Ride a Painted Pony

By Jeff Allen (MAAR Research Manager), Mark Allen (MAAR CEO) and Greg Sax (MAAR Communications Manager)

"What goes up, must come down" -- Blood, Sweat and Tears, pioneering jazz-rock combo and noted housing economists

It’s there. Creeping among the facts in our Market Indicators tool. Impossible to ignore. Uncomfortable to accept. The Twin Cities median sales price in January 2008 was 8.9 percent below the median sales price in January 2007. While one month does not a market make, it is the continuance of a growing trend that began last summer.

Yes, friends, the market corrections we’ve been waiting for have arrived. On first glance, this massive decline is a shock to the system. But let’s think this through.

For the market to head towards a semblance of rebound, it has to become more attractive to buyers. Laws of supply and demand dictate that those who control the market also control the price and, in our case, that’s indisputably buyers. With sellers—especially builders and banks—pricing their homes aggressively downward to spur some form of action, the inexorable march towards a new affordable market pricing structure has begun. And this march will continue until the environment becomes suitably attractive.

Admittedly, it seems hard to fathom that it’s not attractive enough already—given the continued prevalence of rock-bottom interest rates, the record number of homes to pick from and the slowly improving affordability picture. But there remain obstacles which the good news in our market has to hurdle:

• widespread uncertainty in the domestic lending industry, as well as the international credit markets that finance it

• the lowest consumer confidence index since the beginning of the Iraq War in 2003

• the omnipresent releases of dour economic news from all corners of the world

• a fragile housing affordability environment that has to prove its recent rebound is for real

So while one could argue that this is one of the most attractive buying environments in history, the simple truth is that buyers have either not gotten the message or they do not yet believe this is the best it’s going to get. But take heart. A backlog of home buyers is building, and they will eventually return to the market. January’s decline in home prices is one step closer to that day.