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!