Identifying with Felix Hernandez

2010 Year in Review -- Realtor's Version

Looking back over 2010, a lot of Realtors had years like Felix Hernandez -- minus the accolades.

Felix who?

Felix Hernandez is the Seattle Mariners' pitcher who just won the AL Cy Young award, despite only having a measly 13 wins (he also had 232 strikeouts and a league-leading 2.27 ERA).

Stellar Performance in a Tough Market

What made those statistics award-winning is that Hernandez compiled them for a last-place team, the 61-101 Mariners.

Similarly, many Realtors have done stellar, tireless work this year marketing and showing homes, educating their clients about the process, writing offers, etc.

However, due to a slow housing market and still-recovering economy, they have few decisions (closed deals) to show for it.

(Real estate really should -- but doesn't -- have something analogous to baseball's ERA, or earned run average.)

Contrarian Indicators -- Housing Market Edition

"The Death of the Housing Market?"

"The reports of my death are greatly exaggerated."

--Mark Twain

It's hard to be a student of markets without some passing familiarity with so-called contrarian indicators: those harbingers that signal that a market is at an inflection point, presenting investors with a singular opportunity.

That opportunity can either be to get out -- before things crash -- or to get in, after everyone else has despaired, sold their positions -- and driven prices through the floor (of course, as we now know in nauseating detail in the wake of the housing market "troubles," there's a third option: '(sell) short like crazy').

One of the most famous stock market contrarian indicators was the 1979 Business Week cover story proclaiming "The Death of Equities" (pictured above).

Two, short years later, the Dow Jones began an epic, 17-fold rise spanning two decades.

The reverse would be when CNBC, Jim Cramer, etc. supplant sports programing on health club TV's.

In both cases, the underlying theory is that, by the time shoeshines are dispensing stock tips (supposedly, what prompted Joseph Kennedy to sell before the 1929 Crash), there are no more marginal Buyers/Sellers left -- and therefore things are about to flip.

Housing Market Harbinger

So, what would constitute a contrarian indicator for the housing market?

Besides the spate of stories heralding the "End of the American Dream" the last week or so, I can think of one, at least in Minnesota.

That would be a push to eliminate the time lag setting property taxes.

Background

If you didn't know, by longstanding tradition, Minnesota sets property taxes every January 2 for the following year.

So, in 2012, you'll pay property taxes on whatever your home was worth -- or the government thought it was worth -- this January.

When home values are rising, this lag works in everyone's favor.

However, when prices are dropping, "sticky" property taxes are decidedly negative, delaying needed relief for beleaguered home owners.

Continuing with the contrarian theme, a very good sign of a long-term bottom in housing prices will be when conventional wisdom decides that falling prices are the norm, not the exception, and demands grow to revise how property taxes are assessed.

Legislators??

P.S.: want to know why Minnesota collects property taxes on May 15 and October 15?

The story I've heard is that the two times farmers are reliably flush are in the Spring, before they plant, and in the fall, after they've sold their crop(s).

New vs. Existing Housing

"How's the Housing Market?" -- Vol. 27

"Where" (location) is certainly one of the key qualifiers for anyone seeking to divine the health and direction of the housing market.

But so is "what?" -- as in "what kind of housing?"

In the housing market, the key distinction is between existing and new housing.

Conflicting Signals

That distinction explains how, literally in the same paper (the Star Tribune, on July 30), the front page ran a story saying that new housing inventory was shrinking, and that new permit applications were up.

Conclusion: things are getting better.

Meanwhile, the lead article in the business section attested to the slow-down in sales of existing housing, and an uptick in foreclosures.

The takeaway?

Things are getting worse.

Relative Size

Certainly by size, what happens to existing housing matters much, more more: existing homes account for more than 90% of the market, or about 5 million units annually, vs. less than 500,000 units for new construction.

However, economically, new construction exerts an influence far greater than its 10% market share would suggest.

That's because each new home represents tens (if not hundreds of thousands) spent on labor, material, land, appliances, furniture, etc. -- expenditures that reverberate through the economy many times over due to what's called the multiplier effect.

Overlapping Demand

It's also true that new homes frequently compete with existing ones for Buyers, just as used (pre-owned) cars compete with new ones.

So, the supply (and therefore) price of new homes affects the supply (and price) of existing homes -- and vice versa.

However, at least in the Twin Cities, my experience is that the two markets -- existing and new -- overlap less than elsewhere.

I see two reasons for that: 1) the vast majority of new housing locally is put up in the outer suburbs ("exurbs"), where land is cheapest; and 2) the price difference between a new home in the 'burbs, vs. an existing one closer in, isn't as extreme in the Twin Cities as it is elsewhere -- for example, the Bay Area.

Going back to "location, location, location," most Buyers first settle on "where," before they get to "what" (kind of housing).

P.S.: is Jim Buchta back? The long-time real estate reporter for the Star Tribune -- switched to the travel section 2(?) years ago -- has has several housing article bylines in the last few weeks.

If true, that's very good news!

Home Buyer Tax Credits -- The Sequel

What Happens May 1 (and Beyond)?

The word amongst Realtors is that the tax credits for home Buyers -- $8,000 for first-time Buyers, $6,500 for move-up -- is a dud.

Unlike the first round of incentives which expired Nov. 30, the sequel -- scheduled to expire April 30 -- does not appear to be catalyzing a major surge in purchases, especially in the lower price brackets.

That said, lots of eyes are focused on May housing activity, to discern signs that the cumulative incentives effectively "sold forward" housing activity, with the result that the second half of 2010 will experience a (more) pronounced drop-off.

And, no, unlike last Fall, there does not appear to be an extension in the cards . . .

Today's Sellers: Biting Two Bullets

Two Bullets

Would-be Sellers of upper brackets homes now -- the slowest part of today's housing market -- often have to bite not one but two bullets.

The first is pricing their home consistently with "the comp's": similar, nearby homes that have sold recently.

In fact, better than the comp's, depending on what's currently active nearby.

Bullet #2 is ponying up for anything that's out-of-commission (or close) -- like an aging roof, badly dated flooring or walls, etc.

Sellers can certainly skip tackling any deferred projects -- but then they had better expect to price accordingly.

Often times, the needed discount is $2 or more for every $1 in repairs.

Cushioning the blow of bullet #2, especially for long-time owners: they may need to spend a few thousand on cosmetic updates . . . but it's a good bet they paid virtually nothing for their house, way back when.

For example, I recently worked with long-time owners whose home was "only" worth $800k last year (down from perhaps $1.1 million, ballpark, at the peak), but who paid $75k for it decades ago!

"The Trader Joe's" Housing Market

Ready to Eat -- er, Move Into -- Homes

Call it "The Trader Joe's" Housing Market (or more accurately, the "middle-aisle-at-Trader Joe's" housing market).

That's where the ready-to-eat, frozen meals are stocked.

Not only are they attractively packaged, the right number of servings (4-6), and good quality -- but they're great values, too.

Similarly, homes that are selling well in today's challenging market are . . . attractively packaged (staged), the right size (for families, anywhere from 2,000 to 3,500 square feet), well-built and maintained -- and offer a good value.

In Demand: Move-in Condition

Perhaps most importantly, they're in move-in condition.

That attribute seems especially important now.

Judging from my own clients, it certainly seems that few people have the time or inclination to do significant remodeling these days.

In the majority of family households today, both parents work full-time.

That leaves little time for cooking meals (cue Trader Joe's) and kiddie supervision, let alone meeting with interior decorators or picking out new tile for the bathroom.

Of course, unlike the home purchase itself, which can be financed with a mortgage, remodeling costs are typically paid for out-of-pocket -- a tall order in a recession.

Baseball Metaphors & the Housing Market

Willie Keeler & The "Asterisk '90's"

Surveying the real estate market from a Realtor's perspective the last year -- and the prospects for next year -- conjures up some parallels with baseball.

Namely, it's the era of the "singles" hitter.

Just as some periods in baseball seem to be dominated by sluggers (think, Mark McGuire and Sammy Sosa in the late, "asterisk" '90's) -- others seem to favor singles hitters like Pete Rose and Rod Carew.

This would be the latter era for Realtors.

Selling What's Selling

Instead of hitting "home runs" -- upper bracket homes fetching north of $1M -- by far the most active part of the housing market is the lower rungs (call it under $200k) where first-time Buyers predominate, and the government's tax incentives loom largest.

It's also the part of the market that can have the biggest deals: dramatically written-down bank foreclosures (often times in a condition to go with).

Think of it as the opposite of Willie Keeler's explanation for his hitting prowess: 'I hit 'em where they ain't.'

In today's housing market, the trick is to sell what people are buying . . .

When Does 2 -1 = 0?

Housing Market Math, Circa 2010

When does 2 - 1 = 0?

When a two-income family that's "upside down" on their mortgage loses one of those jobs ("upside down" is Realtor-speak for owing more on your home than it's worth).

The first wave of foreclosures largely consisted of marginal borrowers -- putting very little (or nothing) down -- paying inflated prices in especially overheated housing markets.

By contrast, today's second wave of foreclosures disproportionately consists of homeowners who are financially stretched because they've lost their job(s).

That's from Bob Peltier, Edina Realty President & CEO, who spoke at City Lakes' weekly meeting this morning.

That unfolding, second wave of recession-driven foreclosures is likely to be one of the dominant stories of the 2010 housing market (as I've blogged previously, I'd add to that list Option-ARM's, strategic defaults, and the economy generally).

3 Keys to 2010 Housing Market

Which Way the "Move-up Market?"

I'm working on my 2010 letter to clients now, but here's a quick preview -- following are 3 factors that I think are key to next year's housing market (p.s.: if you want a copy of the letter in December, instead of February when I'll post it on this blog, send me an email at rosskaplan@edinarealty.com. If you bought or sold a house through me in the last few years, you're already on my mailing list):

One. Fate of the "move-up" market, or, "as the move-up market goes, so goes 2010 housing."

Thanks to the $8,000 tax credit for first-time home buyers -- plus cheap foreclosures dumped on the market by banks -- entry-level housing has been strong virtually all year. Perhaps too strong.

Just ask prospective Buyers and their Realtors what the choices are like below $200k in nicer areas of the Twin Cities right now.

Strength only at the bottom of the market doesn't make for a strong market, though.

So, everyone's looking for evidence that the higher rungs of the market will "join the party."

Other Shoes Dropping?

Two. Given how instrumental the $8,000 tax credit has been, there is a bit of a "waiting for the other shoe to drop" quality to the housing market at the moment.

Namely, everyone's waiting to see if demand tanks once the incentive(s) disappear. (That is, assuming that they do; there's rampant speculation that the tax credit will be extended in one form or another.)

However, assuming Nov. 30 really is it, there's some evidence that things will transition just fine: at least some Realtors are reporting that their clients are postponing their home searches till after Nov. 30.

Their logic?

Artificially-spiked demand is driving up entry-level home prices more than the $8,000 tax credit is going to save them.

Three. The other "other shoe" is a much-rumored second wave of bank foreclosures.

In particular, millions of so-called "option-ARM mortgages" (pay what you feel like -- at least for awhile) are due to re-set nationally in 2010.

The good news for the Twin Cities: these loans never became as popular here as they did in places like Southern FL, Southern CA, and Las Vegas.

The bad news: a continuing, lousy economy -- and in particular, high unemployment -- is hurting many other homeowners who got more conservative mortgages.