The Skinny

"Jingle Mail"

With home values around the country in decline, being "upside down" on one's mortgage is far more common these days.

Some estimate that 5-10% of American homeowners are in some form of negative equity, with the potential for more to fall into that category in 2008 and 2009 as home values are dragged down by the increasing market share of lender-mediated foreclosures and short sales. If you're a homeowner, owing more on your mortgage than your home can fetch on the open market puts you in a tough position—especially if you have an unexpected and extended loss of income.

So what options does an upside down homeowner have?

Option # 1: Suck it up, work through it, make the payments, wait out the tough market and enjoy your home all the while.

Option # 2: Walk away from the mortgage and all obligations, leaving your credit damaged but your lender holding the bag.

Beyond a simple sense of obligation to do "what's right," what would really keep a distressed homeowner from choosing Option # 2? The economic incentives in this scenario are structured such that walking away from a monthly cash obligation on a declining asset might actually justify the sizable dent in your credit score. So does that mean that across the country from sea to sea there are mass legions of consumers voluntarily going back to renting? That there's hundreds of thousands sending their lender the dreaded "jingle mail," so named by the sound of keys to the now-abandoned home rattling around in the packages in the lender's mailbox?

According to many, no. Filed under "Fake Trends," the Free Exchange Blog from The Economist tackles the issues surrounding this myth and directs us to some relevant web content. Click here to view the full post; it's worth the read.

In sum, people respond to far more than just economic incentives (emotional and social incentives are insidiously powerful) and, perhaps more importantly, buy houses for reasons that extend beyond their financial benefits.

In other words, owning a home is not like owning a stock. No one's particularly enamored with the idea of owning Apple stock on principle alone (unless, I suppose, you have one of these). Most own Apple stock solely because it's a good investment for their financial portfolio.

Homes are different. They're where where we live, sleep, eat, breath and drink beers on our back porches. The fact that you get to build a little wealth in your back pocket over a long period of time is a nice bonus, but it's not necessarily the main attraction.

The Dumbest Generation

First-time homebuyers are the lifeblood of the housing market. The fuel that keeps the fire stoked. The oil that keeps the engine running. The mayonnaise that keeps the sandwich lubricated. Insert your own rote metaphor here.

And, more often than not, first-time homebuyers are relatively young. They were probably born after 1975, young enough to have at one point believed that New Kids on the Block were awesome (though are justifiably unexcited about their recent comeback).

According to Emory University English Professor Mark Bauerlein, these people are also incredibly stupid.

His forthcoming book is called "The Dumbest Generation: How the Digital Age Stupefies Young Americans and Jeopardizes Our Future (Or, Don’t Trust Anyone Under 30)." Bauerlein's thesis, essentially, is that the internet and video games make people dumb. Young people, avid users of the internet and video games, are therefore dumb. Click here to view his website, and here to see a web slide-show explaining his rationale. I guess he's trying to appeal to the crotchety-angry-old-lady-on-her-rocking-chair-yelling-at-the-neighbor-kids demographic.

As someone born in 1981 and an avid user of the internet, I'd love to weigh in with my opinion on the topic, but I'm just too damn stupid. I can barely read the manuals that teach me how to play all of the video games I spend 18 hours a day playing, let along formulate a cohesive response to his argument.

Those of you who work with young first-time homebuyers already knew this though, right?

The Power of Price

Realtors know as well as anyone that humans are instinctively wired to be swayed by the bottom line and to scour for deals. Take two properties that are identical in every respect: location, square footage, condition, etc. Offer one for $250,000 and the other for $249,900 and guess which one sells first.

Obviously, real estate doesn't often offer properties which are identical in every respect, which is why the housing market isn't like Wal-Mart. Houses aren't uniform commodities and lowest price doesn't always win out. Consumers are willing to pay more for quality.

With all that in mind, here's a pretty sweet video from local band Tapes N' Tapes which illustrates the power of price. Stay tuned to the end of the clip for the full effect.

Flawed Home Price Data

There's been a lot of talk—quite understandably so—about the picture being painted by national and local data on housing prices in recent months. For potential home sellers, the numbers haven't been pretty.

Numbers from the National Association of Realtors showed a March median sales price decline of 7.7 percent from a year ago. The Standard and Poor's Case-Schiller Index shows a 12.7 percent drop in their composite of the nation's twenty largest metropolitan areas. In our own market, we're showing a 9.7 percent decline in median sales price when comparing March 2008 to March 2007.

But there's an inherent trouble in accepting broad, metro-wide median sales price numbers as some sort of gospel truth about general home price appreciation. Housing markets are not homogeneous. Within each metro area there's a cornucopia of different property varieties. Location, price range, construction status, condition and—yes—foreclosure status all affect housing values on a case-by-case basis. So these median price numbers have to be approached with a critical eye.

This caution is especially crucial in a time like today, when our national housing market is in the midst of a fairly unique point in its history. Foreclosures and short sales—often priced at extreme discounts to spur sales—are comprising a much larger portion of our markets than they have in previous years, rendering the traditional methods employed by NAR, Case-Schiller and ourselves a bit skewed.

Even NAR and Case-Schiller are now publicly acknowledging these flaws. Click here for a MarketWatch piece on the subject.

Hmmm...if only we had a way to separate foreclosures and short sales from non-bank-mediated properties in the data. Then we could really get a feel for current market conditions.

A subtle hint: keep an eye on us in the next week.

Hat-tip to Pat Paulson for pointing out the MarketWatch article to us.

The Wright County Discussion

As many of you already know, the Star Tribune recently ran an in-depth three-part series on the Wright County real estate market called "From Boom to Bust." Wright County has experienced some tumultous changes in the last few years due in no small part to the real estate boom and resulting explosion of new construction activity in the growing, exurban region. With the housing market now in contraction, Wright County is—like many counties in the metro—experiencing dramatic declines in new construction and uncertainties with some high-profile residential projects.

The Strib broke up their coverage into three parts:

Part I: Minnesota's New Ghost Towns

Part II: Housing Bets Gone Bad

And Part III, with an infinitely less-catchy title: Suburbs stuck with empty houses are trying to figure out what to do now

No matter your take on the fairness or objectivity of these reports, they are worth the read, and highlight some important market currents underpinning the challenges that face communities struck hard by the shifting market. The Strib's editor even went as far as publicly praising her staff for their work on the story.

But some aren't so pleased with the coverage, perhaps justifiably so, for its laser-focus on one specific county's troubles. In light of the troubles experienced by the entire metro, this feels like an unnecessary pile-on by some. In the interest of promoting intellectual curiousity and vigorous discussion, below is an unpublished letter to the Strib editor, penned by Wright County Economic Development Partnership leader Noel LaBine (hat-tip to Laurie Karnes for sending it our way):

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Star Tribune Article off-balance

The recent articles by Star Tribune reporters Chris Seeres, Jim Buchta, and Glenn Howatt have been very biased in their presentation of the current housing situation in the area. Why they decided to target Wright County is curious. They certainly have not taken a balanced view of what has happened in the current market. Moreover, their interpretation of the facts is misleading.

They are biased because they have decided to use a fear mongering approach to explain an already distressed situation. Obviously they are not students of the use of media to be an asset towards the development of community. Words like reckless, ghost towns, and meltdowns are more useful to describe war and devastation than to describe a needed correction in the housing price bubble. Quoting people, who believe that were heading for a depression, adds further impetus to their fear-mongering.

More on the positive side includes all the businesses that are doing well in Wright County. Expansions have recently occurred for manufacturers in Annandale, Cokato, and St. Michael, and more are being planned for manufacturers in Howard Lake and Monticello. These are building expansions ranging from 7,000 s.f. to 90,000 s.f. Other expansions are occurring with several manufacturers, that I know of, that does not include building expansion, but which certainly include product and/or workforce expansions. In addition there are several large projects underway with a new jail being built in Buffalo, an addition to the hospital clinic in Monticello, and a new Fleet Farm retail center in Monticello. In addition to these, there are two new restaurants being planned for Otsego and two more new bank buildings going up there as well. Meanwhile, a new community center is being planned for St. Michael. Some other new businesses that are looking to move into or start-up in Wright County include a corrugated plastic pipe manufacturer, an environmental concrete wet-waste handling businesses that will employ up to 40 employees in two years, and a natural pet and human skin and teeth treatment and food supplement business. These are just some of the many projects that are occurring in Wright County, which has a healthy economy overall.

A more balanced view would consider some of the facts. If 1 out of 40 houses are in foreclosure, in Wright County that would be about 2.5% or 97.5% of houses are either paid for or the owners are able to make their monthly payments. Which way of presenting that information is less scary? In a balanced view aren’t both points of view valid? There is another fact mis-represented. While Otsego, Albertville and St. Michael may have had predominantly German ancestors, there are 16 communities in Wright County, and some of them have had a majority of their ancestry from either Ireland, or Finland, or Quebec, or other regions. I raise this point, because in Wright County we have balance, we believe in balance, and we try to maintain a balanced point-of-view.

While the current distressed housing industry and market is worrisome and has caused some decay in consumer confidence, this is certainly not the general profile of our economy. The housing and auto industry only makes up 7% of our gross domestic product. The other 93% of our economy is doing fine. With the declining value in the dollar, not only are U.S. and Minnesota manufacturers experiencing increased demand for their products, but for the first time in 20 years we are experiencing a positive foreign balance of trade. This market correction is not only a necessary part of a free market society, but already there are some very positive signs of the much-needed correction. Bottom line is 95% of us have good jobs and we are making are payments. Hardly the profile for the despairing economy that the Star Tribune promotes.

If the purpose of their articles were to sow dissension and fear, then they have succeeded. I have attended five events in Wright County in the last four days, and everyone has had a negative reaction to the stories. One realtor told me that a deal that she has been working on for a retail strip mall is being further scrutinized by the banker, because he has been spooked by the article. A number of people have asked me to write a response to these articles. If the Star Tribune is trying to regain some of the subscribers that they have lost, I would suggest that printing articles like these is not a good tactic.

Another criticism of their tactics is their decision to make these stories of “get-rich-quick schemes by a few” worthy of front page news. For one thing, it is not a new story. The market has already shaken out most of the bad mortgage writers. For another thing, the courts are already indicting a number of fraudulent deal makers. Putting this kind of story on the front page is just one more step toward the tribune becoming a tabloid newspaper.

Further Fed Rate Cuts?

With the national economy teetering on the brink of recession (and some would say already within one, and handily), AND legitimate inflation fears surfacing with reports like this and this, the Federal Reserve faces some tough decisions ahead. Which potential enemy do they fight first: economic contraction or price inflation?

Cutting borrowing rates further certainly helps with problem number one, but could prove problematic for problem number two.

Local mortgage blogger Alex Stenback points us to the crucial questions and some interesting web content on the subject. Click here.

Rental Properties on the Rise

There's a very interesting story from the Star Tribune today on the growth in rental properties around certain cities in the metro. In essence, a convergence of market factors is creating an environment where the flip from owner-occupied to renter-occupied is easier and, in some cases, more profitable.

With the well-documented rise in foreclosures, a dearth of qualified and motivated home buyers, and shifting tax burdens rendering an owner-occupied status less desirable than in years past, it's not a shocking development. But worth watching nonetheless.

For a look at how various cities are responding to the growth in rental properties, take a look at the full Star Tribune article from Steve Brandt. Hat tip to Jon Weber for bringing this to our attention.

The Media, The Realtor, The Tension

Call me crazy, but the tension between the media and the real estate industry is 100% fascinating.

In case you missed it, there have been approximately 984,412 articles in the Twin Cities newsmedia the past two weeks on the local housing market. One on suburban foreclosures. One on the role of the credit crunch. Another on the troubles associated with vacant homes.

Realistically, this deluge of coverage isn’t that surprising. The recent news that February’s median sales price of $195,060 was 12.5 percent behind the same month last year is certainly something that any reputable news outlet should have an interest in reporting.

But in all of my face-to-face interactions with realtors, I get the impression that industry professionals are less than thrilled about all the recent press coverage. And really, I can’t blame them for feeling that way. The common accusation is that the media “goes negative” and sensationalized at the expense of providing the simple and unvarnished truth about the market.

All the emphasis on the negative aspects of the housing market in the media undoubtedly has had a depressing effect on consumer psychology and confidence. Few could argue with that. But as we all know, “truth” is a subjective phenomenon at best; it ain’t viewed in the same light by all parties. One man’s truth is another man’s spin.

And we also need to remember that there’s a stark, strong and necessary difference between the advertising arm of a large media outlet and the journalism arm of that same organization. Just because a newspaper gladly accepts our advertising dollars does not mean they then owe us any semblance of a “payback” in their actual news content. Journalism’s proud traditions require that the news remain untainted by the revenue concerns of the organizations that provide it.

I don't have a grand thesis to impart here. Just wanted to point out that the relationship between the media, real estate professionals and the general public is very complex, with no clear heroes or villians. Everyone’s got legitimate and illegitimate beef with everyone else. Yes, press coverage tends to accentuate the negative. Yes, this is probably having a troubling effect on consumer confidence. But the numbers really haven’t been that pretty, and we’re all collectively responsible for educating consumers about the full, nuanced reality of this market.

The item that sparked this whole train of thought was a great recent Inman News Article on the industry-wide tension between the media and the real estate industry.

Click here for the article (password may be required).

Clowns to the Left of Me, Jokers to the Right

We have been neener-neenering with pointed finger at such overwrought housing markets as California, Nevada and Florida over the past year and saying, "Ha, it ain't us!" Our 2007 President, Deb Greene, made the point on national television that the country's interior markets were far more stable than the coasts, to which CNBC's Maria "The Money Honey" Bartiromo said, "Good point, and thanks for making it."

But what's this? A new year-end report from OFHEO seems to be poking a small hole in our argument. The Minneapolis/St. Paul MSA ranks #225 out of #291 MSAs on the list of appreciation rates. Really? That low? Okay, our area's annual appreciation of -1.6% is nowhere near the muck of Modesto, California's -15.5% or Punta Gorda, Florida's -13.3%, but is it so impossible to imagine us as the next Ann Arbor, Michigan (-7.9%) in the near future?

Look around the region, and you'll see that just about everyone is doing better than us. From Duluth to Dubuque, from Sheboygan to Sioux Falls, we're on the outside looking in at their relative calm. Are we reeling from some big-city issues that the likes of Ames and Appleton don't have to worry about? Not sure about that. Milwaukee's relatively stable at 1.4%. Chicago's hanging tough at 1.6%. Even Cincinnati and Columbus are evens to our odd (let's not talk about Detroit or Cleveland for now; too messy, those comparisons). 

On the flip side, the mountains and the scrub plains are doing bully business, according to the OFHEO 2007 figures. Grand Junction, Colorado enjoyed a smiley 12.0% appreciation; Ogden, Utah was a solid 10.8%; and big ups to Bismarck, North Dakota for their 10.7% increase.

Needless to say, we'll be watching 2008 like a hawk around here. We recently called 2007 "one of the most interesting years in the history of residential real estate." There is currently no reason to believe that 2008 won't be another wild ride.

The Rub

REALTOR® associations have it rough. I know, I know...hearing us whine is not exactly what you come to this blog for. But hear me out.

By some, we're expected to be cheerleaders of sorts—shouting positive platitudes from the hilltops for all to hear, even in the darkest of times. Shining light on the silver lining in every cloud, turning every frown upside down. We're supposed to be Bing Crosby in the 1940s, shuffling with a wide smile across a USO stage and imploring all to "Accentuate the Positive."

By others, we're expected to be dour and soulless number-crunchers—cold and calculating doom prophets who insist that the proverbial light at the end of the tunnel is a Mack Truck hell-bent on destruction. This kind of bleak hysteria is often called, in many circles, "telling it like it is." Ah, the irony.

The truth of the matter is that blind allegiance to either camp—positive or negative—isn't productive or honest. Lean too far towards rose-colored analysis and you'll understandably lose credibility as a trusted source of information. Sway too deep into headline-grabbing, blood-soaked doom and gloom and you'll not only alienate your members, but also create an unfair and often untrue picture of reality that needlessly damages the confidence of those participating in the market.

So what's the solution to this eternal conundrum? Well I guess we'll never have it completely figured out.

But out overarching goal in our analysis of the housing market is too always be honest and forthright. Usually, that involves finding the middle ground between optimism and pessimism; the truth always tends to lie in that unsexy but essential region.

In this spirit of honesty, consider the following pieces of news, one good and one bad:

• New York Times Article (password may be required): American Housing Debt Now Exceeds Housing Equity

MAAR Analysis: This sucks. Pretty bad. No way to sugarcoat it.

Bad debt and depreciating home values are causing headaches and heartaches for some consumers.

• FHA Release: New Loan Limits to Help Homeowners, Economy

MAAR Analysis: This rules. Pretty hard. No way to ignore it.

Raising the FHA limit makes 77.4 percent of current Twin Cities listings eligible to be purchased using secure, FHA financing. This provides a much needed option to consumers in this period of uncertainty in the credit and lending markets.