Real Estate Snippets

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!

Buyers Inspection

It was a fun couple of hours.  Inspections in vacant houses go more quickly and efficiently so we were out of there promptly after two hours.  Today's purchase was a St. Paul house being sold as part of a short sale.  Since the seller has no money to pay the mortgage, it can also be assumed s/he has no money to pay for defects found as a result of the buyers' inspection.

We found a bucket masquerading as a waste basket today.

The masquerade worked because in our first two showings the bucket had us convinced that it was a waste basket.  But in the inspection today, a leak was found just above this waste basket which we realized was masquerading as a bucket to catch the drips.

On a side note, I'm glad the copper thieves haven't found this St. Paul house.  Even the drain pipes were beautiful copper.  "They just don't make them like that anymore!"

Bright Greenasaurus

I found myself staring through green gel gem shamrocks on my kitchen window at the melting snow and longing for the green to start sprouting from my garden.  St. Paul will probably get several more cold spells and some snow yet before green hits our beautiful city, but green is where my mind was today.  As a result, Bright Greenasaurus seemed apropos for this week's Diggin' Dino.  Bright Greenasaurus was created for the McGough Companies by Aime Feirke and spent the 2007 summer at the Landmark Plaza. 

The green of Bright Greenasaurus is not the green of spring that I was thinking of.  Instead the McGough Companies were advertising their expertise in smart sustainable practices.  They are headquartered in St. Paul and bill themselves as "the premier construction sustainability expert in Minnesota".  Having sold houses to McGough employees, their more traditional development and building expertise were familiar to me.  The green aspect of their practice was not, however.   You can check it out here.

Knee Jerk Solutions

Once again I'm watching as policy and rule makers scurry around trying to solve a problem that has existed for a long time, but a tragedy or lawsuit has brought the issue to the forefront.  This week the calamity is the wasteful and unnecessary death of 4 young children caused by an illegal alien in our midst.  It seems to me illegal immigration is a problem we have had for some time (even my hero the Dog Whisperer was an illegal alien at first), but now the media is all in a tizzy about what legislation should be created (It's already in place.) to prevent such a travesty again.  The same was true of our 35W bridge collapse.  The same was true of 9-1-1. 

If there's a lawsuit, policies suddenly appear across the nation.  Buyer agency was created because our own Minneapolis based Edina Realty suffered and lost a class action lawsuit for not disclosing who they represented.  Before that time there were no agency disclosures.  I bought my first two houses with an agent who I thought was MY agent but legally represented the seller!  Who knew?

Private home inspectors now are required by their insurance companies to have a waiver signed by the buyers who hire them.  A paragraph of legalese is added to every inspection report basically saying the inspector did his best but is not liable for making a mistake. 

The lawsuit against the blogger in Florida is generating discussion among real estate brokers as to whether policies should be made or not to control what their agents say on blogs.  Even closer to my back yard is the St. Paul City Council proposal about vacant homes. 

My husband calls it reactive rather than proactive policy making.  I tend to be more common in my description.  To me it's all a knee jerk reaction created by a need to cast blame and the fear of being the object of that blame.  Occasionally I make a mistake.  Avoiding mistakes is high on my priority list (I don't like mistakes or the embarrassment that accompanies admitting them!), but I am not perfect.  The difference I see is that I take responsibility for my mistakes.  When I forget to send an e-mail, I admit I forgot or used the wrong address.  If I'm ever sued, I will be sunk, because I'll admit I was wrong if I was.  It's part of what I consider to be accountability and responsibility for my actions. 

We live in a society that thrives on law suits.  The media publishes that people get rich by spilling hot coffee in their laps (Again, I am not demeaning the pain but point out how the media conveys the story.  See this link.).  Teachers are not allowed to control their classrooms because they might offend someone.  Bus drivers get attacked by students while their moms listen on the cell phone and the moms think it's okay?   

Our national and local real estate market is full of short sales and foreclosures currently.  The stop gap measures taken to forgive unpaid debt, to pump money back into the economy, to put a band-aid on the "owie" to make it better are just that . . . stop gap.  They are temporary fixes.  Our economy has to go through the bad times and come out the other side.  Time will be the healer as homes return to prices people can afford.  As sanity is restored to the lending market with clearer guidelines and a return to more stringent requirements.  As buyers and sellers realize they can't always get their way. 

Rather than looking for knee jerk solutions, we need to examine the residual consequences of our proposals (whether it's St. Paul houses, illegal immigrants, or coffee in the lap) and make them good solutions that will stand the test of time.

St. Paul Council Public Hearing

The murals in the St. Paul City Council chambers were lit during the public hearing.  They had been dark during the tour taken last year.  It was amazing what a difference the lights made to the intensity of the pictures.  They almost came to life.  Ah, but my camera was safely shut off for this serious and very austere meeting.  The formality itself was intimidating without knowing opposing views were about to be expressed.

Better than an hour was spent interviewing the Chief of Police and the "use of force" trainer regarding tazer use.  The Chief had an appointment, so the first item on the agenda had been pre-empted to allow his quick escape.  The interview process was interesting but lengthy.  The public was only given 15 minutes in total to express their views for each side . . . not 15 minutes each, but 15 minutes corporately.

Finally, the vacant housing amendment was presented to the council.  The amendment was as it was summarized to me.  The proposal is to prevent property title from being transferred on a category 2 or 3 registered vacant building.  Both of those categories require a complete code compliance upgrade before someone can legally occupy the premises.  The fear is that too many houses have been abandoned in St. Paul and like everyone else including me, the council wants to keep the quality of St. Paul's housing high. 

To support his concerns, Councilmember Bostrom played a short video of 3 blocks on the east side of St. Paul showing 10 out of 23 homes as condemned.  In his film was a beautiful old Victorian home that I had found for a rehabber 10 years ago.  That house was condemned when he bought it, and it became, and still is the gem of the block.  Under this new policy, that beautiful old Victorian may have been torn down for lack of repairs.  Today it is proudly owner occupied . . . the goal of both the City Council and me!

The 15 minutes devoted to opposition of the amendment was shared by a resident/landlord, Pat Ruble from the St. Paul Area Association of REALTORS®, three local bankers who spoke as a team from their bankers' association, and myself.  It was scary to say the least.  The bankers were clear that they, as owners of some of the abandoned properties, would be hesitant to invest additional money into properties that have already cost them so much.  Only one resident spoke in favor of the amendment.

Dan Bostrom's summary statement of the opponents who spoke was to say he had heard concern for the REALTORS® and their commissions, concern for the investors losing money, concern for the rehabbers, but none for the neighborhoods who have to suffer this blight.  I was appalled and felt like shouting out, "Who said anything about REALTOR® commissions!"  So, after 24 hours of cooling off, here is the summary of my concerns:

1. Lender owners of foreclosed properties will not invest thousands more dollars into the homes to get them back to code.  Some of these homes have been vandalized because they were vacant.  Some were vandalized by the angry owners before they vacated.  Some have experienced a long time of deferred maintenance.  The lenders have already taken a significant financial hit and are not going to gamble that putting $20,000 or more into the house is going to guarantee a future buyer.
2. Absentee owners who have already abandoned their properties for various reasons, have made the choice to abandon them and take the financial hit.  They have moved on.  That's what abandoned means!  The City can fine and raze the properties.  The house is abandoned.
3. The City will continue razing the category 2 and 3 abandoned houses.  This is currently being done at about 20 a month according to one of the staff members.
4. St. Paul will lose some of its beautiful old houses that are filled with character and make St. Paul what it is. 
5. Dirty vacant lots will eventually become City property because of unpaid fines, taxes, and penalties.
6. Tax dollars at work:  administrative and inspection costs to identify vacant buildings, administrative costs to research and contact owners, cost of demolition, cost of clean-up, cost of maintaining the vacant lot for absentee owner, cost of recording fines and penalties, loss of property tax income, eventual ownership by the City, auction or marketing costs for lot sale.
7. Some of the vacant lots will have new homes built on them at a cost far exceeding the price of the former house causing displacement of new buyers who can't afford new construction.

It was my suggestion that the City find a different way to regulate this problem.  Minneapolis has a point of sale inspection that requires repairs be done before the title can transfer.  This includes homes that need a code compliance.  Minneapolis has deemed that title can transfer in cases where the buyer is willing to accept responsibility for the repairs the City requires including code compliances.  The buyer is given 6 months to complete the repairs or suffer fines.  If a title transfers without the repairs being made prior to closing or with no approved responsibility agreement, the City goes after the seller, the title company and the real estate agent.  It is a serious matter and their ordinance has "teeth".  Their ordinance allows professional "rehabbers", or owner occupants with expertise and deep pockets, to legally obtain the property to fix for resale in the future.

Some of the vacant buildings in question truly need to be torn down, but others are beautiful examples of St. Paul's rich architectural heritage and need to be saved from the bulldozer.  The ones with good "bones" only need some love and thousands of dollars to make them shine once again.

 

Get Rid of Those Magnets

There are several big bad no-no's in taking listing pictures.  They include taking pictures of your own purse which you dropped on the table in order to take the picture; leaving the toilet seat open; magnets on the fridge; etc. 

The picture at left was one of my St. Paul listings.  We all have refrigerators that look like this one, but part of preparing your house for sale is to remove all of those magnets and notes and pictures and REALTOR cards, so the fridge has a clean face.

Maybe the inventors at Amana had real estate in their blood because they have created a new solution to this problem, the jot fridge.

I wonder if it comes with an eraser?

Condemned Houses

Nooooooo!  Not again!  Yes, again.  Vacant houses are the reality of today's market.  Some St. Paul houses are vacant because the owners faced foreclosure and walked away.  Some are vacant because the City of St. Paul pulled their occupancy permit (rental houses).  Some are between tenants.  Some have been vacated because sellers have already relocated to a new place and can afford to leave their old home vacant while it's on the market.

In St. Paul, though, being a vacant house can be problematic.  Often foreclosed houses are vandalized, illegally occupied, or experience theft.  Something so simple as a water shut-off can trigger the City's attention to a vacant building causing the home to be registered.   Category 2 vacant buildings require a code compliance with the commensurate city permits to obtain a certificate of occupancy.  The category 3 vacant buildings require a $5,000 bond and complete code compliance (approved by the City inspectors) before they are removed from the vacant building list and issued a certificate of occupancy.

One of those horrible Minnesota nights found me showing St. Paul houses to my clients.  My reason for going out in 24 below temperatures was one house in particular.  It had over 3000 square feet and was only $124,000!  In our market, that is a steal.  I carefully perused the listing sheet looking for any hints of reasons why the house was so cheap, but found none.

At 7:30, in the dark, we drove up to the house.  My heart instantly sank as I saw the blue sign in the window.  This house was on the registered vacant building list.  My clients were not handy and had very little in extra funds to use on fixing up a home.  We looked at the house, but after explaining the need for a city code compliance and the six month time limit for repairs, my clients lost interest.  Yes, there was lots of space and to an experienced rehabber, very little in repairs, but to my clients the work was insurmountable.  For this house we had ventured out when most sane people were home keeping warm by the fireplace!  And they brought their infant with them!

When asked for feedback on the showing, I gave the agent a cordial "earful" letting her know she might have at least put the fact that the building was a code compliance in the agent remarks (which are not open to the public).  I told her I would never have taken my clients out on that awful night if I had even a hint about the property's status with St. Paul.  This property was not a match for these clients.  When she called back, she had changed the listing to disclose this material fact in the agent remarks.  She realized the code compliance disclosure does decrease the amount of showings, but increases the number of "qualified" buyers that actually see the house.

Spring Is in the Air

Spring is definitely in the air.  It's still cold outside, but the St. Paul snow is melting.  How do I know this?  Because I just washed my car yesterday and it looks like these cars today!  I only drove 40 miles and it's full of road spray!  The downspout extenders have frozen lakes at their ends.  The bunnies . . . well, the bunnies and I are going to war this year again.  Currently they're only leaving tons of turds in my snowy yard but that means they're there.  And if they're there, that means I won't have a single tulip bloom this spring.  Spring is definitely in the air.

St. Paul Abandoned Properties

The pictured house obviously has been abandoned and is not in the city.  However, with so many people facing foreclosure and no money vested in the properties by the delinquent homeowners (i.e., no down payments), it's becoming more common for owners to just mail the keys back to the lender.  Marcie Geffner called this "jingle-mail" in an article about walk-away homeowners published in Inman News on February 12, 2008.  The unlucky lenders who receive jingle mail become the owners of vacant and abandoned homes because the owner has walked away.

Bank owned homes are the lifeblood of rehabbers who purchase the homes at a discount and repair them for future resale at a profit.  Rehabbers tend to be the primary buyers of such homes because normal buyers don't have the funds or ability to do major repair projects while they live somewhere else.  Lenders also do not give traditional mortgages on properties that need considerable repair.

Many of the bank owned homes have become registered vacant buildings.  In fact, part of the existing St. Paul housing ordinance is that vacant buildings must be registered with the City.  To be law abiding, lenders should register their St. Paul foreclosed properties that are considered abandoned.  That registration places the property on the registered vacant building list which is published monthly and currently has 1625 identified properties. 

An amendment to the current St. Paul building code has been proposed by Dan Bostrom from Ward 6 that will directly impact the change in ownership of registered vacant buildings.  The amendment would prohibit the sale, purchase or change in title or ownership of any residential property that has been designated as a vacant and/or abandoned building in St. Paul without first getting a certificate of occupancy or certificate of compliance from the City.  If this amendment passes it could drastically impact the future sales of any of St. Paul's abandoned homes whether they are owned by lenders or private parties. 

Once on the registered vacant building list, the new proposal would require the banks to fix the property before it could be sold.  Fixing houses is NOT the business that banks are in!  They have already lost money on the foreclosed property and are certainly not going to invest more money into a lost cause.  My thought is that this will cause more vacant properties to languish unoccupied causing them to grow more and more dilapidated and become more of a blight on St. Paul neighborhoods.

I just don't get the reasoning behind this proposal.  It totally confuses me that an amendment like this would be proposed at a time when the market is being flooded with vacant buildings which has caused all kinds of havoc already.  To put a hurdle of this kind before the sale of a foreclosed property is totally beyond my comprehension.  To better understand the proposal (make sure it's what has been summarized to me) and to voice my opinion for the St. Paul City Council, I will be attending the public hearing on this coming Wednesday, February 20, at 5:30 PM in the City Council Chambers on the third floor of City Hall, 15 West Kellogg Boulevard in our great city of St. Paul.