickinson + Edina Realty = Even Better! 

Edina Realty Market Share 10-07

Twin Cities Inventory Falling

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The Twin Cities has seen the peak inventory levels for the year in September and now begins its precipitous fall… likely falling from current levels of approximately 34,000 homes in the 13 county metro to 25,000 by year-end.

While this may sound good to sellers, it isn’t.  Inventory is falling but this time of year buyer demand falls faster than your competition.  What this means for buyers is that there is less and less choice this time of year but the homeowners that are on the market may be more willing to negotiate with you.

August Minneapolis/St. Paul Home Sales Stats

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In August 4,173 closed in the 13 county metro area.  This is down 17.8% over last year and a whopping 40.2% over two years ago.

For the period of January – August 2007, there have been 28,739 closed sales, down 14.9% over last year and down 27% over two years ago.

It’s a slowing market… which is great for 1st time buyers and move-up buyers but not great for downsizing households.  Houses can sell quickly though… just sold one of my listings in 3 days!

House Sold in Under 36 Hours!

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There are still plenty of buyers in this market!  While sales year-to-date are down approximately 14% over last year, and there are 10% more listings for sale today than last year at this time, buyers are still out there.

On Monday August 27th a listing east of Lake Harriet came on the market for $470,000.  On Tuesday afternoon my clients and I went to see the house.  In the less than 36 hours it had been on the market there were a total of 8 business cards left in the house.  When we arrived there was another agent showing it and while we were there another group came through as well.  I call the agent back that evening to let him know we have interest and he informs me that the house sold that afternoon before we even showed the house!  This home was in top-notch condition in an in-demand neighborhood and was priced to drive significant numbers of buyers through the home… it worked!

Morals of the story:
1. No matter how bad it may be, it isn’t as bad of a market in most areas as people think.
2. A house with the right price, right condition, and right location still sells quickly.
3. Buyers need to be ready to jump on a property if the right one comes along…