The Skinny

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.