Real Estate Snippets

Why Am I So Busy If Real Estate Is Depressed

Bubbles, schmubbles.  If the St. Paul real estate bubble has burst, why am I so busy?  Maybe it's because there are more houses from which to choose so buyers are looking at more houses before buying.  Maybe it's because there are more places to advertise a listing now, so it takes more time to get the word out.  Maybe my age is slowing me down?  No, that couldn't be the reason!  Nope, we'll reject that one outright.  I know!  It's because I have a Webkinz friend whom I have to virtually visit every day!  Nope, that's not it either because reading took up as much time as the computer does today. 

The reality is buyers are buying in St. Paul.  The prices are great.  The sellers have figured out they have to be reasonable in order to sell.  Negotiation has become fun once again.  Enough real estate agents have dropped out of the business to give the remaining members a bigger piece of the market.  Lower prices mean lower commissions, but I prefer busy-ness any day compared to the lack of business in 2006!

Interpreting Real Estate Statistics

I love reading Bernice Ross on Inman News.  Bernice is a regular writer for Inman as well as a blogger in her own right.  What fascinates me is her insights into the market and her quick wit.  Today she has started a series on Inman about the real estate sky not falling as is so often published.  Like myself, Bernice realizes that statistics can be made to mean what the interpretor wants them to mean.  Her article today "Put a Gag on Chicken Little" points to a perfect example of statistical conflict!

According to Bernice, much of what is published in the media today regarding real estate has been gleaned from the S & P/Case Schiller Index.  This index has only been resourced by the media in the last couple years.  The S & P is full of doom and gloom regarding the real estate market, but conflicts with the figures published by the National Association of REALTORS® (NAR), the Office of Federal Housing Enterprise Oversight (OFHEO), and Realogy.  According to NAR, OFHEO, and Realogy the real estate market is stabilizing, some markets have shown signs of improvement, and prices have fallen less than 1% nationally. (New figures from OFHEO are published here.)  The S & P reports between a 12% and 13% decrease in prices.  The S & P includes jumbo loans and lends "weight" to certain factors before calculating its formulas.  The other three agencies do not.  As Bernice says, "weighing" factors is done by human judgment and human judgment is not necessarily unbiased!  Scientifically when data produces differing results, it is compared with other sources.  In the case of our real estate market, the S & P index is the odd man out producing results that drastically differ from the other three agencies that are reporting on our housing market.

Why is it that the media has picked up the negative story to publish instead of the more positive ones?  I'm told it's because bad news sells!  My question is whether this bad news can produce a Pygmalion effect on our market.

The Subprime Crisis Became Global

I'm sure it's an economic fact and known by people with much smarter brains than mine, but the concept of a Global Pool of Money is staggering.  The Global Pool of Money is a major player in how the sub-prime mortgage crisis has become an international credit crisis as explained in the Chicago radio program "This American Life" co-produced by Public Radio International and NPR News aired May 9, this year.

To understand more about the recent housing crisis which has become a global credit crisis in the last three years, the entire radio program can be heard by going to this website.   Hats off to Calculated Risk for a heads up to this program.

Foreclosures in St. Paul

After my post from yesterday that spreads encouragement about the St. Paul real estate market, let me throw a little cold water into the mix.  Once again how one views the market depends on whose shoes you are wearing.  My experience the last two weeks in showing houses in the $200,000 to $300,000 range has been an eye opener for my St. Paul buyers.  The stereotype of foreclosed homes is that only homes in the lower price ranges are lost to foreclosure.  In today's market, that is not the case.  Of 25 homes we viewed in that price range, only 4 were occupied.  Eighty-four percent of the homes we viewed were either foreclosed or the sellers had moved on without first selling their St. Paul area home.  That is a high percentage. 

The other impression my buyers had was that they can get a much larger home in their price range than they could have 4 years ago.  Since they are moving back from out of state, getting more home for the dollar is welcome news.

So, while the number of St. Paul and suburban sales is increasing, the prices are still remaining lower and there are still a lot of homes that are now "corporate owned" (real estate lingo for bank owned) on the market.   In St. Paul alone, without the surrounding suburbs, there are 409 properties listed with the words "corporate owned", "bank owned", or "short sale" in the MLS listing agent remarks.  The prices on those St. Paul foreclosures range from $15,000 to $415,000.  I guess if I was a mortgage lender with a high inventory of foreclosed houses to sell, I would think the real estate market was more than terrible!

Real Estate Experience Precedes the Statistics

My crystal ball is out, but I won't say it's a predictor of the market.  It just means I'm going to share my impressions of the market. 

In the fall of 2005 when the St. Paul real estate market skidded to a halt, real estate agents cautiously asked one another, "How are your listings going?  Are you getting any showings?  How about your open houses?"   The questions were carefully asked because we didn't want to show our hand.  We didn't want to admit to another agent that suddenly we were not getting any showings on our listings.  No one was coming to open houses.  It was like the real estate market rolled up the sidewalks and locked the doors of business.  The market was dead and each of us first thought we were the only ones to have our listings lose traffic.

The previous five years real estate agents in St. Paul had been working furiously to keep up with the fast pace of the market.  We barely had time to catch our breath and catch a few winks at night.  If we had buyer clients, we had to present an average of four offers before getting one accepted.  That meant four times the work for the same commission.  It was a frightful experience.  Always in the back of our minds was the thought, "When is it going to end?  It can't keep up at this pace forever.  When will we reach the ceiling?" 

The published statistics for the fall of 2005 in St. Paul showed healthy numbers.  The problem was the numbers were lagging behind our experience of the real estate market.  It didn't take long for agents to commiserate openly together.   There was no interest in the houses that were for sale.  Buyers had disappeared and we were all taken by surprise.  We had hit the ceiling and hit it hard.  Because it was the fall, we kept telling ourselves it would heat up in the spring again.  But that did not happen.  The numbers for 2006 reflected the experience of the St. Paul agents.  The real estate market was stonewalling us!

The hard work of convincing sellers they must lower their prices and upgrade their homes in order to sell began.  Sellers were stuck in the market statistics of the previous year.  Real estate agents had few statistics to reflect what was really happening because the stats lagged behind our experience.  We researched by hand to show increases in market time and decreases in prices.  One of my listings showed homes dropping prices in $20,000 increments weekly with discounts approaching 25% of the list price!  This was another difficult time for sellers and agents alike.  Buyers didn't notice because they were all holed up in their homes worrying about where their next mortgage payments were coming from!

So, what does this mean for today?  Well, let me tell you what St. Paul agents are now whispering to each other.  Over coffee, in the coat closet, at the water cooler, the question now is, "Are you getting a little more traffic this year?  How are your listings going?  Are you getting showings?"  We're asking one another these questions now because it was so quiet the previous two years, that we can't believe we survived to tell about it.  Is it possible that we're busy again?  Not busy the like feeding frenzy years, but more normal busy?  Can it be true that buyers are buying again?  Is it possible that we are going to survive?  While we're holding our breath and waiting for those statistics to show whether our experience is indicative of the market, a press release is posted by the St. Paul Area Association of REALTORS® with this statement:

Pending sales, a leading indicator of future closed home sales, moved strongly forward from January to February increasing 20.49 percent for the month. There were 3,087 pending sales reported in February compared to 2,562 in January. That is the third highest percentage increase of pending sales from January to February in the past eight years. That rate was exceeded in 04 (21.02 percent) and 05 (33.9 percent).

The entire press release is quite hopeful and seems to reflect what St. Paul real estate agents have been whispering by the water cooler.  We're all waiting with bated breath hoping that "normal" is more than a cycle on the washing machine.

The Real Estate Market

It's almost a buzz word.  At parties, in the office, at school, in the grocery line, the minute someone hears I'm a REALTOR®, the question pops out, "How's the market doing?"  It's like asking a plumber if water is hot or cold.  The answer is, "It depends."  It depends because how the market looks is based on the perspective from which you're viewing it.

St. Paul home sellers probably think the market sucks.  They have good reasons:  prices are down; length of time to sell has increased; lots of competition in the housing market; and a real possibility of not successfully making a sale.

St. Paul home buyers probably think the market is awesome.  They also have good reasons:  prices are down; no multiple offer pressure; time to think about the purchase and do due diligence; and lots of houses from which to choose.

St. Paul real estate agents have mixed feelings about the market.  Agents specializing in foreclosures are busy beyond comprehension, but not all of that "busy-ness" is making money for them.  Marketing mass amounts of foreclosures is expensive and time consuming.  Agents only get paid when a house sells and since not all houses are selling, a lot of time and money is being spent with no compensation in return.  In like manner, regular listing agents are having to market harder and explain the lowering of home prices to their clients which is no easy task.  Many have had to learn what a short sale is and how to negotiate the layers of paperwork involved.  Once again, there is no guarantee of a sale and thus, no guarantee of being paid.

Buyers real estate agents are happy with the inventory and the lack of multiple offers.  Lowers prices are a boon for their clients although that also means lower commissions.  But, a buyers' agent is guaranteed to get paid . . . eventually . . . maybe after showing 50-60 or more houses! 

All of the other real estate professionals have taken a hit as well.  Many mortgage officers, title companies, and paper processors have experienced lay-offs and slow downs.  To them, the market is in a slump.

So, if you pass me in the grocery store or see me at a party and ask the all pervasive question about the market, don't be surprised if I tell you, "It depends".  Truly, I'm not trying to be cagey.  It just depends!

St. Paul and Minneapolis Affordability Index

I know I listened in my high school economics class because I got an "A".  I was there and obviously spewed back the information required of me, but, either I've forgotten a lot, or there was a lot that wasn't covered.  Important terms like affordability Index and absorption rate were new to me when real estate became my career.

For the ill-informed like me, Google is king!  Type in affordability index and pages of information appear on the screen.  InvestorWords.com provided this definition for me:

"A measure of the financial ability of U.S. families to buy a house. 100 means that families earning the national median income have just the amount of money needed to qualify for a mortgage on a median-priced home; higher than 100 means they have more than enough and lower than 100 means they have less than enough."

Having the definition helps tremendously to understand the 2007 St. Paul and Minneapolis Housing Market Analysis published by the Minneapolis Area Association of REALTORS®.

National median incomes for 2007 don't appear to be published yet, but the national median income in 2006 was $48,201.  It's recommended one's house payment not exceed one third of your income.  Divide the annual income of $48,201 by twelve to get the amount earned each month which is $4,017.  Divide that amount by 3 to find what monthly payment the buyer can afford.  In 2006 the person with a median income can afford $1,339 for a mortgage payment.  IF the buyer had a large enough down payment the affordability of the St. Paul or Minneapolis home would go up because the payments would decrease, but most buyers in 2006 did not have down payments.

In the St. Paul and Minneapolis area in 2006, the median price of a home was $230,000.   If the buyer had no down payment, the principle and interest at 6% interest is $1,380.00.  Oops!  That amount is already over the recommended 1/3 of income and we're not done yet.  To the $1,380 is added 1/12 of the taxes and hazard insurance plus private mortgage insurance making a total payment of at least $200-300 more than $1380.  That doesn't seem very affordable to me.  To continue to place buyers in homes, the lenders stretched the recommended 1/3 to as much as 40-50% of one's income or with adjustable rate mortgages that would adjust to unreasonable percentages.  It wasn't long before the damage was done and the real estate market blew up.

Of course, there's an actual formula to arrive at the affordability index, but the Minneapolis Area Association of REALTORS® did an awesome job of creating this chart so I didn't have to do the work.  Here, in picture form, is the affordability index for the Twin Cities housing market in the last five years.

According to the MAAR report, home values outstripped household income by almost three to one from 1992 to 2005.  That's a considerable increase in house prices that wasn't matched by an equal increase in income.  The ceiling was hit in 2006 and buyers could no longer buy a home.  As St. Paul and Minneapolis area prices have started to decrease, buyers have cautiously returned to the market.

 

The Real Estate Market

Jeff Allen, the Minneapolis Area Association of REALTORS Research Manager, published a 2007 real estate market report for the entire Twin Cities area.  Jeff's writing style kept me engaged throughout his statistical analysis.  Usually I'm skimming ahead because most statistics writers bore me to death.  Jeff calls the years 2007 and 2008 the "Post-Party Cleanup".  The first 3 words of his dissertation?  "Mark it, Dude!"  Evidently statistics has changed since I was in college!

This report solidified several things for me.  First off, there is no one factor that caused this real estate fiasco, unless, of course, one considers greed to be one of the factors . . . greed among lenders, real estate agents, buyers, and sellers.  Did I leave anyone out?  Employers might also be included in the mix.

How dare you, you say?  Let me explain ever so little.

1. Buyers:  Household size (number of people in the home) has been decreasing in recent years but the square footage of homes we are buying has increased.  Each of us has come to expect our own little domain within the household.  Some St. Paul homes even have a bathroom for each bedroom!  Sharing?  What's that?  It is assumed bedrooms must be big enough to contain the occupant's TV and computer station and closets have to hold more clothes than one can wear in a week.  Some people call this vast prosperity. Whatever it's called, it comes under the heading "greed".
2. Buyers:  Budgets were (are) not used.  Saving for a major purchase was (is) not common practice.  Buying on credit was (is) common.  The McDonald's generation of wanting it, and getting it, now, rather than in the future had (has) grown deep roots.
3. Sellers:  Because of the McDonald's mindset, houses became ATM machines with refinancing used up the equity on homes to purchase toys or pay off credit cards, etc.  Sellers maxed out the value of their homes AND their ability to repay the loan.  The thought was not for the future.  Recent history showed steady appreciation of homes in Minnesota (even in the down cycles) so spending the equity now rather than when we retired seemed a good idea.  Besides which, if home sellers listed in the early 2000's, they could ask almost any price they wanted for their St. Paul or Minneapolis homes.
4. Lenders:  Rates were low.  Qualifying standards were low.   Down payments were not required.  Sellers were willing to pay closing costs.  Pay dirt!  They wanted to make money like everyone else.
5. Real estate agents:  Because of easy lending, buyers glutted the market.  It was payday.  Sellers could ask any price they wanted for their listed homes because there weren't enough to go around.  Whereas agents had to deal with emotional buyers who lost in multiple offers, a sale was guaranteed for each client.  We wondered how high it would go, but the market was like lassoing a wild bull with dental floss.  If we cautioned buyers, then they lost in multiple offers.  If we suggested lower prices on listings, even more buyers came and upped the ante.  We made money, and spent money, like everyone else.
6. Employers:  The dollar is ever the bottom line in business, therefore, wages did not increase at the same rate that houses were appreciating.  When house prices exceeded buyers' ability to pay, the market shut down.  When the market started to turn, it impacted other industries as well.  Lay-offs came and St. Paul and Minneapolis area home owners were in trouble.

The terrorists of 9-1-1 thought they'd destroy our economy when they hit the World Trade Center.  Instead, a more insidious enemy has waged a brutal attack.    As Walt Kelly's Pogo said, "We have met the enemy and he is us." 

We're not lost by any means, but greed may have to take a backseat to more rational and controlled spending habits.  (What's up with that "Feed the Pig" commercial anyway?)  Home owners who have lost their homes must adjust to more frugal spending and living quarters.  Some are even having to share with other families.  Lenders and real estate agents have taken the hit as well and some have left the business entirely.  Employers also have suffered as spending has decreased and profits have plummeted for some.  We may not like the adjustments we are forced to make, but generations before us lived with much less . . . AND SURVIVED!  Imagine that!

MGIC Runs the Gauntlet

MGIC Investment Corporation announced on February 7 that it will be tightening mortgage insurance qualifications starting March 3, 2008.  MGIC (Mortgage Guaranty Insurance Corporation, a subsidiary of MGIC Investment Corp.) is the largest writer of private mortgage insurance for conventional mortgages.  The change in underwriting standards comes as a direct result of an anticipated fourth quarter loss in 2007 of 2.3 billion dollars!  Now that's a "lotta moolah"!  The MGIC losses occurred because so many homes have gone into foreclosure and MGIC insures the lenders against just such losses.  As my honey has told me many times.  Insurance companies exist to make money NOT to pay out claims.  In this case, MGIC has had to pay out too many claims and has lost a LOT of money!

MGIC has named 30 restricted markets across the nation to which the new guidelines will apply.  Minneapolis (and St. Paul by implication) has drawn the unlucky straw and is on this restricted list.  Other cities include Denver, Washington, D.C., Atlanta, Honolulu, Chicago, Baltimore, Boston, Detroit, Newark, NJ, New York City, Portland OR and Vancouver WA.  Four whole states are included on the list as well:  California, Florida, Arizona, and Nevada.

What does this mean for the St. Paul real estate market?  The new guidelines will require at least 5 per cent down payment regardless of the applicant's credit scores, but if your credit score is below 680 10 per cent down payment will be required.  More documentation will also be required of applicants for mortgage insurance.

From the buyers' perspective this may seem irrelevant since mortgage insurance generally is viewed as an expensive inconvenience.  The problem lies in that most St. Paul lenders will not loan the money for a home purchase without mortgage insurance.  It's one of those costs of closing that is paid by the buyers because the lender requires it.  The bottom line.  If you can't get private mortgage insurance in St. Paul and your lender requires private mortgage insurance, you can't buy the St. Paul house.  If you're one of the ones denied PMI, your remedy is to save a larger down payment, increase your credit scores, and provide more documentation that you're not a poor credit risk!

Yep, prices are going down.  Foreclosures are going up.  Mortgage qualifications are tightening.  Mortgage insurance standards are stiffening.  It looks like we're returning to the ol' days where one needed a down payment and good credit and paper trails in order to get financing. 

Super Bowl and Real Estate

This is what I remember about the game last night.  The winners wore red socks.  It used to be a REALTOR® who wanted success was encouraged to wear a red tie and red socks.  Maybe the Giants were reading the "dress for success" book. 

You can tell I'm not an avid football fan when the thing that really impressed me was the red socks.  My attention was broken during the half-time performance, but the half I watched was pretty impressive for football.  Sometimes the Superbowl guys are so polished that every play seems choreographed like a dance.  But last night's game was fun to watch.  The quarterback kept getting smashed before he could throw the ball.  The ball kept getting "whacked".  I like whacked.  It reminds me of the Minnesota Swarm (lacrosse) who constantly whack their opponents with their sticks .  The game last night was unpredictable and full of surprises.  It was entertaining.  Here are a couple links to YouTube highlights of the game for your viewing pleasure.

How does this relate to St. Paul real estate?   My point today was that in Minnesota the Superbowl marks the end of cocooning that Minnesotans do in the winter.  Only the short month of February stands between Minnesotans and spring.  Cabin fever has taken hold and we're longing for the spring thaw.  We start coming out of our houses and St. Paul home buyers start shopping.  By now the frigid temperatures of January have passed, sidewalks begin to clear, and roads are easily traversed.  We've partied through the holidays and through the Superbowl.  Real estate sales begin their upward trend after the Superbowl.

That was my point, but Inman News had an even better description of the relationship between the Superbowl and real estate.  Avram Goldman, big wig in a San Francisco real estate brokerage, wrote a truly funny article on how the Superbowl is a predictor of which way the real estate market goes.  Here is Avram's take on why it's a good thing the Giants won last night.

"More impressive is when the Patriots lost the Super Bowl in 1986, and in 1997 the markets rallied 25.8 percent on average. Now we are talking. It is a good thing the Patriots lost last night because the last time we had a team go undefeated (the Miami Dolphins in the 1973 Super Bowl) it preceded the 1973-74 economic recession where the S&P 500 dropped 14.5 percent.

Finally, the two times that the Giants won the Super Bowl economic conditions were similar to our current situation. The 1987 win preceded the October stock market crash, and the 1991 victory was during the last major housing recession. The good news is that in both cases the markets moved higher (1987, +5.1 percent; 1991, +30.6 percent).*"

Choose whichever predictor you like.  Either way the real estate shopping season is upon us in St. Paul.