"Centripetal Force"

Why (Some) Twin Cities Real Estate is Headed Higher -- Part One

Instead of focusing on "when" the housing market is going to bottom and start recovering, a more useful (and answerable) question is, "where?" While market turns are notoriously difficult to call, where the Twin Cities (and national) housing market is headed, long-term, is increasingly evident.

Perhaps the single biggest trend afoot is the "centripetal" pull of the core neighborhoods -- downtown, uptown, and the close-in suburbs. (If your high school physics is a distant memory, "centrifugal" is the force exerted away from the center, "centripetal" is the pull towards the center).

There are a couple, inter-related reasons for this, starting and ending with gas prices.

All the new subdivisions (5 years or younger) on the periphery of the Twin Cities were predicated on (continued) cheap gas. Places that were conceived and might have made sense when gas was $2.19 a gallon are prohibitively expensive now that gas is $3.49 -- and you're commuting in a SUV that goes through a tank a week, easy.

The remote 'burbs (dubbed "exurbs") also come with long commutes -- and, frequently, inferior services. Too often, developers put up the houses first, and hope the grocery stores, dry cleaners, and restaurants follow them.

Stranded in the Suburbs?

Unfortunately, due to how fast the downturn overtook many of these subdivisions . . . they aren't. Services are few and far between. Meanwhile, many of the homes are only partially complete, and a significant percentage of the completed ones are sitting, vacant and deteriorating. Needless to say, prices are . . . soft.

As the development tide continues to run out, these subdivisions will have a hard time holding on to the people currently living there, let alone attracting newcomers. (See, "Minnesota's New Ghost Towns," Star Tribune; 4/21/08). Click here for the link:

http://www.startribune.com/local/west/17932454.html

By contrast, closer-in communities offer mature infrastructure; established services; proximity to the unparalled city lakes and park system; and access to downtown and the River. The airport is close in, and, because of budget constraints, is going to stay that way. The antiquated, 35W-Crosstown (62) "T" that's bottled up traffic south of downtown for decades is about to disappear.

There's more.

Light rail is a success and going to be expanded (next: a connection between the two downtowns). The new Twins stadium is going to invigorate and expand the warehouse district. The new 35W bridge over the Mississippi -- borne of tragedy, but vastly superior to its predecessor -- is nearing completion.

Also consider: the University of Minnesota is about to have a brand new, outdoor football stadium -- to go with several hundred million dollars of new campus construction the last decade. The Washington Avenue corridor connecting downtown and the University is filling in nicely, and is located just south of the River and new Guthrie. See, "With Books as a Catalyst, Minneapolis Neighborhood Revives," NY Times; 4/30/2008). For the link, click here:

http://www.nytimes.com/2008/04/30/realestate/commercial/30books.html?_r=1&scp=1&sq=washington+corridor&st=nyt&oref=slogin

Within 2 miles or so of all this are thousands of new, interesting, and CHEAP condo's.

Last but certainly not least . . . the new administration -- whoever it is -- is likely to vastly beef up spending on infrastructure, both because it's needed, and to stimulate the economy. "Them that has, gets."

So if you've got some money to put into real estate the next year or two, hoping to pocket some nice, *tax-free, long-term appreciation, where are you going to look??? To update Horace Greeley, "go towards the center, young man."

Next: Wall Street Bust, Midwest Boom?

*Singles may exclude up to $250k in long-term capital gains from a sale; couples $500k. Both are subject to qualifying rules.

Read All About It!

"Before" and "After" Staging in Today's Star Tribune

Want to know what staging is? Check out today's Star Tribune housing section. It features my listing at 2819 Glenhurst Ave. in St. Louis Park, just two blocks to Cedar Lake. (If you're looking for a great family home -- 3,800 FSF, smashing new Kitchen, huge owner's suite, tons of charm and character -- let's talk!).

The Star Trib article profiles the home's Family Room, and what my stager did to enhance its appeal. Here's the link:

http://www.startribune.com/homes/sell/18171114.html

Click here to learn more about the home (the Star Trib pictures don't do it justice):

http://matrix.northstarmls.com/Matrix/Public/Email.aspx?ID=4641199918

Local Reality Check

New-Home Sales Don't Tell the Whole Story

The New York Times reported yesterday that sales of new homes fell 8.5% in March compared to a year ago. According to the Times, new home sales are running at an annual pace of 526,000, the lowest since October 1991.

Sounds bad, right? It's certainly not good news, but it's not as bad as it seems, for three reasons.

One. What the Times article neglects to point out is that new-home sales are dwarfed by existing-home sales. In fact, existing-homes account for about 85% of all homes sold, with new construction representing the rest.

Locally, Minneapolis and many of the mature, close-in suburbs have very few or no new homes. For example, in St. Louis Park, on Minneapolis' west border, more than 1,000 single family homes have sold the last two years. The number of those that were new construction? Five.

So depending on the part of town you're talking about (see next), new-housing statistics can loom very large -- or be practically irrelevant.

Two. New homes tend to get built where land is available and cheap. Where's that? At least in the Midwest, on the periphery of existing development, typically in the remote 'burbs. In the Twin Cities, that includes places like Farmington, Albertville, and Otsego.

What all those places have in common is that they are long commutes from the city center; with the price of gas skyrocketing, suddenly they are expensive, long commutes. Add to that a weak economy, lack of infrastructure, and frequently lagging services (groceries, dry cleaners, etc.), and it's surprising that new-home sales in these areas aren't off more.

Three. There is a positive, flip side to the new-home sales "coin" that the media is leaving out: namely, that the same factors that are hurting new-home sales on the outskirts are bolstering demand for existing homes in closer-in, more established areas.

Take St. Louis Park as an example again. In 2006, the low $200k's was enough to buy a 1 1/2 story, 1,300 square foot expansion built in the late '40's or early '50's with three bedrooms and one, maybe two baths on a standard, 40' x 120' city lot. Fast-forward to today, and that same $220k or so buys . . . pretty much the same house.

Homeowners who bought two years ago may be disappointed that their equity hasn't increased, but it's hardly the rout that one might expect from the media's housing coverage.

In places like St. Louis Park, the main consequence of the buyer's market/credit crunch is that, sprinkled in with the aforementioned $200k-plus homes, there is now another, lower tier of $150k-$175k "fixer's," short sales and foreclosures. To be sure, that's not great news if one happens to be down the block from you, but it's also not really competing with your home, either (due to condition, financing requirements, etc).

As they say, all real estate is local. In a market with so many countervailing trends and so much going on beneath the surface, that's never been more true.

"There will be . . fees"

City of Minneapolis Fees Exacerbate Housing Woes

It might be misplaced, but I always feel a twinge of sympathy whenever I see a broken-down car on the side of the road with a ticket on the windshield.

Yes, the owner should have maintained their car, and no, they shouldn't have abandoned it on the side of the road. But adding an expensive fine to all the car owner's other woes seems like kicking somebody when they're down. If they didn't have money for the repair(s) or the tow, where are they going to get the money to pay the fine?

(Ben Cohen, of Ben & Jerry's ice cream fame, tells of a gym teacher in grade school who threatened that if he and Jerry couldn't run a mile in less than 12 minutes, "they'd have to keep running it over until they did." Cohen drily notes that if you can't run a mile in less than 12 minutes the first time, you probably won't be able to the second . . or third, or fourth).

In a nutshell, that's how I feel about Minneapolis raising the annual fee it levies on vacant and abandoned buildings to $6,000 this March (a 300% increase!).

According to the city, the increase was prompted by the "high amount of staff time and resources required to monitor and manage" such buildings. The city's Web site goes on to cite "the high volume of police and fire services associated with vacant properties, inspections services, unpaid water and sanitation bills, and expenses for garbage removal, grass cutting, and securing of structures."

Why shouldn't the city be reimbursed for all these costs? And what's fairer than getting the (ir)responsible homeowner to pay?

Unfortunately, common sense suggests that the chances of actually collecting this fee from the homeowner -- assuming anyone knows who it is -- are not high. Due to the way mortgages are now bundled and re-sold -- often more than once -- the chain of ownership can literally vanish into the ether.

In the vast majority of cases, then, the vacant building fee is destined to simply become a special assessment, added to all the other unpaid fees attached to the (rapidly declining) property. These fees ultimately become the responsibility of the home's next buyer.

If there is one.

Vacant properties need all the help they can get. By definition, they're already in tough shape, in tough areas, and scare off all but the most intrepid (and handy) would-be investors and owner-occupants. The one thing they've got going for them is that they're cheap. Unfortunately, Minneapolis' hiked vacant building fee undermines even that advantage.

P.S.: I wonder how many of those abandoned-car tickets actually get paid???

New Listings Down 20%

Market Firms Up . . . A Bit

In his e-mail to realtors this week, the CEO of the local board of realtors notes a significant drop in the number of new listings:

The signs are early and nascent, but there are some promising early indicators that the Twin Cities housing market is beginning to correct and pull back from its two year-beeline in the buyer's favor. While affordability, interest rates and overall supply are still attractive, home sellers are cutting back on new listings substantially in 2008.

For the week ending April 12, there were 2,156 new listings, down a full 20.1 percent from the same week last year. That's the fifth week in the last six that we've seen double-digit percentage drops from 2007 activity. Newly signed purchase agreements (pending sales) are still behind last year also, posting a 3.8 percent decline.

While our market still faces a long road ahead to full recovery, the recent reduction in new supply is a positive beacon on the horizon and undoubtedly welcome news for home sellers.

Sincerely,
Mark Allen
CEO
Minneapolis Area Association of REALTORS

Like employment statistics, trends in housing supply can be misleading. For example, economists note that the current unemployment rate (just over 5%) omits all the workers who have stopped looking for work. As a result, the economy is likely weaker than the reported rate suggests.

Similarly, a drop in new listings undoubtedly reflects would-be sellers' take on the current market. Instead of taking their chances in a (very well publicized) buyer's market, they're biding their time, waiting for better selling conditions. Until the number of pending and closed deals start to show meaningful increases, it's too soon to announce an overall market bottom.

In the meantime, the drop in new listings is certainly a positive development, if only because it shows market processes at work -- namely, higher prices elicit more supply and check demand, while lower prices shrink supply and stimulate demand.

Now if only oil prices worked that way . . .

"Eating their own Cooking"

Banks Now Holding -- Not Selling -- Mortgages They Originate

Chefs that eat their own cooking tend to gain weight. So do banks.

According to the Federal Reserve, total assets at U.S. commercial banks swelled to more than $11 trillion in early April, up from $10 trillion a year ago. Last month, the growth rate of bank assets hit its fastest growth pace in 28 years ("The Future of Banking: Big, Cautious"; The Wall Street Journal, 4/18/08).

What does that mean for the housing market? Higher lending standards, which translate into tighter credit. To quote my earlier post,"when you have to eat your own cooking, you tend to pay closer attention to the ingredients."

Potter Capital vs. Bailey S & L

Does Identity of Lender Matter to Borrowers?

In markets where housing has fallen the most -- Miami, Las Vegas, San Diego, etc. -- many borrowers who are "upside down" on their homes (they owe more than the home is worth) apparently are behaving differently this downturn than previous ones. A generation ago, beleaguered borrowers did whatever they could to stay current on their mortgages and keep their homes. They got second (or third) jobs, curtailed almost all other spending, cut up their credit cards, etc.

Now, lenders are reporting that many borrowers are simply mailing in the keys, oblivious (or numb) to the credit-wrecking consequences of surrendering their home.

There are undoubtedly many reasons for this. Many of these defaulting borrowers had little equity to begin with, and therefore have little (besides their credit) to lose. They see making exorbitant payments on a house that has fallen in value as throwing good money after bad. Other "upside down" borrowers aren't making any moral choices, they literally just don't have the money -- either because their adjustable rate loan re-set to an astronomical amount and/or due to health issues, job loss, divorce, etc.

However, there may very well be another factor that is exacerbating borrower defaults: the impersonal, convoluted nature of today's mortgage market.

Six Degrees of Separation

Today's borrowers don't borrow from George Bailey, the conscientious local banker at the center of the movie classic, "It's a Wonderful Life." They deal with Potter Capital, the modern-day successor to the cross-town bank run by Bailey's vile nemesis, Henry Potter.

More specifically, they deal with a lowly minion of Potter Capital. There is no personal relationship, no sense of duty or obligation between borrower and lender, no relationship of any kind, really, besides an abstract, contractual one. And that contract isn't something they ever understood very well in the first place.

So defaulting borrowers don't think their actions really hurt anyone -- at least not anyone they care about.

Potter Capital is just a big, anonymous corporation to whom any one mortgage is just peanuts, anyway. More likely, Potter Capital isn't even the ultimate loser; it's Mega Capital Corp, the even bigger and more anonymous corporation that bought the securitized loan from Potter. Even then, that's not the end of the daisy chain: if Mega Capital Corp is truly big enough and it's losses are staggering enough, it's losses will be passed to . . . the Federal Reserve (in other words, all of us).

Psychologists have long known that anonymity can make people behave badly. It should not be a surprise that financial anonymity can encourage borrowers to behave irresponsibly, too.

Hair Stylist-Mortgage Brokers

Calling the Housing Market Bottom, Continued

Legend has it that Joseph Kennedy (father of President John F., and the first SEC Commissioner) bailed out of the stock market just before the 1929 crash because of something his shoeshine told him. Specifically, the shoeshine had discovered stocks, and was blithely sharing his latest "can't-miss" picks with Kennedy.

Kennedy reasoned that if even shoeshines were buying stocks, speculative fever had gotten out of hand, and a crash couldn't be far behind. So he got out.

In that vein . . . I'm happy to report that I got my hair cut today, and was not offered a mortgage loan by my stylist.

Beginning about four years ago, that was actually a fairly regular occurrence. Apparently, originating mortgage loans was such a lucrative, low-entry barrier business that anybody with a pulse got into it. (To be fair to hair stylists, I was also solicited for mortgage referrals by people whose day jobs were flight attendant, cable repairman, and insurance sales).

We all know how that ended.

What makes me a little dubious about the apocryphal Kennedy/shoeshine story is the timing. In 2004, when I first noted that hair stylists were dabbling in real estate, the market still had another 6-8 quarters of upside left. So anyone who heeded this contrarian indicator would have gotten out too soon. Or would still be waiting to get in: even with a 10%-15% drop since the mid-2005 peak, housing prices nationally are still ahead of where they were in 2004.

In Joseph Kennedy's case, it's likely that shoeshines were talking about stocks well before September, 1929, if for no other reason than the 20's bull market -- like the recent housing boom -- went on much longer than many rational observers expected.

My guess is that Kennedy, a notorious (and notoriously well-connected) investor, got a "heads up" about the market's direction from some better-placed sources than his shoeshine.

End of "Financing on Steroids"

Securitization Pipeline Still Clogged

Buried in Thursday's Wall Street Journal -- the significant news always is -- was a stunning tidbit about the state of the securitization market (insecuritization market?). According to the Journal, securitizations of home loans totaled $19 billion in March, compared with $218.6 billion in March 2007 ("The Bank Loan Haircut," WSJ; 4/10/2008).

That's a rather astounding drop of 87%, and has important consequences for the housing market.

For the uninitiated, securitization is the process by which millions of illiquid mortgages get bundled together and re-sold as liquid, tradeable (theoretically) commercial paper. More than low interest rates, loose lending standards, or borrower greed and fraud, it was this phenomenon that arguably fueled the housing bull market (facilitated by the ratings agencies, which put their Triple A "seal of approval" on literally trillions of thus-securitized mortgages).

Securitization turned lenders' business model upside down. Instead of interest rate arbitrage -- paying depositors low rates and charging borrowers higher rates -- originating mortgage loans became a fee-and-commision business: make a loan, sell it (to a buyer who "securitizes" it and re-sells it to investors), then make another loan with the proceeds.

As the securitization boom accelerated, this process became turbo-charged: many of the biggest (and unregulated) mortgage lenders got their money directly from Wall Street, bypassing depositors altogether. However, the underlying principle was the same: borrow cheap, short-term; lend high, long-term. Huge amounts of leverage magnified this spread and the attendant investment returns (Bear Stears' leverage was rumored to be 30:1).

--------------------------------------------------------
"When you have to eat your own cooking, you tend to pay closer attention to the ingredients. Your appetite is also finite."
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In a nutshell, this is the engine that drove the munificent housing bull market the first half of this decade.

As the saying goes, anything that cannot continue forever . . . won't. The wheels on the securitization market chassis started to come off as increasingly marginal borrowers paid ever-higher prices for homes, using ever-junkier mortgage products (negative amortization loans, option-ARM's, etc.)

By the time signs of market saturation became apparent, literally $5 trillion (or more) of mortgage securities had been created (the actual amount in existence -- including derivatives tied to mortgage debt -- is the subject of much speculation, and is of no little interest to the Federal Reserve, investment banks, etc.)

As indicated by the March numbers, the clogging of the mortgage securitization pipeline means that mortgages are back to being long-term assets, held on the originators' books (rather than re-sold). In turn, that has inexorably raised lending standards -- equivalent to tightening credit.

Think of it this way: when you have to eat your own cooking, you tend to pay closer attention to the ingredients. Your appetite is also finite.

While this is long overdue and ultimately healthy for the housing market, in the short run it reduces demand -- no more "financing on steroids." That's great for (still) credit-worthy borrowers and prospective home buyers, but probably isn't what home sellers want to hear just now.

Credit Brahmins . . and Untouchables

Better Jumbo Rates May Presage Market Improvement

Just as a watched pot supposedly never boils, my instinct is that residential real estate is not close to bottoming -- at least nationally -- so long as everyone seems focused on calling the bottom. With that caveat, however, there are some recent signs of improvement worth noting.

One of the most encouraging is a drop in jumbo rates to around 6.25% locally. That's a full point below where they had been just three months ago, and within 50 basis points of prevailing rates on "conforming" mortgages (under $417,000, for most of the country).

As market-watchers know, one of the side effects of the credit crisis has been the opening up of a huge gap between the rates on conforming and non-conforming (jumbo) loans. Only the former are insured by Freddie Mac and Fannie Mae, and in a suddenly risk-averse universe, "uninsured" meant "un-sellable." (Historically, rates on jumbo's have been slightly higher than conforming loans, to compensate lenders for the greater amount of capital at risk.)

The shrinking of the jumbo loan premium indicates that the credit markets are calming down. Cheaper money means increased buyer demand, especially in expensive coastal markets like New York and California. In turn, increased demand bodes well for housing prices.

Behind the scenes, however, it's far from business as usual.

Just as investors are busy trying to separate the healthy investment banks from the walking wounded (or worse), mortgage lenders have gotten religion about distinguishing good credit risks from bad. To qualify for today's cheaper jumbo loans, borrowers must now have high credit scores, a strong balance sheet, and good income. Needless to say, all of the foregoing must be documented.

Brahmins . . and Untouchables

Those borrowers who pass muster qualify for attractively-priced jumbo loans. If anything, they are likely to find themselves increasingly being courted with perks and discounts (think, "frequent borrower miles").

There are two reasons for this. One, there are fewer strong borrowers. In a recessionary economy where many consumers have bruised, housing-related finances, credit survivors (if not exactly thrivers) stand out. And two, more lenders are competing for their business. Thanks to aggressive Federal Reserve easing, this may be the first banking crisis in history where the banks survive and it is the customers that disappear.

Before banks can do business with these prospects, however, they must first identify them and figure out how get to them in the door (or onto the Web site). Hence, the perks.

Unfortunately, borrowers on the other side of this "bifurcated market" needn't bother to apply -- literally. Interestingly, even people who have exemplary credit repayment histories may now find themselves on the wrong side of this divide, if their absolute level of debt is relatively high. The rationale, according to one loan officer I heard recently, is that such borrowers simply have less margin for error.

In today's cautious, uncertain economy, lenders have no interest in risking their diminished capital on marginal borrowers. That's especially the case as more lenders hold onto loans they're originating (vs. re-selling and securitizing them). However, it would appear the doors are once again opening wide for the best customers.

Silver Linings, Too

The Stuff Recessions are Made Of

So I picked up the Sunday Star Tribune -- Saturday, when the early edition is out -- to proof the splashy new ad for my new listing in St. Louis Park. To maximize exposure, I always instruct the copy setters to make my ad headline three type sizes larger, and to place it first in the classified section it's scheduled to run in (they're organized by city). Of course, I pay a premium to do that, but I've found that it's worth it -- that's what full-service real estate sales is all about.

I needn't have bothered. My (extremely prominent) ad is the only ad running in the local city section. This despite the fact that there now exactly 364 other residential properties for sale in St. Louis Park (a suburb of 50,000 on Minneapolis' west border).

This is no doubt a commentary on the decline of newspaper advertising; last year, Edina Realty decided -- correctly I believe -- to drop its Star Trib ad page to focus on its own branded Web site. However, it's also a testament to the state of the market. Early April is usually the height of the Spring market in the Twin Cities. In previous years, one would have expected to see 15-20 ads, minimum, where my solitary ad appeared.

Clearly, realtors are pulling back on their marketing budgets. Fewer print ads makes the newspaper smaller, which reduces demand for newspaper staff, which results in layoffs and further crimps demand for toothpaste, cars -- and real estate.

(Note: given the dreary, non-stop rain in the Twin Cities today, one might reasonably guess that realtors held off on open houses today because of the weather forecast. That would be plausible, except for the fact that the ad deadline was Thursday, when the forecast was for merely mediocre weather).

Just as every expansion benefits from a virtuous cycle, every recession is aggravated by the foregoing vicious cycle.

Assuming that we are currently in a recession, this will be the 12th (give or take) since World War II. There will undoubtedly be a 13th, 14th, and 15th. They typically last from 6-15 months; then, as surely as Winter (eventually) yields to Spring, the economy begins to grow again.

In the meantime, the silver lining for would-be home buyers is selection and pricing. To a person, I guarantee you that the realtors trying to sell those 364 St. Louis Park listings are impressing upon their clients the need to price right, from day one. That means coming on the market below the competition.

Thereafter, every 30 days or so that their home doesn't sell, those same owners are being urged to reduce their price. Where sellers would have put up a fight even 2 years ago, with all the negative media about real estate, they're now obliging.

The result is a lot of marked-down property selling at extremely attractive prices.

If you're fortunate enough to be flush right now, it's a great time to shop for a house!

2008 "Dear Client" Letter

What Would Warren Buffett Say?

Note: Warren Buffett, the CEO of Berkshire Hathaway (which also happens to be the parent company of Edina Realty), is famous for his annual letter to shareholders. In that vein, I composed and distributed the following missive to several hundred of my clients and acquaintances this past January (if you want to avoid the 3 month lag, sign up for my e-mail distribution list!).

Dear Clients:

With real estate seemingly making news daily -- and not the positive kind -- I thought it might be timely for a quick, boots-on-the ground take (mine) on what's going on now in the local real estate market:

●Notwithstanding predictions of huge price drops (see below), the big story now is a (continued) slow-down: buyers are nervous about values, and sellers want to sell for '07 (or '06!) prices. With buyers and sellers on different pages, the main consequence is a drop in deals.

●All real estate is local. Where there's (foreclosure) pain, there's a lot of it. In Minneapolis, that includes many parts of the Camden neighborhood on the north side, the Phillips neighborhood, and (increasingly) downtown condo's. Ditto for the remote 'burbs where most of the new construction was built. However, established, historically strong neighborhoods such as Linden Hills, Seward, and around Cedar Lake seem to be doing fine.

●Wall Street predictions. The same people who were remarkably quiet about the direction of real estate prices just two years ago -- or who simply extrapolated gains indefinitely into the future -- are now quite vocal that housing is (still) too expensive. Just last week, Merrill Lynch made headlines with a prediction that housing prices will fall another 15%-25% nationally the next two years. This from the same company that didn't see tens of billions in sub prime losses on its own balance sheet until it was too late. Two of my favorite lines about Wall Street are: 1) "nobody knows 'nothin"; and 2) "those who talk don't know, and those who know, don't talk."

●At the risk of disqualifying myself, per above, my own best guess is that instead of housing prices coming down significantly, the price of everything else is going to go up. That's called inflation. With gas well over $3 a gallon, food up dramatically, the dollar weak and gold strong, clearly that process is already under way, abetted by Federal Reserve easing.

●Capital flows: after the tech bubble burst in 2000, a lot of money that was formerly committed to stocks instead went into real estate. Then, as the stock market began to recover in 2003-2004, the process reversed and money flowed from real estate into stocks. With the exceptional volatility in stocks in 2007, and more of the same so far in 2008, the investing pendulum is set to again swing towards real estate. That's not so much of a factor at the low-end of the market -- first-time home buyers typically don't have stock portfolios -- but I see it (positively) affecting demand for more expensive housing as the Spring market kicks into gear.

●Rental market trends: although this isn't my focus, all the anecdotal data suggest that the credit crunch is helping landlords raise rents. In the meantime, homeowners with some equity and good credit are taking advantage of lower rates.

With the foregoing as prelude, what should you be doing now?

For the vast majority of homeowners, probably nothing. If you are not contemplating moving this year, spare yourself the agitation and skip all the "What's next for real estate" articles proliferating like kudzu. If you want to know what's really happening in your neighborhood, just call me. As a former (and hopefully future) client, you're always welcome to check in with me and get a market snapshot. (I'll expect a family update in return, though.)

The one, proactive step that I do recommend now, depending on what kind of mortgage you have (assuming you do), is to consider refinancing. Courtesy of the Fed, 30 year rates are now below 6%; 15 year mortgage rates are 50 basis points or so less. As always, fees matter, and it's a good idea to shop around. Just as with a purchase-money mortgage, lenders offering refinancing loans must provide you with both a timely Good Faith Estimate and a Truth-in Lending disclosure showing their fees.

Lastly . . . if you rented in Minnesota for any part of 2007, be sure to get a Certificate of Rent Paid to include with your 2007 tax return. Minnesota landlords are required to provide these forms by January 31. Depending on your circumstances, you may owe less tax as a result.

If somehow this letter doesn't sate your appetite for real estate info, please don't hesitate to call or e-mail, or, check out my blog at http://citylakes.blogspot.com/

Sincerely,

Ross
Edina Realty – City Lakes Office
Cell: (612) 710-3282
E-mail: RossKaplan@EdinaRealty.com

Priced to Sell . . . or Sit?

"Leave Room to Negotiate"
vs. "Priced-to-Sell"

No realtor-client conversation is more anticipated -- or important -- than the one about suggested selling price. Every owner wants to maximize their sales price. No seller wants to feel, leaving the closing, that they left money on the table. (And no realtor wants their client to feel that way!)

So what's the best way to maximize the selling price?

Especially to people who love to negotiate, it can be counter-intuitive, but my advice -- at least when it comes to residential real estate (vs., say, oriental rugs) -- is to price to sell. That is, realistically, as opposed to at a marked-up price chosen for supposed negotiating leverage.

There are three reasons.

One. While it is true that all real estate is unique, the reality is that buyers make their purchase decisions in the context of what else is currently for sale.

In today's buyer's market, there are many more homes for sale than buyers looking. Many of these homes are destined to sit, unsold, for months. Statistically, more than 30% of the homes currently on the market will not sell at all, simply expiring at the end of the listing.

To sell in a market with lots of inventory (read, competition), a home must not just match its peers, it must stand out: in staging, condition, marketing, and . . . yes, price. Choosing a too-high asking price is the best way to torpedo the interest of prospective buyers.

As an example, take a house whose fair market value is about $250k, as indicated by the comp's ("comparable sold properties"). However, to leave room to negotiate, the owner insists on listing at $300k. What happens?

The $250k home gets compared to homes selling for $300k -- and found wanting. Instead of getting second showings and serious interest, the $300k "wannabe" simply makes the other homes in its mis-chosen peer group look better.

By contrast, now imagine that the $250k house is listed at $239,900. Instead of being outclassed, it looks like a deal. Buyers watching the market take notice, and scramble to get in to find out what the "catch" is. Once they're in, the positive surprises continue -- and so does their anxiety that someone else will snap it up first. Voila! Buyer Urgency -- a rarity in today's market (and catnip to any anxious seller --and their realtor).

In such a situation, more than one buyer can emerge, which can easily drive the selling price up to (or even past) the $250k original target price.

Two. Other Terms. While price is probably the biggest issue in a deal, other terms matter, too. Especially in the middle of a credit crisis, how much earnest money the buyer puts down, and how fast they commit to getting their financing, makes a big difference to sellers. So, too, can a swing of weeks (or months) in the preferred closing date. A Seller who is selling a home everyone wants has much more leverage negotiating other terms to their liking, and insisting on language that strengthens the deal.

Three. Post-deal Leverage. The presence of multiple prospective buyers helps the seller even after a deal is struck. No home today is purchased without an inspection. Depending on the home's size, condition and vintage, it is not unusual for a buyer's inspection to uncover several thousand dollars in possible issues.

How those issues are resolved is a matter of negotiation.

In my experience, buyers who feel they paid a rich price can drive hard bargains, expecting sellers to make generous inspection concessions to preserve the deal (assuming they don't want out altogether). By contrast, buyers who "hear footsteps" are careful not to rock the boat. (Note: if the deal does derail, the seller must subsequently update their disclosure to reflect any material defects.)

Of course, like any strategy, the price-to-sell approach has exceptions and caveats.

The more unique a home is, the harder it is to find good comp's, and the wider the suggested price range. In practice, I'll often characterize the comp's for a given property as being either "tight" or "loose." If your home is a landmark in a one-of-kind setting, you have much more latitude to price aggressively.

Sellers who insist on a too-aggressive price will often argue that they are in a better position to negotiate concessions. Buyers never pay full price anyway, they reason, so why not accommodate that instinct by building in the markdown that they're sure to expect? Plus, if someone really is interested, they're always free to offer less, anyways.

Again, the problem is, buyers don't make offers on homes they don't go through, or that they find disappointing if they do. (Ponder for a moment the observation, "if your parents don't have kids, you won't, either"). Also, although there are many buyers who feel no compunction about making "low ball" offers, many buyers in the land of "Minnesota nice" are reluctant, even when a home's asking price is obviously inflated.

With so many other homes to look at, buyers' reaction to an over-priced home can be summed up in one word: "Next!"

Arguing for a higher initial asking price, many sellers rationalize that, "I can always lower the price later." True enough, but as every realtor knows, the best and most intense interest comes at the beginning of the listing. Re-attracting buyers who weren't impressed the first time through takes a great deal of effort -- and often a much lower selling price. To their chagrin, many sellers who start too high discover that, once their home has languished on the market for months, they must over-shoot fair value on the low side to actually sell.

Finally, to work, a price-to-sell strategy has to be executed by a good realtor. Contrary to what most people think, the realtor's job is not to sell a given home (shh! . . well-priced, well-marketed homes sell themselves). Rather, the realtor's job is to make the home as appealing as possible to the broadest range of prospective buyers, then to market like crazy to generate showings and traffic.

Like the line about a tree falling in an empty forest, a real estate value means nothing if no one knows about it.