The RE Biz & "Inferior Goods"

McDonald's, iTunes --
and Real Estate Signs

In economics, the term "inferior goods" means anything that you consume more of as you have less money.

Historically, foods like hamburger (vs. steak), potato's, rice and the like qualified; today, that would be fast-food chains like McDonald's, and all the Dollar store chains that appear to be doing brisk business.

"Inferior goods" applies to other things, too.

So, demand for entertainment is also surprisingly recession-resistant.

That's because people tend go to the movies more, not less, even as they cut back on luxury goods and services.

Or perhaps makes that "download more, not fewer, iTunes."

Real Estate Equivalent

In the real estate business, the equivalent would be good, 'ol-fashioned real estate signage.

Even as Realtors pare back expensive media advertising (how do you think Google makes its billions?), they are stepping up -- or at least maintaining -- their purchases of "For Sale" signs, sign riders, banners and other hallmarks of boots-on-the-ground marketing.

At least, that's the take I got this am from the sign company I've done business with for years.

BIG Edina Discount

Great Value Overlooking Lake Edina

Where: 4904 Poppy Lane in Edina

What: 4 BR/3BA walkout rambler with 4,200 FSF and pool overlooking Lake Edina

How (much): $699k

Who: listed by Steve Stewart; broker is Edina Realty

Historically, homes in Edina enjoyed some of the best appreciation in the Twin Cities -- and weathered economic downturns much better.

Not this recession -- especially for upper bracket Edina homes (and true of upper bracket homes throughout the area).

Exhibit A would be this sprawling rambler overlooking Lake Edina.

Originally listed at $1.1 million a year ago, the price was just reduced Monday from $825k to $699k -- now a whopping $180k below the tax assessed value ($880k).

I saw the home earlier this Spring, and thought it was a value $100k higher!

Realtors & Buyer's Markets

Realtors & Buyer's Markets:
Feeling Sellers' Pain

It was the best of times, it was the worst of times.
--Charles Dickens

In a Buyer's market, Sellers' pain is Buyers' gain. And the vast majority of Buyers today are represented by Realtors, too (acting as a Buyer's Representative).

So it seems fair to ask:

Why isn't a Buyer's market, with dropping prices and lots of inventory (at least in most parts of the Twin Cities), as good for Buyer's agents as it is bad for listing agents (representing Sellers)? (Of course, most agents typically play both roles.)

The short answer is, for some Realtors, it is. Especially for agents representing lots of first-time Buyers, this is a once-in-a-lifetime market. However, for many experienced agents, this a trying market (to say the least).

Here are three obvious (and perhaps not-so-obvious) explanations:

One. Commissions are based on home prices.

To dispense with the obvious, Realtors' income, at least collectively, is a direct function of home prices. When the average Twin Cities home sale (vs. home -- BIG difference) falls from $220k in 2006 to $165k today -- a drop of 25% -- Realtors' income falls 25%, too.

Of course, Buyer's markets are also frequently characterized by a drop in sales volume -- especially in the early stages (look at Manhattan now). That delivers a second blow to Realtors' incomes.

"Fatigue Factor"

Two. Balky Buyers. I'd characterize the mood of my recent buying clients as "cautious" or even "anxious" rather than "celebratory." They are naturally pleased -- if not delighted -- by how much house they can buy now.

However, they're equally nervous about home prices falling further. Depending on their job security, they're also worried about the recession hurting (or eliminating) their income.

As a result, Buyers today seem to be viewing more homes, and taking longer to make purchase decisions, than when the market favored Sellers. The net result -- at least for their agents, if not for them: an increased "fatigue factor."

Three. Realtors tend to identify with Sellers more than Buyers, because of how the business works (and used to).

Until perhaps 20 years ago, Buyer's agents didn't even exist: if you sold residential real estate, your client was always the Seller, even if the agent worked with and otherwise assisted the Buyer.

Even today, when Buyer's agents are rapidly reaching parity with Seller's agents, it is the Seller who pays both agents' commission (who split again with their respective brokers). So, there's what could be called a "vestigial" identification with Sellers.

Feeling Sellers' Pain

Too, as Realtors gain experience, their client mix often shifts from mostly Buyers to mostly Sellers ("agents who list, last").

That's so because Sellers tend to favor established Realtors. After all, who would you trust to sell your $300k (or $1.3M) home: someone who's done it three other times, or someone who's been selling homes for 10 years?

Given that real estate is a famously transient business -- four out of five Realtors are out within five years -- over time, the nucleus of the Realtor ranks becomes dominated by experienced Realtors whose clientele is weighted towards Sellers.

When they hurt, their Realtors feel their pain . . .

Recession Casualty: Pretense

Starbucks vs. Burger Jones

One restaurant doesn't exactly make a trend, but the new burger joint new Lake Calhoun -- aptly named "Burger Jones" -- appears to be embracing an anti-Starbucks marketing strategy.

So, forget Starbucks' "Tall," "Venti," and "Grande" for "Small," "Medium," and "Large" (or, is it the other way around?).

If you order a burger at Burger Jones -- and that's pretty much what people do -- the choices aren't "rare," "medium," and "well-done," or gradations thereof.

The choices are: "some pink" and "no pink."

3rd Wave of Defaults

"Safe" Mortgage Pain Spreads to MN

In the latest phase of the nation’s real estate disaster, the locus of trouble has shifted from subprime loans — those extended to home buyers with troubled credit — to the far more numerous prime loans issued to those with decent financial histories . . . Economists refer to the current surge of foreclosures as the third wave, distinct from the initial spike when speculators gave up property because of plunging real estate prices, and the secondary shock, when borrowers’ introductory interest rates expired and were reset higher.

Peter S. Goodman and Jack Healy, "Job Losses Push Safer Mortgages to Foreclosure"; The New York Times (5/25/09)

What's eye-catching about today's NYT story isn't the phenomenon of foreclosures spreading to formerly solid borrowers now falling behind due to job losses; in the worst recession in decades, such "metastasis" is hardly a surprise.

Rather, it's the local angle: the two families profiled, both deep in the hole on their mortgages, are right here in Minnesota (one is in Woodbury, the other is in Babbit, up north).

According to the nonprofit Minnesota Home Ownership Center, three of every five Minnesota borrowers seeking foreclosure counseling now have a prime loan.

So much for "it can't happen here."

Unfortunately, it already is.

Downtown Mpls. Retail Bust

Recession Casualty . . . or Something Else?

I made the rare foray into downtown Minneapolis for some retail shopping the other day, and what I found reminded me of an old skit from The Chris Rock Show.

An African-American man is shown trying, unsuccessfully, to hail a cab. Naked. As each cab passes him by, he grows increasingly angry and indignant, railing that the cab drivers are blatant racists, that an African-American "can't get a break," etc. (yeah, you have to be an African-American comedian to safely traffic in this kind of humor -- and this is one of Rock's more politically correct skits).

Back to downtown Minneapolis.

I would be shocked if retail sales haven't cratered. I don't think I saw 20 shoppers in the 30 minutes or so I was walking around.

However, as tempting as it would be to blame the recession, there's a much more obvious explanation: road construction and parking.

Virtually every downtown street within a 6 block radius of the IDS (the epicenter of downtown) is torn up and restricted to one, v-e-r-y s-l-o-w-l-y moving lane of traffic. Parking was nowhere to be found, and when I finally did find a spot, the meter informed me that an hour would require 16 quarters (or something like that).

I don't think I carried around that much change when I used to use laundromats.

Somewhere in between waiting for interminable traffic lights to change and looking for a merchant who could make some change, it occurred to me that shopping in the 'burbs was a whole lot more convenient.

Which is where I headed.

Who Can You Trust?

(More) Recession Trend Spotting

If you want a friend in Washington . . . get a dog.

--President Harry Truman

To my mind, what's unique about this recession isn't just the damage to people's pocketbooks -- bad as that may be so far -- but to something more fundamental: their trust.

You don't have to have invested with Bernie Madoff to worry about getting "burned": today, the safety of your savings, the balance in your 401(k), even the food you buy is potentially suspect.

So who can you trust?

Yourself, for starters. You'd guess that that at least partly explains the appeal of vegetable gardens (Burpee seed sales: up 30% so far this year).

But maybe the question should also be "what can you trust?"

It might just be my imagination, but it seems like people are spending more of their (shrinking) disposable income on . . . pets.

You may not have much faith in Wall Street or Washington, but Fido (or Rover or Boots) will always be there for you.

Peggy Noonan Recession Trends

Noonan: 'Goodbye Bland Affluence'

Peggy Noonan, who writes a column for The Wall Street Journal, is as thoughtful a social observer as there is. Notwithstanding her conservative, *Manhattan-centric take on things -- which she freely concedes -- she is consistently insightful, and a good barometer of where center-right thinking is at.

So it's noteworthy that her current column, "Goodbye Bland Affluence," comments on a family of self-described "back-to-the-land" economic survivalists.

While she doubts that many people will emulate this family -- you really can't go "back" to something you never knew -- she does note some less dramatic concessions to today's recessionary times.

Her are some of Noonan's more notable predictions:

The cities and suburbs of America are about to get rougher-looking. This will not be all bad . . . storefronts, pristine buildings—all will spend less on upkeep, and gleam less.

People will be allowed to grow old again. There will be a certain liberation in this. There will be fewer facelifts and browlifts, less Botox, less dyed hair among both men and women. They will look more like people used to look, before perfection came in. Middle-aged bodies will be thicker and softer, with more maternal and paternal give. There will be fewer gyms and fewer trainers, but more walking. Gym machines produced the pumped and cut look. They won't be so affordable now.

New home fashion will be spare. This will be the return of an old WASP style: the good, frayed carpet; dogs that look like dogs and not a hairdo in a teacup, as miniature dogs back from the canine boutique do now.

[America] will look like 1970, only without the bell-bottoms and excessive hirsuteness. More families will have to live together. More people will drink more regularly. Secret smoking will make a comeback as part of a return to simple pleasures. People will slow down. Mainstream religion will come back.

According to Noonan, what will replace "bland affluence"?

Something she dubs "authenticity chic."

As she notes, it comes with some notable silver linings: a more genuine, connected, and, hopefully, meaningful existence.

*Clearly, Noonan hasn't spent much time in the Midwest: plastic surgery is much less a fixture here than in upper-income New York. Ditto for "frou-frou," manicured dogs that fit in purses.

In the rest of America, people aren't putting off visits to their plastic surgeon so much as the doctor, the dentist, the pharmacist, etc.

Recession Silver Lining

Time to Revisit New Airport?

Like a homeowner who chose to remodel their current home instead of buying new, the Twin Cities decided -- sometime in the '80's -- to update and expand its current airport rather than build a new one.

In today's economic environment, it makes sense to revisit that decision, for the following three reasons:

One. It's a lot cheaper.

Twenty years ago, developers laid claim to practically every sizable parcel of land within 50 miles of the Twin Cities. Then, beginning a decade ago, the ethanol boom kicked in, driving prices for crop land higher.

As a result, assembling a parcel big enough for a second Twin Cities airport would have been prohibitively expensive.

Today, of course, the real estate boom has played out (to say the least). Even though gas prices are dramatically below their peak last Summer(!), no one knows for how long. That uncertainty, plus a severe recession, makes the economics of the exurbs much less compelling.

Combined, all these factors suddenly reduce the land costs associated with building a new airport by as much as one-third.

Two. The other major cost associated with building a new airport, labor, is also "on sale" now.

State unemployment is now well over 8%, and real estate construction projects all over the Twin Cities are either stalled or simply not getting off the ground.

As a result, thousands of skilled construction workers are idle at the moment. Instead of depleting state funds to pay unemployment benefits -- or simply watch as people lose their jobs and possibly, homes -- put them to work!

Done well, a long-term capital project like a new airport is stimulus spending at its best: in the short run, it creates high-skilled, high paying jobs that boost the economy; in the long run, the community gains a long-lived asset that truly is an investment in the future (it pays back more than its cost, including the debt that will inevitably be used to fund it).

Three. Today is the right point in the economic cycle.

The time to plan and build a new airport isn't when you need it -- it's 15-20 years before. Even the most pessimistic economists project that today's recession will lift by 2012 (the optimists say later this year), and that home prices will begin to recover in the next few years.

Meanwhile, according to the Metropolitan Council, by 2030 the Twin Cities will likely be pushing 4 million, and have 30%-40% more jobs than today. Air traffic by then could easily double from today's depressed levels.

With foresight and long-term planning, the Twin Cities could be cutting the ribbon on a brand, new state-of-the-art airport just as the area needs it most.

Depending on the kindness of . . family

Recession Housing Trend: Doubling Up?

Families around the country are weathering the recession by hunkering down with relatives and friends . . "I'd rather be home if I'm going to be broke," said [one person who moved back home].

Kris Haher, "Homeward Rebound: Weathering the Storm With Kin"; The Wall Street Journal(4/7/09)

If you don't know the term, "boomerangers" refers to 20-somethings who move back in with their parents after leaving home for college.

Now, thanks to the recession, that trend appears to be spreading to older adult children -- sometimes with their own children. According to the Journal, the people opening their doors aren't just parents, but in-laws, extended relatives, and even friends.

Aggravating the problem: overwhelmed social service agencies, and long waiting lists for such things as food stamps.

The article mentions such places as Alabama, Iowa, and New Hampshire, but no doubt there are plenty of affected families in Minnesota, too.

"Just Don't Call it Formica"

2009 Home Features: What's Hot (and not)

One of the perks (duties?) of being a 2008 "Super Real Estate Agent" -- jointly chosen by Mpls. St. Paul Magazine and Twin Cities Business -- is getting mid-year surveys asking for your input on coming trends. The feedback from all the 2008 Super Realtors will appear in the June issues of those two publications.

As long as I'm taking the time to provide answers, I thought I might as well "scoop" my own blog readers.

Hot:

--Functional, economic Kitchens; laminate countertops (DON'T call it formica . . because it's not. In fact, modern laminates are much more durable and aesthetic than their '50's counterparts.)
--Gardens, especially vegetable gardens
--In-home entertainment (spurred by recessionary "cocooning")
--"Practical" upgrades (low E windows that cut your utility bills)
--Economic "cosmetics": new paint, carpeting (Home Depot is busier than you'd expect right now)

Not:

--"Luxe" Kitchens with granite countertops and stainless steel appliances
--"Bells and Whistles" of all kinds (too expensive; plus, not where people's heads are at)

Holding their own:

--Druthers for open floor plans. No, McMansions aren't coming back, but Gen X, Y, & Z'ers(?) seem to have an enduring preference for a combined Kitchen/Living Area. Call it "Great Room 2.0."
--Oversized garages. You can never have enough storage space. If the SUV doesn't fill it up, your other stuff will.

I haven't seen it yet, but I'm sure that we will have plenty of examples of "recession chic" before long.

"57 Channels (And Nothin' On)"??

Three Reasons Why Deals
Are Tougher in a Recession

What amuses me about 99% of the articles written about the housing market -- and there's been an explosion lately -- is that they're not written by active, working Realtors.

Most are simply journalists whose "beat" (area of focus) is the housing market. On a scale of 1-10, their writing skills are a "10." But in terms of first-hand experience, they're . . not very high.

Obviously, brains and good sources can compensate immensely. But you still need to know which sources, and how to filter what they say. And even then, there's still slippage between direct and vicarious experience.

In that vein . . . here's a first-person, Realtor's take on the local housing market right now.

"Low-Low" Offers vs. "Lowball-Low"

Generally speaking, deals are fewer and harder to come by now -- foreclosures being the very big exception -- for three reasons.

One. Buyers and Sellers are starting farther apart.

Between the daily headlines blaring housing's woes, or seeing a neighborhood with one (or two) too many "For Sale" signs, Buyers seem to be overestimating how much leverage they have over Sellers.

As a result, Buyers' initial offers are often -- if not "lowball-low" -- just "low-low."

Needless to say, that doesn't get negotiations off to a rousing start. (Again, foreclosures being a notable exception. Banks don't get p-ssed off. They don't get . . . anything. They just say "no" -- and take their time doing it.)

While both sides may gradually yield ground, the operative word is "gradually" -- and the initial gap can be quite wide. As a consequence, the momentum that's needed to drive a deal through to conclusion is often lacking. (Bonus question: what deals have that quality today? Houses selling in multiple offers -- which is more common than you'd think right now).

Two. Money is tighter.

I've never really worked with clients who are cavalier about money -- people with that attitude tend to be quickly separated from theirs (just like fools). However, in flush economic times, Buyers and Sellers just seem to be more, well, "generous." And flexible.

Now, every dollar counts. Even little issues that are routinely disposed of in easier times can threaten to torpedo deals now.

Three. Inventory can feel surprisingly "thin."

It sounds odd to say in a market with 30,000-plus homes for sale, but I've heard more than one agent working with Buyers now say -- and have experienced it myself -- that it seems like there's a ton of inventory . . . until you have a client actually looking for something.

Then . . it's nowhere to be found (sort of the housing market's equivalent of Bruce Springsteen's song, "57 Channels (And Nothin' On)."

Realtors vs. "Laymen"

No doubt one reason for that is that discretionary Sellers -- people who can afford to wait -- are waiting, until perceived conditions improve (as I've written previously, those perceptions can be very wrong -- See, "Now You See it . . .Now You Don't").

But it's also true that once a home has been on the market for awhile, Buyers tend to look for flaws. (Note to Sellers: the pendulum swings from overlooking flaws to zeroing in on them as a direct function of time on the market.) And market time is appreciably higher in a soft, slow market.

So the same house that everyone would have "oohed and ahhed" over when it first hit the market around Labor Day is chopped liver in late Feb. (and now overpriced, given the drop in the market last Fall).

While Realtors are much less susceptible to this phenomenon than "laymen," they're still human.

Big -- and Little -- Ticket Purchases

Recession, Uncertainty Hammer Big-Ticket Purchases

What to know what's selling today? Not big-ticket items.

On a scale of 1-10 (1 is the lowest, 10 is the highest), here is a shorthand -- mine -- for the magnitude of various consumer (and business) purchase decisions. Just like the Richter scale, this scale is logarithmic, kind of (8.0 is a much bigger purchase than 6.0).

Anything ranked over 3.0 has seen a dramatic slowdown; anything over 6.0 has fallen off a cliff.

A. Consumers

Basic Necessities; "Sundries" (toothpaste, gallon of milk, candy bar): 1.0
First-run movie: 1.5
Nice Restaurant: 2.0
Tank of gas: 2.0
Clothes: 2.0 - 3.0
Appliances: 3.0 -4.0
Furniture: 3.0-5.0
Used car: 4.0-6.0
New car : 5.0 - 7.0
House: 10.0

B. Business

Capital equipment (commercial plane, agricultural combine, bulldozer): 10+
Publicly traded company (buyout): 10+++

To my armchair economist's eye, big-ticket purchases have been killed by: 1) economic uncertainty, including job (in)security; 2) financial pressure (and in some cases, hardship), caused by falling housing and stock prices, and rising unemployment; and 3) concern about falling asset prices.

Interestingly, any one of these can chill demand for houses: even people who are relatively flush and feeling confident about the future logically may hesitate to step up and buy if they're convinced housing prices have further to fall. That psychology explains why markets tend to overshoot (a phenomenon also associated with stocks): to coax people out of their defensiveness at market lows, bargains often have to become screaming bargains.

Of course, the companion to wanting to buy is being able to.

Fortunately, the federal government is increasingly focused on steps designed to address that. Those include: a fat tax credit to first-time home Buyers; very cheap mortgage money; and lots of fresh capital ploughed into Fannie Mae and Freddie Mac (which should then "irrigate" the housing market with added liquidity).

Will these steps work? Stay tuned. . .

Recession Hits Housing Prices

Oct. Case-Shiller Numbers:
Down 18% from '07

“People who think they’re going to lose their job don’t buy a home”
--Steven Ricchiuto, chief economist at Mizuho Securities; NY Times (12/30/08)

There's not much mystery about the most recent leg down in the national housing market: recessions destroy jobs, and people who are unemployed -- or worry they may soon be -- don't make major purchases.

For most people, there's no bigger financial commitment than buying a home.