The Skinny

The Future: A Total Crapshoot

Pending sales in the Twin Cities housing market have showed a year-over-year increase for two straight months—a notable and positive achievement that we've pointed out in a few spots before.

The question for today is whether or not this is going to continue through the remainder of 2008. Will sales remain robust, fall a bit, or fall a lot in the next 4 months?

Anyone who purports to have an exact answer to that question is trying to sell you swamp land. There are a ludicrous number of uncertainties swirling in the marketplace, perhaps historically so, which prevent anyone from being able to gauge with a high level of certainty where the housing market is headed in the near-term future.

For good measure, here is a list of all the current questions the housing market must contend with:

• How much impact has the sunsetting of the FHA seller-funded downpayment assistance program had on "last call" buyers? In other words, how much of the recent upswing is due to home buyers trying to take advantage of the waning days of The Last Zero-Down Loan Program Available? We should reasonably expect there to be some level of decline in sales when the program finally disappears on October 1st, but the question is how much.
• Are buyers taking advantage of the new $7,500 homebuyer tax credit? How many? Will the benefits of that program help pull in extra buyers this fall?
• Then there's that small little matter of The Economic Hiccup, and now the impending bailout of Wall Street. Needless to say, this has got consumers and investors a little shook. Consumer psychology will undoubtedly trend towards conservatism in the months ahead, as people look to protect their nest eggs rather than risk them. You better believe this will have some effect on whether or not first-time home buyers take the plunge into home ownership.
• Will the tumbling finance sector cause mortgage standards to tighten even further? There's some who say that's proved to be more myth than truth so far, but who knows what the future may bring if banks continue to pile on heavy losses.

All of this is simply to say that the crystal ball on Twin Cities home sales this fall is decidedly cloudy at the moment. Feel free to share your opinion on whether or not sales will continue their nice little streak in the comments section.

Lessons in Marketing from the Minnesota Twins

I went to a Twins game the other night. Shocking but true.

It just so happened to be the game where Joe Mauer got two balls thrown at his head, Gardy got ejected, and the Twins blew a three run lead in the late innings. So needless to say, the game could've gone better. The outcome was not the most interesting event of the evening, however.

In the third inning, I got a hankering for an alcoholic beverage of the barley and hops variety. Some people call these "beers." So I scanned the crowd looking for the closest vendor of such a delicious product and found not one, but two, available beer guys. Though they were both selling beer, they were doing it in very different ways.

The first beer hawker looked kinda like this guy on the left. Nothing particularly shocking here. Baseball cap. Polo shirt. Shorts. Clear, plastic cups with domestic draft beer. Budweiser, Bud Light, Miller, Miller Lite. The American Quartet of brews. The Everyman of beer vendors -- simple, unassuming, appealing to the masses.

The second beer guy was a completely different story.

Essentially, the second beer guy was Jeeves from www.askjeeves.com. He was wearing a nicely-pressed tuxedo shirt, formal black dress pants, fancy and completely insensible footwear for the miles of steps he would be traversing. All of this was communicating a sense of luxury and grandeur (as much as one can consider ordering a beer at a Twins game to be partaking in luxury).

What sort of beer do you suppose Jeeves was selling? Why "premium" brands, of course. Summit, Heineken, Stella Artois even.

And he wasn't selling them in clear plastic cups, either. These were the genuine, 100% real deal, glass bottles. Most stadiums won't sell glass bottles on account of the very real possibility that their fans will pelt the opposing team with life-threatening beer projectiles. I guess the Twins assume that the type of person who is willing to shell out $7.00 for a "nice" beer is not the type of person who is prone to irrational hooliganism.

The point of all this is that brands mean something. To consumers of mainstream alcohol, their beer man should reflect mainstream America. Alcohol is not a luxury item, but a tool to get you where you need to go, if you catch my drift. Consumers of premium beers make a conscious choice to gravitate towards a more sophisticated product, and therefore expect the overall experience to reflect sophistication. Once again proving that what we buy and how we buy it isn't just about fulfilling a market need, but often a psychological need to define ourselves.

Every market has niches, and understanding them is crucial, even in real estate. Ask yourself whether your current business model and marketing efforts are aimed at a specific kind of customer or whether you're attempting to provide a one-size-fits-all kind of service. Do the people you tend to work with seem like Budweiser people or Stella Artois people? And do you operate accordingly?

All these questions are making me thirsty.

The Season is the Reason for Housing in this Region

Winter is an omen of change, both positive and negative, in Minnesota. Dying leaves, falling snow, stalled cars and chapped lips on the negative side. Holiday spirit, the Super Bowl, skiing and ice fishing on the positive side.

It's also a sign of seasonal change in the Twin Cities housing market.

Market activity slows down during the fall and winter months of most metro markets across the country, but it's affected more dramatically in Minnesota where the extreme differences in meteorology between the summer months and the winter months make the difference like night and day. For buyers and sellers, this means a substantially different set of market conditions to face in the winter months than they find in the summer months.

Let's take a look at seasonal differences by using some of our more common metrics.

Supply-Demand Ratio

To put it simply, our Supply-Demand Ratio (SDR) is a measurement of how many houses are for sale for each buyer. The higher the number, the more the buyer has to choose from, the more competition the seller faces.

Without fail, our SDR is at its lowest point every year in the early spring and summer months of March through May, when buyers are at their most active. Not surprisingly, the SDR is at its highest point every year in the year-end months of October through December, when buyer activity drops like an anvil after the start of the school year, temporarily hibernating until it unthaws in the sunshine of the following spring. The average SDR for March through May over the last three years has been 4.76, while the average for October through December has been 9.30—almost double the number of homes per buyer.

So even though there is less supply on the market in the winter, there's even less sales activity, which means a tougher environment for sellers.

Percent of Original List Price Received at Sale

Another measurement of changing supply and demand, the Percent of Original List Price Received at Sale (heretofore referred to as SP/OLP in the interest of brevity) changes significantly by the season. The SP/OLP is always at it's highest in the summer months, when the increase in buyer activity from signed purchase agreements in the spring leads to slightly higher closed sales prices two months later when those pending sales finally close. The winter months always bring the lowest SP/OLP rates, as homes that sell in the winter months have typically been on the market much longer and been forced to drop their prices further.

Like this:

   

Days on Market Until Sale

Not surprisingly, this metric follows a similar pattern as the first two with respect to seller disadvantage in the winter. It's almost like they're all related trends, or something.

The winter months always report a higher Days on Market Until Sale, again due to the fact that properties which sell in that time of year have already typically been on the market for many months already. The months of spring and early summer, when sales are "poppin,'" see the lowest numbers.

See here, eh?

So let's wrap this all up and put a nice bow on it.

Buyers: while you seem intent on purchasing the majority of your homes during the spring and summer, bear in mind that you have fewer buyers to compete with in the winter.

Sellers: despite the drop in supply, you face tougher conditions in the winter months than you do in the early spring and summer because there's fewer buyers.

Regardless, houses still sell in the winter and deals are still done. This post is not an attempt to say that you should only attempt to sell your home in the spring or to imply that buyers can demand thousands upon thousands of dollars in price reductions in the winter. The market will determine price and negotiating dynamics on a property-by-property basis. Houses that are priced right and in good condition are moving no matter the time of year.

But bear in mind that the drastic changes in Minnesota seasons do have an effect on everything, including real estate.

Business (Highly Irregular!)

Yesterday, I wrote about "Policy and a Pint," a refreshing and unique format for learning about and discussing important topics that should matter to everyone. The day before discussing mortgage issues at Policy and a Pint, I was in Brooklyn Center at LD4, the Land Development Conference. I generally dig the events put on by the Real Estate Communications Group, including one that MAAR was a part of back in January, but LD4 was a real snoozefest. It was an endless parade of blah-blah with limited variation and interactivity—the conference equivalent of my cubicle walls.

I'm not going to go so far as to say that you need to have beer and plush seating to get people to listen and participate, but it doesn't hurt to interject some comfort and fun into the mix, especially if you want to attract the next generation to your message.

I'm a Gen-Xer myself, the so-called MTV generation. If you're a generation or two ahead of me, feel free to dismiss me. We Gen-X types are used to it. But the "kids" that make up the generations behind me, of which there are a lot more of than there are of my ilk, don't have time for your dismissal or even 3-minute music videos. They make 30-second YouTube clips and carry an Internet-ready Blackberry in hand at all times. They thrive on speed and anything instant, and if you don't understand their motivations or processes, then you're in the way.

I don't expect my younger cohorts to get used to today's typical business and learning methods. Oh, they'll tolerate it for now, but there will be some changes once they are the workplace majority. Everything from the office experience to classroom learning to mass communication via conference format is going to change.

There will still be good common sense and smart business going on. I'm certain of it. But the old line will fade. Just like I never wore a suit and hat to my workplace everyday, they will not even go to a singular workplace everyday.

I for one welcome this. After I sent my first email in 1993, I immediately began to ask, "Why am I here?" But I'm less lofty with my existential questioning than Sartre. My question is more like, "Why did I drive for 20 miles in traffic just to type this blog post in a drab cubicle when everything I need to do this and most other daily work exists right where I started my day?"

Many REALTORS® of all generations have already figured this out and are currently maximizing their output with toothbrush in hand and contracts spread out across the kitchen table. I commend REALTORS® for understanding that "workplace" can mean anywhere at anytime and that time is important enough to compete for regularly with no assumptions.

Check it: In 2008, we have the ability to research anything, create and respond to any piece of communication, review any document, take any class, share any idea, and even make eye contact with anyone in the world from wherever we are. What we can accomplish in a single day is beyond what Edison, Bell, and Ford could do in a month.

I bet the vast majority of office workers could learn to get by with less paper pushing and status quo maintenance on their way to developing and strengthening more efficient business practices that are more relevant in a global economy. Maybe Tuesday meetings are enough. Maybe we throw in the occasional, motivating "casual gath" team update over ribs, cole slaw, Pepsi products and Fiji water paid for with money saved on antiquated things like office space, cubicle walls, photocopiers, paper and parking lots. Maybe we indulge in the occasional discussion of work policies over a pint or goal-setting over gastroenterological delights or just some task updates over tapas. Maybe.

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.

How Do You Measure Home Values?

With both the local and national housing markets experiencing prolonged, downward pressure on home values for the first time since The Great Depression, everyone and their mother is understandably curious about just how much less their home is worth this year, if at all. So the dataheads and number-crunchers and economists who make it their business to understand the inner mechanics of the housing market are suddenly finding their work in high demand. To think, after all these years it's finally sexy to be able to explain the role of shifting supply and demand dynamics on price (thank God I actually paid attention in undergraduate-level Econ 101).

We're all collectively turn our eyes towards measurements of home values, trying to squeeze out any semblance of a realistic picture of how what is likely the largest asset in our personal wealth portfolios is fairing. We look at OFHEO Quarterly Appreciation figures, NAR Median Sales Price figures, Case-Schiller Index figures—whatever we can get our hands on. And while each tends to paint a relatively similar picture, they all seem to provide a different number.

Realistically, none of these methodologies is perfect—at least not yet. Each has their own inherent limitations. The Case-Schiller Index has started to receive a good deal of notoriety and, some believe, deservedly so, due to their focus upon comparing values of the same kind of house, year-over-year—rather then a marketwide median price comparison.

But there are some chinks in the Case-Schiller armor that are worth talking about. One of our very own members, Pat Paulson from Exit Lakes Realty, has posted some excellent thoughts on this very subject in a blog post called "The Case Against Case (Schiller)." Take a look at it by clicking here.

Buyers: Inactive by Choice?

A compelling and mostly unanswered question: why are home sales sluggish?

There's a myriad of potential explanations to this question, many of which have already been talked about at length by others, including us. Most of these explanations are at least somewhat valid and salient, and the true culprit is likely an amalgamation of factors working naturally and unintentionally in concert to create an environment that discourages home sales.

What's truly intriguing is that these varied explanations and justifications can mostly be segmented according to two distinct conceptual groupings:

• people don't want to buy homes
• people can't buy homes

In other words, are buyers consciously sitting on the sidelines because they believe that now is not a good time to buy? Or are they trying to get in the fray but can't because something is holding them back against their will, like tightened lending standards? Below are some suggested explanations for buyer inactivity, grouped accordingly.

The million dollar question: is there one segment that feels like it explains the situation more than the other? Do people just not want to buy houses? Or do people want to but can't? Or is it a combination of the two? What do you think? We're looking for input from the broader real estate community here.

The people who may have the most to say about this would be those in the mortgage community. Has there been an increase in the number of applicants who don't qualify to purchase? Can these consumers account for the lion's share of the drop in sales or not?

Sometimes blogs are valuable not for providing answers, but for asking questions. Hopefully this is an example.

Running Up, Trickling Down

The run up in home prices during the boom years was fast and extreme, like an Andrew W.K. record. But the downward correction in prices—at least until recently—has been relatively slow and mild, like a Low record. In other words, the drop in home values we've seen so far is just a drop in the bucket compared to the value increases of past years.

Your reaction to this news depends on whether you're an optimist or a pessimist.

Pessimist: more price declines must be on the way to bring some balance back.

Optimist: people who bought their homes in the late 1990s or early 2000s are probably still sitting on a nice little chunk of appreciation.

Realist: The beauty of it (and the trouble of it) is that you're both right.

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).

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.

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.

Post-Party Cleanup

Mark it, dude. 2007 will go down as one of the most interesting years in the history of residential real estate.

It was a year of frustration for many, as too many sellers were competing for too few buyers, consumers watched financing options disappear, at-risk borrowers were being smothered by resetting mortgage rates, and brokers saw the tail-end (we can hope) of a two-year swoon that saw their sales fall 32 percent. It was the year we realized that there are no quick fixes or band-aid solutions to fractured market fundamentals. That there’s no such thing as a party (1997–2005) without a post-party clean-up (2006–present).

Many in the housing industry (MAAR included) expected 2007 to be the year that home sales halted their decline, but still-fragile affordability and dampened consumer confidence would postpone any rebound. And as the summer unfolded and the credit crisis took hold of international finance markets, a new wrench of uncertainty was thrown into the works and buyer activity stalled even further. For the year, the Twin Cities 13-county metropolitan area saw 43,560 purchase agreements signed (pending sales) and 40,055 closed sales—down 15.5 and 16.4 percent from 2006, respectively.

Naturally, a continuation of buyer advantage brought corrective price declines. There’s no way to sugarcoat it: the annual median sales price in the Twin Cities fell relative to the previous year for the first time since we started keeping records in the 1960s. While this understandably causes anxiety for some—especially sellers—it also means fantastic opportunities for home buyers, whom are desperately needed for future growth.

Seller activity also fell, but to a lesser degree than the buyer side. New listings finished the year at 105,044, a decrease of 2.8 percent from 2006, but the number of homes for sale stayed at record levels throughout the year due to slowed sales.

Prices weren’t the only things retreating from their boom-year positions, as investors grew more conservative in lender qualification standards and retreated from risky loan products they had made available in recent years. This “back to basics” approach shrunk the qualified buyer pool, which will have a hangover effect for a couple of years but will also benefit the market by staving off vulnerable consumers from unmanageable risk.

Despite a tumultuous environment, changes took root throughout 2007 that have set the stage for a slow and gradual rebound. Houses got more affordable, loose lending practices were reigned in, and builders drastically cut back to stem the growing inventory tide. To put it simply, there’s a silver lining to that big grey cloud that needs to be recognized.

The market’s shift to the buyer’s favor has been a natural reaction to the boom years, and was expected. While it causes some pain and anxiety now, it will ultimately lead to great opportunities and motivated home buyers, which will launch our eventual rebound to a more robust market. Housing affordability has improved dramatically in recent months.

Often, when people talk about our current environment they refer to it as a “down market.” While “down” may be descriptive of what many experience personally, it might be better stated as a “correcting market,” as that implies better days are ahead as a whole.

The strategy for 2008 should be survival, as it will be another year of slow home sales before we see signs of improvement in 2009. In the meantime, we’re projecting 41,000 purchase agreements will be written next year and roughly 478,000 new cable television shows dedicated to real estate will be produced. To put it simply, the public’s voracious interest in real estate isn’t going away anytime soon.

So what do you think? What does 2008 hold for housing? Comment to this post and let us know -- join the conversation.