The most important features of this report in my opinion are the ability to understand the impact of lender mediated sales in our market and to spot trends in both where this market has been and where it is going.  Q3 data shows the same trends as before… mainly that the share of our current housing market that is a foreclosure or a short sale continues to increase.

Median Sales Price

Median Sales Price is a huge part of the story.  While Traditional Sellers have seen their sales prices fall, their sales price is down only 4.6% from 2 years ago, while Lender Mediated Sellers have seen their prices decline 9.1%.  This means the disparity between the average Lender Mediated home vs. Traditional Seller home has grown from $65,000 in Q3 2006 to $76,000 in Q3 2008.

The Resurgence of Homes Under $120,000

In 2006 we had a total of 1567 in the 13 county metro area that sold at or below $120,000.  This year, we’ve had 2004 homes under $120,000 sell in just the 3rd quarter, July 1 - September 30, 2008.  The chart below shows the phenomenal resurgence in homes priced at the lowest end of our market.  This poses two issues: first, there’s been a huge resetting of home affordability at the low end of the market… I know many agents in my office who did their first sub-$100,000 sale in many years this year and I’d say in about 3/4ths of the sales it was a 1st time buyer purchasing the home.  The second issue is a question of condition.  While this huge surge in sales under $120,000 suggests great inroads to affordability, it is often coming in part due to the substantial decline in the homes’ condition.  The last time we saw 2,000+ sales under $120,000 in the 3rd Quarter was in 2000!

The Decline of the Traditional Seller

While Traditional Sellers have seen their median sales prices fall in the last two years, the slip has been fairly small in comparison to the sales price gains seen up to 2006.  What we have seen though is a 40% decrease in the number of homes listed and sales closed by Traditional Sellers in the last 2 years.  This is likely from many factors but I believe that much of that decrease is because sellers owe more than their house is worth today and they either do not have the cash to pay the difference or they don’t want: “to have to pay for the priviledge of selling their house.”

In today’s market, here’s an approximate amount a seller needs in cash/equity to move from a house valued at $200,000 to one valued at $300,000:

• $13,000 - $15,000 - sales commision and closing costs on current home
• $5,000 - $7,000 - closing costs/prepaids on new home (could be rolled into loan by having seller of new home pay closing costs)
• $10,500 - $15,000 - 3.5% - 5% down payment for new home 

Therefore it is likely to cost a minimum of $23,500 in cash/equity to move, which is 11.75% of the value of the $200,000 house owned by the person in this example.  Though the housing downturn today makes it an excellent time to make a “move up” purchase since price declines on the sell side can be made up on the buy side, unless a prospective move-up buyer has the cash required, they cannot take advantage of this market.  Though asking a homeowner to have a little more than 10% equity in a house to plunk down a new one isn’t an unreasonable request, for many years sellers put down 0% and spent their down payments on anything/everything else so this comes as a 1-2 punch to our market today.  Really the cash requirements of today are just the same requirements of a decade ago.  While the equity impact on sellers’ ability to become move-up buyers affects sales, I believe there’s a larger reason for today’s lower sales:

One-Sided Transactions Lead to Far Fewer Sales

If we look back at the housing market for most of the last 50+ years, we find that most transactions had a Traditional Seller who would sell their home to a buyer.  That seller would then go on to purchase another home from the next seller.  That seller would then go on to purchase another home, etc.  With a Lender Mediated Seller, either the seller is a bank who is never a buyer, or it is a seller in financial hardship who very rarely has the financial or credit wherewithal to purchase another home.  If you take a guess that 50% of sellers historically went on to purchase another home after selling theirs, then the 4,110 Lender Mediated sales in Q3 2008 would have produced an additional 2,055 sales.  In from Q3 2006 our sales are down 1,531 units, so an argument could be made that our sales would have met or beat 2006 sales if it were not for the current influx of lender mediated inventory.  This example is very simplistic and doesn’t factor in myriad variables to our market, but you get the idea of the impact that lender mediated sales have on our market.

Are we Approaching a Fundamental Value in Lender Mediated Sales?

This year has seen the resurgence of the multiple offer.  I can’t remember hearing about multiple offers in such great quantity since 2004 or 2005.  Nearly all these multiple offer situations that I have seen or heard about have been on lender-involved listings.  While I’ve seen many overpriced houses languish on the market for months, when the seller prices it right from the get-go, buyers seem to come out of the woodwork.  In most of these situations the house ends up selling at or above asking price… sounds awefully familiar to stories from a few years ago, doesn’t it?  From what I’ve learned, it looks like the typical lender-mediated house (in particular foreclosures) are selling for 60% - 70% of the property’s previous sales price.  This is a number that’s low enough to account for issues with condition and disclosure and still motivate buyers to make an offer.  Can prices fall further from this point?  You bet.  The difference is that there seems to be strong support at that level, as evidenced by the multiple buyers that come forward with offers at that price point.

Where do we go from here?

2008 is likely to end with nearly 1 in every 2 sales in the 4th quarter being a foreclosure or short sale.  2009 will likely start off where 2008 ended, but mid-2009’s activity is going to largely depend on the decisions of Washington and of the big mortgage lenders throughout the country.  If lenders become more willing to renegotiate loan terms and/or the economy turns back around, the housing market may finally stabilize.  If those hopes do not come to fruition, 2009 will likely end up looking a lot like 2008 in terms of sales volume and likely see sales prices fall another 2%-5% from this year’s numbers.

Using a little cut-and-paste magic, I wanted to take a look at the impact of the housing market’s shift over the last 4 years.  Comparing total sales volume (in Dollars) in 2008 vs. 2005 shows that we’re down 40% in the 3 years since the market’s peak.  Since most real estate agents & brokers earn their incomes from commissions based on the sales price of the home, you can see how incomes for the agents and their brokers are down dramatically.  Just like any other business, changing times require a changing business models and practices.  We’ve seen many real estate brokers close their doors, merge with other companies, or downsize this year.  The biggest market players, CB Burnet and Edina Realty, which combined produce over 1/3rd of the sales each year, have both closed offices and reduced headcount to accomodate the new market realities.  This is a necessary component of the right-sizing required to remain profitable.

Agents too have been in retrench mode.  I’ve seen many leave the business or place their license “on ice” so that they stop incurring the many different costs associated with being an agent.  I have also bumped into several agents as they now work a 2nd job trying to make up for lost revenues.  This was a market ripe with excess and a downturn was inevitable so while these changes are painful, they are part of the natural balance of things and will leave us with a leaner, stronger base to build from when the market recovers.

As the law of averages always goes, there are some agents doing far worse than average and some doing far better than average.  I feel lucky to count myself among the latter group but it has come at the cost of extra time and money required to keep activity and sales high.  As a whole my company and office are doing above average as well, which I find is a testament to the agents, management, and environment we’re in every day.  In fact, our parent company, Home Services of America, has been given a $250 million war chest by our owner, Warren Buffet’s Berkshire Hathaway, to use to go out and buy real estate brokerages that are fundamentally sound but challenged by today’s market.

In the broad economic downturn that is hitting our country, it seems as if most people are feeling some of its effects and I’d argue that the real estate agents and brokers are getting hit harder than most.  In the past people argued that real estate agents/brokers made too much money… I think those same people would have a harder time arguing that point today.

Adversity can bring out both the best and worst in people and challenges like this bring forth opportunities for improvement in our tradecraft.  While I’m not happy about the struggles that have befallen our market, I look at this as a chance for all of us to reset our expectations and actions and prepare us for a new beginning.  I’m a firm believer that a positive attitude and making smart decisions leads to being “lucky” and consequently I’m encouraging all of my friends in the business to not lose sight of the opportunities available if they simply continue to think positive and act smartly.

Recently I introduced a buyer to the Crescent Ponds development in Blaine, Minnesota.  Murphy McKee, Centex’s representative, was great to talk with from Day 1.  At first we found the prices just a little too high, but when a sales event hit, my buyers were comfortable enough to step up to the plate.  My buyers are buying their first home, so going “all in” on new construction as your first home purchasing experience can be a little overwhelming… it is even for my buyers who have owned houses before!  Murphy was extremely knowledgeable and reassuring, but just as important was how great he was interacting with both my clients and myself.  It is so much easier to work through all of the decisions that need to be made when you’re at ease with the person helping you do so.

Really the entire team at Centex was great… the sales reps at other developments we met when we were looking at floor plans, the staff at the design studio, the construction manager, and the mortgage rep at CTX Mortgage.  The experience with the mortgage rep started off a little uncomfortable but once I alerted Murphy to the situation, he and the rep discussed the issues and from that point on the LO was excellent.  I would have no hesitation to work with him again as well if the situation presented itself.

What really went above and beyond my expectations is when Centex did a price reduction on the model my client was building… right before my clients completed their final selections.  I fully expected Centex to say: “sorry, you’re already under contract” but instead Murphy was able to tell my clients the good news: they would be paying the lower price!  They immediately went and spent most of that money on additional upgrades to the house, which was great because now the house they are building does not have anything in it that they felt they had to “settle for” because of budget constraints.

While it is highly unlikely I’ll have another client for that development, I certainly will keep this experience in mind for my future buyers and think positively on the Centex experience for some time to come.  My clients are looking forward to moving in to their new home in March!

Centex also offers new homes in Ramsey, Champlin, Brooklyn Park, Hugo, Woodbury, Rosemount, Apple Valley, Farmington, Shakopee, Prior Lake, Chaska, and Carver, MN.

The first agent faxed a purchase agreement where the buyers’ signatures were illegible.  The rest of the contract was clear, but you couldn’t be certain who had signed the offer.  I had the agent try several other options and none worked.  Then, magically, the purchase agreement came through clear… the agent had traced his buyers’ signatures.  Really?  Yup.

The 2nd agent faxed his offer over but it was missing one signature and one initial from the buyer.  Apparently the buyer lives far from the agent’s office, so the agent said “my buyer authorized me to sign on his behalf” and faxed back the applicable pages.

I was absolutely dumbfounded to discover both of these agents’ activities.  These are legally binding contracts that require complete and legitimate signatures by all parties to be legal.  If there was ever a problem with the transaction after the fact, buyer seller or agent could claim the contract was not valid to begin with.  Effectively these were both open liabilities and because they both appeared to be illegal activities, E&O insurance would not cover that agent or me!

I know that sales are fewer, I know that sales are tougher, and I know that commissions are smaller.  Even though many agents are struggling, there simply is no excuse for ANYONE to be taking shortcuts.  Not only is it an issue of legality, it is an issue of ethics as well.  Our industry is better than this and we all need to remind each other on this every day.

According to a press release announcing the event, a survey of CB agents recently conducted showed they thought their listings were still overpriced.  Consequently the marketing blitz was a good way to get a large number of their listing prices dropped all at once.  What happens after the 10 day event is over?  Do the prices go back up?

While on their web site CB Burnet advertises their 1276 listings that have reduced their prices for the “sale,” Edina Realty’s web site shows 3725 properties with price reductions in the last week, which is 3x the number of houses.  The difference is that no matter who has the property listed, Edina Realty agents are happy to sell it!  There are many properties for sale today that are still very overpriced, but there are also many more that are absolute values at their current prices.

Will the sales event prove to lead to more sales for Coldwell Banker?  Only time will tell.  I have to give them kudos for getting out there with something new and different and trying to make this market wake up to the good prices on housing that are out there.

All in all, REALTORS are pretty good about obeying the rules.  As in any community though, there are some members that are either carelessly or intentionally naughty.  When someone feels wronged enough to submit a complaint, those complaints are then forwarded to the Professional Standards Committee to consider an ethics hearing.

When a complaint is received, 3 members of the committee and a staff member from the state association schedule a conference call to review the complaint & initial response from the member charged to determine: “if the accusations in the complaint are found to be true, would this be a violation of the Code of Ethics?”  We spend 10-15 minutes discussing the complaint and response and then take our vote.  If we agree there is a potential violation, it is forwarded back to the committee so a hearing can be scheduled.

The hearing is scheduled and 5 members of the Professional Standards Committee are selected to be the “judges” on the case with a member of the state association’s legal department acting as advisor and a senior member of the panel acting as Chair.  On the day of the hearing, all parties attend and call any witnesses they believe support their position.  The Complainant and Respondent can cross-examine each other and their witnesses.  The 5 member panel asks questions as appropriate throughout the hearing.  Once both sides have said their peace and the panel has had their opportunity to ask any questions they wanted, the parties are excused and the panel goes in to closed session to make a judgement.

We can find the Respondent guilty of nothing, or guilty of only some of the Article violations they were charged with, or find them guilty of all charges.  Depending on the Respondent’s previous history of violations and the violation(s) they have just been found guilty of, punishments can range from a letter of warning to fines in the $1000’s and/or suspension/expulsion from the Minnesota Association of REALTORS. Any monies earned from fines go back to the Association and not to the Complainant. 

It is these deliberations that I find quite interesting, as everyone on the panel is not only judging the situation but reflecting on their own business practices and thinking about how they would have handled the situation.  No one in the room is perfect and so there is often some empathy for the Respondent but at the same time there is a strong interest to keep REALTORS honest and to prevent a recurrence of the activity in the future.  This form of self-regulating seems to work well and I think that everyone that participates in the hearing learns from the experience, which makes all of us better professionals.

Just like any system of justice, nothing is perfect.  Sometimes it may seem that the Respondent “got off easy” and I believe that we still have too few members reporting violations in the first place.  However, most people I’ve spoken to regarding the experience are generally pleased with the process.  This year I was on the Complainant side of the table and experienced firsthand the dispensing of justice.  I thought the hearing went extremely well and that both myself and the Respondent argued our cases well and were thoroughly engaged by the panel members to clarify our positions.  Regardless of the outcome of the hearing, I felt very happy with the experience itself and I know that the REALTOR will not repeat his actions in the future, and that I believe is the biggest benefit of all.

While there are few co-ops in town so this is a limited issue, the issue of unsold units in association communities is a far larger one.  If you buy/have bought in to an association-run development (condo/townhouse) and many units remain unsold, those units are not contributing revenue to the association, which can leave the association in financial distress.  In that situation you wouldn’t lose your home, but you certainly could see monthly dues rise dramatically.

Most of the consumers you talk with will not have a good handle - I am not sure anyone does yet - of the nature of the credit problem. In this short article, I hope to give you at least some quick, understandable talking points when discussing the issue. It is not 100% complete but should give most members an understandable overview of the issue. There is plenty written about the subject if people are interested in more detail.

• The vast majority of people are not in trouble. About 3% of total households are behind on mortgage payments (33% of households have no mortgage) and about 1% eventually go through foreclosure.
• Most homes are not mortgaged over their true value. The national number is that home owners have a 71% LTV mortgage on the property (2006).
• The foreclosure level of today is very similar to the foreclosure level in 1986 from a national perspective. MN did better that time around.
• A major difference today is about how financial firms packaged and sold mortgage securities to investors - often leveraging the value many times. (see more below)
• No mortgage insurance as consumers opted for loans that avoided PMI, thus increasing the lender’s exposure.
• Government asset reporting, as a result of Enron, requires a true reflection of the asset value on balance sheets. This means that the 65% LTV mortgage that a financial institution or Fannie/Freddie issued and now holds in their portfolio is reported as a bad investment because the value of the asset has dropped. As an example, Chris takes out a mortgage with 5% down and is issued a 95% LTV mortgage on a $200,000 home. This means the mortgage is $190,000, but it is protected by an asset valued at $200,000. Chris makes all of his payments on time for 3 years. However, in the last 3-years the home’s value has dropped by 10% to $180,000. The bank/financial institution/Fannie/Freddie now must report the lower asset value on their books - which means they do not have enough asset value in the home to cover their loan.
• Remember the leverage issue. The financial institution now must report and the investors will see that the assets protecting their securities are not sufficient protection to cover their investment. Keep in mid, Chris is paying his mortgage on time - as are the vast majority of people with a mortgage. Yet, if the LTV is upside down because the asset value dropped, the lender is in trouble and in need of funds to shore-up his balance sheet for the investors who purchased the securities backed by mortgages.
• Mortgage insurance was part of the protection against falling asset values in the past. Because so many newer loans were issued without PMI, the lender exposure is much greater this time around.
• Liar loans and other poor lending practices are a piece of the problem and demonstrate clearly how greed (at all levels - consumer, lender and advisors) overwhelmed reasonableness. This also happened in the mid-1980’s with FHA/VA “fog a mirror” assumable mortgages. Credit tightening and consumer “skin-in-the-game” will help eliminate this in the future.
• Problem loans in the next 2-years will be a result of 2nd/3rd mortgages which are tied to the LIBOR index. Some are subprime, many are Alt-A and prime.
• The LIBOR went up 50% last week and it is the index used to determine the ARM interest rate. Many of these are held by middle-class folks who spent their home equity taking out 2nd & 3rd mortgages. The problem they face is LTV when they go to refinance out of the bad ARM product. Example: Chris has an 80% 1st mortgage and a 20% 2nd mortgage he took out in 2005 to buy a boat and pay off credit cards. The total of the 2 loans is $200,000 on January 1, 2005. He makes all of his payments on time. In October, his 2nd mortgage - which is an ARM - has a payment increase of 25% because of the LIBOR index. He cannot afford the additional payment because of job situation, health insurance, etc. so he goes to the bank to refinance. Because the value of his property has fallen since he took out the mortgages, he can no longer borrow an amount equal to the 1st and 2nd mortgage he has on the house. You can see the hole that Chris has dug for himself - whether he used a subprime or “liar-loan” - as the asset value drops his options are significantly reduced and now must make some very difficult choices.

It is important to remember that for many years homes were considered a hard un-liquid asset. People rarely borrowed against their home, except for repairs or emergencies, and the equity growth made upward movement possible. Over time, financial geniuses invented tools and convinced people that homes should be a liquid asset that they individually leverage in order to increase their standard of living. That strategy worked for a while until people in mass began living beyond their means.

Often we find that the fundamental principals of the past are concrete solutions for the future.

Short Sale
Definition: a home sale where the seller owes more than what the home is worth and is asking the lender(s) to accept an amount that is less than the amount owed to them as payment in full.

The same problem continues to come up day after day and I finally have the time and focus to sit down and write about it.  For the last year now, short sales have become a common type of listing in our market and in markets around the county.  A short sale is a “Liar Listing.”  In most circumstances, the seller and listing agent place the home for sale at a price and terms that they have no way of honoring unless the bank(s) agree to that price and terms, which isn’t learned until long after an offer is submitted.  While some responses on short sales can come back in a week or two, it regularly takes 2-3 months or more for the bank(s) to come back with a response and that response is just as likely to be a “no” as a “yes.”  In fact, I find that through a combination of reasons, only about 1 in 3 offers on a short sale is likely to make it to closing.

A short sale is a “Liar Listing.”  In most circumstances, the seller and listing agent place the home for sale at a price and terms that they have no way of honoring unless the bank(s) agree to that price and terms, which isn’t learned until long after an offer is submitted.

 A few months ago the RMLS of Minnesota, the governing body behind the MLS database used by REALTORS throughout the Twin Cities, decided to implement a field called “In Foreclosure/Lender Owned.”  This field was meant to help clear up disclosure issues with these properties and help make it easier to do searches to either include or exclude these listings.  Unfortunately I believe that it has in many cases made things even worse.  Unfortunately the only properties that can be disclosed this way are properties that have actually received an official notice of foreclosure, so the seller has to be 2+ months behind on their payments.  Further, the seller can choose not to disclose it whatsoever.

There is a substantial difference between a short sale and a foreclosure in terms of the procedures for the offer and negotiation process as well as timelines.  More importantly, a bank/lender listing a home for sale at a specific price and terms will accept an offer at those price and terms, whereas a homeowner in a short sale situation has a lender who might accept an offer at those price and terms, might demand a much higher price, or accept no sale at all.

REALTOR Code of Ethics:

Article 2
REALTORS^® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction.

Article 12
REALTORS^® shall be honest and truthful in their real estate communications and shall present a true picture in their advertising, marketing, and other representations.

If a listing is in fact a short sale and the agent knows about it but does not disclose it upfront in the listing, I believe that they are violating the above two articles of our REALTOR Code of Ethics.  Because they are listing a property for sale at a specific price and terms, if the seller has no intention of honoring that price without approval from a 3rd party from which they have not received any direction, then they are being dishonest about the listing.  Since a price and terms are required to be listed to have the property in the MLS, I believe disclosing the short sale in the MLS Remarks section is proper explanation saying in effect: “yeah, we need someone else to approve this but we’re hoping this will work.”  It at least prevents buyers and agents from wasting time on houses that they have no interest in making offers on.

The current disclosure field then in fact becomes a problem since you cannot use it on short sales that are not in foreclosure and lumps everything into one big basket.  When short sales and foreclosures (lender mediated sales) currently account for 30% of the sales in the Twin Cities, it seems crazy to have such a broad, vague and yet limited field hold so much responsibility for disclosure.

If I ran the RMLS of Minnesota, this is how I’d have it structured:

Field 1:     Short Sale:         Yes/No
Field 2:     In Foreclosure:  Yes/No/Not Disclosed
Field 3:     Lender Owned:  Yes/No/Not Disclosed

These three fields would tell agents and buyers all they need to know yet provide the seller some privacy if they requested it.  While if the house is in foreclosure there might be some mechanics that require special attention in the transaction, it could be in foreclosure and not a short sale.  Even if it is in foreclosure, that can bring up questions about a seller’s right to privacy so offering a “not disclosed” field is perfectly reasonable.  Same thing with a lender owned property… I think in this case it is crazy not to disclose it upfront but from an ethics/disclosure issue I’m not at worried about it.  I’d love to only see “Yes/No” for lender owned.

Implementing this revised fields would be a boon to buyers, sellers, and agents.  Buyers looking specifically to buy (or avoid) these listings would be able to do so, sellers would only have qualified buyers schedule showings, and agents could better counsel their clients on the whole process and give better information to their clients.  Last but not least, it would allow Jeff Allen and I an ability to make future foreclosure and short sale reports that much more accurate and detailed since we could split sales activity into “short sale” and “lender owned” categories vs. the current compilation of the “lender mediated sale” category.  Think of the benefits!!!

I also saw another builder marking their inventory down in the MLS a similar amount too.

This suggests to me that builders understand that we’re nearing the end of the strong sales season and that they need to price reduce now to sell these homes soon or they will be left holding them all winter!

Donald T. Yeager, you’ve just found guilty of participating in a $100 million mortgage fraud scheme, what are you going to do now?  “I’m going to jail for a little over a year.”

-hypothetical interview with the most recent guy to get off too easy

 The guy makes a paltry $30,000 as an active participant in the scamming the buyers and mortgage companies (and their investors) in a $100 million dollar mortgage scheme and loses only 15 months of his freedom.  Here are some other criminals in this scheme.

By estimates published in the Star Tribune, losses are in the range of $20M - $50M.  Some of the people convicted were involved with dozens of the transactions, some were involved in all 200 of them.  Imagine if it was 200 counts of burglary… what would the sentence be?  Why can’t we prosecute white collar criminals more harshly?  Let’s start nailing some of these people under the R.I.C.O. Act  and get serious about fraud.

The lender mediated sale has always had some level of activity in our market (low single digits), but it has really become a force over the last two years.  While the condo market has so far had a much lower share of these transactions, I expect that this segment’s market share will continue to grow.

While the bulk of the short sale and foreclosure properties today are in the first time buyer category, the problem occurs at all price points.  It is not unusual to see 3-4 houses in the same $300,000 - $500,000 neighborhood all listed as a foreclosure or short sale… I’ve seen a lot of this for subdivisions built 2004 - 2007.

Early this year the local associations held a press conference where one of the presidents said that “there will be no bell that rings when we hit bottom.”  Well I might have to find a bell to ring for when that time does come.  Due to the acceleration of the downward pricing on the lender mediated segment, I think it will become fairly clear when prices have bottomed.

This trend really did give me pause… it shows that the very cyclical nature of this market makes it look like Q4 2008 and potentially Q1 2009 will be the domain of the foreclosure and short sale.  This will moderate again come Q2 & Q3 2009 when Traditional Sellers seasonally come back into the market and it is hard to make any forecast of activity that far out.  As all the mutual fund commercials go, “past performance does not guarantee future results,” but trends are usually quite good at foretelling the general direction of our future.  At some point the lender mediated new listings and sales will peak, just like traditional sellers did, but the biggest question remains when.

Many people will look at the trend above and think: “I should wait to buy a house since we haven’t hit bottom yet.”  For buyers that have substantial cash to put down, I think in general that waiting might be good for you.  If you are a buyer who has very little money to put down into a house, your best option might be to buy now so that you can lock in both your interest rate (around 6 3/8 today) and your financing program.  Interest rates are still likely to climb in the future due to continued inflation worries and financing continues to get harder and harder to get, especially for the buyer will little cash to put down.  On the flip side, buyers who make a purchase with little money down now might find themselves “upside down” in the coming months if prices fall further.  It comes down to this: it is a good time to buy for some buyers, it is not a good time to buy for others.  Everyone’s situation is unique and should be looked at individually.

As co-author of this report and someone who is doing a lot of transactions in this market, I have a better feel for this market than most.  I’ve been actively looking for a new house for myself and have written several offers this year.  It looks like I’ve finally found the right house for me, which should close by the end of the month.  I’m comfortable that the offer I made was appropriate for the property and I received good terms on my loan, so even if prices fall further from here, I feel that 5 years from now I will still be quite happy with my decision.  To All Current Buyers: will you feel the same way?

NEW FEATURE: Foreclosure and Short Sale Information by City and MLS Area

I’m thrilled that in this updated report we have produced a breakdown of the active listings and sales at the local level.  While there are some communities in this list that have high lender mediated activity and have been heavily profiled by the news media, there are many, many, many other cities that are struggling to handle the burden of these listings in their marketplace as well.  This phenomenon is affecting the inner cities, the suburbs, and the exurbs, buy not all of them!  To look at this list is to see one community with 30% or 40% of sales being lender mediated while their neighboring cities might only be experiencing 10% lender mediated sales.

There are Three Kinds of Lies: Lies, Damned Lies, and Statistics

When producing this report, there’s one data set that just isn’t right, and we can’t prove why it is wrong.  See below:

All of us who are out in this market on a daily basis know that Traditional Seller condos have not gone up in value in the last two years but that’s what the Median Sales Price says.  I looked at Median Price Per Square Foot as well and there, Traditional Seller condos have fallen 5% in PPSF in the last two years.  This seems more plausible but still sounds a little light.  There’s a theorey that the condo market has seen far fewer lower-end condo conversions selling in the last couple years, helping hide the price declines, but that’s just a theorey.

In Conclusion

It would be easy to simply ignore the outlier in the data to make this report sound like it is perfect but that’s not fair to the users of the report.  This is an inexact science due to the fairly generic nature of the data we’re looking at.  When the data you have isn’t precise, neither can the analysis.  WIth that being said, I am quite certain the trends are accurate and that, more than anything else, is what we as an industry need to be looking at today.  There is good news in these numbers, and there is bad news too.  With this information I hope that consumers, agents, brokers and government officials will all become better educated on the current situation so that they can make the best decisions for their situation.

I welcome any questions and comments.

Here’s a summary:

• They send one kid to private school ($14,000/yr currently), the 2nd will be in kindergarten next year
• Mom stays at home
• Mom can start working 2 days a week next year when youngest goes to private school
• Their mortgage rate will adjust… in 2011
• Their house has no equity so they were thinking about doing a short sale to reduce their monthly expenses

While it isn’t 100% clear in the segment, it sounds like their original idea was to negotiate a short sale on the house to get rid of that expense.  Carmen explains that they have to live somewhere so that isn’t a good idea, but she misses the opportunity to make a great point.  A debt is a personal obligation and your inconvenience is not an excuse to walk away from that obligation.

These homeowners are not alone… I’ve heard many stories such as this.  People who took out loans and promised to pay them back with the terms provided are now deciding that if they cannot still live at the level of lifestyle they did before, that the best thing to do is screw the bank by doing a short sale or foreclosure.  While at the end of the segment the homeowners were discussing other options, I’m disappointed that Carmen didn’t take a second to give them and her viewers a reality check.

There are many people that simply have no other option than a short sale or foreclosure, but there are many more that do have an option and are simply using this as the least painful solution.  What this does to the rest of us is increase the costs of our future borrowing.  Banks have to make a profit over the long term, so if their profit is destroyed by people taking advantage of the situation, then they will simply increase their fees in the future to compensate or the federal government will come in and rescue them.  Either way it ends up costing the rest of us.

I wish there was a way to shame the people that are doing this as a matter of convenience while not shaming the people who do a short sale or go through foreclosure as a matter of necessity.  If your mortgage were still given by your local banker down the street, the guy you go to church with, see at the grocery store, and schedule play dates with your children, you wouldn’t see this nearly as much.  The fact that so many loans are made by faceless entities on the other side of the country or globe makes it a lot easier to take advantage of them and sleep with a clear conscience.

First Time Buyer Credit Analysis from the National Association of REALTORS

Fact Sheet for the HOPE for Homeowners Act from the Minnesota Homeownership Center

Fact Sheet for New Tax Incentives For First-Time Buyers from the Minnesota Homeownership Center

Jim: I thought you were of the opinion that banks could not bottom before housing bottomed. What changed? –Dana in Florida

Cramer says: “We saw quarters from Wells Fargo from US Bancorp.  We saw a quarter from JPMorgan.  We saw a quarter from Bank of America.  And those guys had already put charges in that made it so that when housing does bottom, they will be overreserved. That’s the ticket. That’s what Wachovia did. They anticipated a housing bottom and they’re going to be right.”

The Federal Housing Authority will put $300 billion to work to help homeowners with exotic loans and that will put a bottom in housing. “I was the first guy that said torch your house for the insurance money. I am now telling you that between now and the next six months you have to buy a house.”

1. Networks new listings in the office to the offfice’s agents… a couple years back I saw a new listing on the board from one of my coworkers, ran my buyer over to it, and signed an offer the next day.
2. Gives agents selling houses a little bit of an ego stroking, which helps them stay motivated and positive. It’s an easy way to give agents selling houses praise without saying a word.
3. Gives agents that are not selling homes encouragement to work harder because they see who is selling and they want to see their name up there too. Activity begets activity.
4. And my favorite, it helps us see what is happening in our office and our market.  This is real-time information that helps us gauge the activity in the marketplace in both volume but also segments.  This year has been marked by a much larger number of lower-priced houses selling.  This isn’t $5,000 - $10,000 price reductions but rather more houses for 1st time buyers and at prices we hadn’t seen in YEARS.  I personally have sold two homes (one a house, one a condo) under $70,000 this year… I hadn’t sold 2 at that price in the 5 years prior!

Our Listings and Sales Boards as of July 21, 2008:

While the writing is too small to read, the important thing to see here is the ratio between the two boards and the number on each.  We’ve seen about 1/4 of a board of new listings when normally we’d expect to see at least 1/2 of a board of new listings by this time in the month.  On the sales side, we’re already on to the 2nd board of the month, which we’ve only been able to reach 2-3 times this year, and we still have 1/3 of the month to go!

What this reinforces to me is that we’re seeing a strong shift in the market dynamics.  Buyers are buying in numbers almost identical to last year while new listings have fallen off much more.  This is exciting to me as it signals that we are closing in on fundamental market levels of supply and demand.  Of course this in no way signals that the Minneapolis/St. Paul housing market is at a price bottom or is going to quickly turn around but a turnaround cannot happen until certain things happen first, including the decrease of seller activity and a rebound of buyer activity, both of which now appear to be occurring.

Over the 4th of July activity slows a little as buyers and sellers spend time with family, friends, and fireworks.  There’s still a lot of activity out there though so the quiet will be short-lived.

Now that lenders, banks, retirement funds, investment bankers, average investors and everyone else have all been bitten by the fallout from this housecological disaster (like my new word?) we find ourselves trying to change our ways, reduce our foreclosure footprint, and move forward to a more sustainable-housing-market future.

The problem is that while there seem to be a large number of borrowers ready to purchase houses in recent months, it is now these same lending institutions hobbling our housing market.

It starts with short sales: lenders were willing to give 100’s of thousands of dollars to anyone with a heartbeat at a moment’s notice but now take MONTHS to tell you if they’re willing to accept a buyer’s offer on a defaulted borrower’s house… which more times than not is a far better return on their investment than letting it go through foreclosure.  The buyers willing to sit on the housing market sidelines for MONTHS while they wait for an answer can wind up the owners of an excellent property at a great price, but few buyers (or their agents) have the stomach for it.

On REO, aka lender owned, homes we see banks still take a week or more to respond to many offers, sometimes haggling over unrealistic sales prices, and so many pages of disclosures and addendums that do everything possible to leave the buyer with an “I just got violated” feeling when they receive the counteroffer from the lender.  Some of these bank addendums are so ridiculous that you roll your eyes the whole time you read them.

Many of these lenders do not provide listing agents enough incentive (i.e. money) or oversight for them to do a good job marketing the house (i.e. some interior photos, a new picture when January snow becomes July grass, room dimensions, a phone number with a real live human person, timely responses, an MLS description that says something other than “bank owned,” ACCURATE association fees and tax information, etc.).  When buyers have 100’s of houses come up in their search, it is easy to ignore the listings that show nothing, tell nothing and mean nothing.

Assuming that the house is not a short sale or a foreclosure, lenders are still finding ways to get in the way of a good borrower buying a good home.  This is the area of the market that I’ve become the most frustrated and cynical about recently.  Here are some of my favorite lender fouls lately:

• Mortgage Insurance Company Changes Downpayment Ratios and Doesn’t Tell the Mortgage Company
  A BIG mortgage insurance company decided to stop insuring loans with down payment ratios over 90%, but it said that the special state-supported first time home buyer programs (many at 3% down payment) were not affected.  A day before closing the mortgage company calls the mortgage insurance company to get the mortgage insurance certificate (which seems way too last minute for my taste) and is told: “sorry, get your borrower to come up with another $14,000 by tomorrow.”  Apparently they decided not to give special consideration to the first time buyer programs and never told the mortgage company.
• Underwriters Didn’t Look at File Until 24 Hours Prior to Closing
  A loan officer had everything in a week prior to closing and the underwriter waited till the day before closing to review the file and came back with a ton of conditions that took days to fix.  Heaven forbid that we know these things in time to fix them without a delay in closing.
• Loan Packages Showing up Almost a Day Late
  File gets underwritten in time and for some reason the loan package sits on the processor’s desk for a day instead of being sent out as it should have.
• A Continually Moving Target for Loan Programs
  It seems that nearly every day the loan programs are tightening up with more requirements, tighter guidelines, and more downpayment needs.  Most conventional loans were still 5% down until just recently… now almost everything is 10% down (due to the tightening mortgage insurance issues) and I think it is quite likely we might see that get even worse given the continuing high number of defaults on bad loans from years ago.  The only “sure thing” right now is good ‘ol FHA… 3% down now, 3% down tomorrow, 3% down hopefully forever.  While you can sneak by with a 0-down FHA loan, I believe FHA will try to quash those options again this year… which would be fine if FHA could come up with a 1.5% down payment option @ a higher mortgage insurance premium.

You take all of these obstacles in the way of today’s home buyer and it is a wonder that our housing market has been doing as well as it has as of late.  These home buyers start out excited and optimistic about their upcoming home purchase and end up exhausted and jilted about the process when it is all over.  This week I had two buyers almost ready to give up entirely and walk away from great houses at awesome prices because of all the problems with their financing.  These were great human beings and qualified buyers that were being beaten up over things that were not of their doing.  I think we’ve come back from the edge of the cliff at this point but it is tough to watch your buyer suffer while you stand powerless to effect any real change on the situation.

Don’t get me wrong, there are still a lot of homes selling right now and many transactions never see these problems, but in my conversations with agents all around town, it seems that almost every transaction takes 2x-3x more work and pays far less than it did 3 years ago.  Some may call this paying our penance for the “good times” of prior years or a needed cleansing of a bloated industry.  Either way, this current housing market’s impact is becoming more pronounced every day.

Until we can get lenders to get their act together and be timely and consistent for a change, I see the current troubles only prolonging a difficult housing market.

Got a story?  Feel free to add it via the comment feature below.

While I appreciate that the Star Tribune is trying to get more interactive with their stories, I believe they need better oversight of their “Featured Comment” tool. Kinda makes them look stupid in my opinion. Click the screen capture below to get the full-size view.

Minneapolis/St. Paul Real Estate Market Stats for May 2008 with commentary.

The “In Foreclosure/Lender Owned?” field:

• Initially will be an agent-only field (not available on Customer reports or on public Web sites through Broker Reciprocity).
• Options are: Yes, No and Not Disclosed
• For NorthstarMLS, “Foreclosure” is defined as the homeowner being served official notice of foreclosure by a governing entity (does not include notice of default from the lender when payments are late).
• If you select “Yes,” you certify that you have permission from the seller to disclose that the property is in foreclosure.
• This field is being added in response to the large increase in foreclosure status properties and agents’ desire to more easily search them when the seller has agreed to disclose it.  Our goal is to initially keep this information on the MLS simple and rely on agents to communicate with each other regarding the details.
• If you edit an existing listing after the implementation, you will be required to complete these fields before saving the listing.

While I applaud RMLS’s efforts on this issue, it seems to me that they’re missing much of the issue.  This new policy ignores the following:

Houses Listed as Short Sales on the MLS
These houses are listed at a price where they have negative equity at the closing table and the seller has no financial ability to pay the difference so the seller is asking their lender(s) to take less than they are owed (a “short pay” or “short sale”) as payment in full.  In many circumstances a house is listed on the MLS as a short sale far before official foreclosure proceedings have begun, so these situations are not covered by the new policy.  Since offers on houses in a short sale situation can take months to get a response back from the lender(s), it seems critical to me and my buyers that this information is clearly disclosed upfront… often my buyers have no time or no interest to wait around for 60-75 days for a 50/50 chance of a “yes.”  Since banks do not give a seller direction ahead of time on what price they’re willing to accept, the list price chosen by the seller and any offers submitted

Houses that are Lender Owned
Since the new RMLS policy takes into account only those houses that are in the foreclosure process, once the house is lender owned (also known as bank owned or REO), there would be no disclosure of it in this new field.  While responses from sellers of REOs are quicker, they can still take a week and come with 10-15 pages of “AS-IS” addendums, basically eliminating most disclosures and protections for the buyer and overriding most of the contract language that is used on the standard purchase agreement forms in Minnesota.  As such, some buyers have no interest in these properties and many others specifically want these properties since they can typically be purchased for substantial discounts to market value.

Considering that a little more than 1 in 4 of the sales occurring in the Twin Cities today is a foreclosure or short sale, it seems crucial to me that we have the best information possible on these properties and that they are easily searchable and reportable.  The current policy that the RMLS is implementing is akin to have a way to search for “one story” homes but not “two story” or “split level” homes.

Instead of the current policy, here’s my suggested solution:

Two fields on the RMLS:

Short Sale Subject to Lender Approval (with options of Prior to Sheriff’s Sale and Post Sheriff’s Sale)
These properties require the approval of the purchase agreement by the homeowner (easy to get) AND the lender (not as easy to get).

Lender Owned
These properties are repossessed by the lender via foreclosure or deed-in-lieu of foreclosure and the lender/bank is the only decision maker.

This would address all the properties in some stage of lender mediation and would make disclosures clearer to buyers and market data for all users of the MLS that much more reliable.

I’d love to hear thoughts from the public… please leave comments below.

http://globaleconomicanalysis.blogspot.com/2008/04/closer-look-at-arms-reset-problem.html

http://www.flickr.com/photos/27215653@N05/sets/72157605363818571/

Falling Inventory
Supply & Demand 101: if demand has fallen sharply, supply must also fall sharply to keep prices in line.  Supply in the Twin Cities is still near record highs, so it must come down significantly.  The trend is certainly going the right direction (inventory is falling +/- 200 listings per week vs. last year) but this improvement is still minor and early at this point.
Trend: Positive

Falling New Listings
So far this year we’ve seen 9.5% fewer new listings come on the market versus the same time period last year, which has tempered total active listings this year.
Trend: Positive

Increasing Sales
The supply problem can also be resolved by more buyers coming in to the market.  As of May 1, we’re still 12.6% behind last year in the number of Pending Sales year to date, so this indicator still needs improvement.
Trend: Negative

Falling Days on Market
Ultimately we will see the market times of listings fall, but in April it still took on average 154 days to sell a home in the Twin Cities… an increase of 16.7%.
Trend: Negative

Flat Median Sales Price
When we see the sales prices year-over-year flatten, it will show we’ve reached a price stability level and encourage more buyers back into the market.  In April our median sales price was down 7.9% from a year ago, so we’re not there yet.
Trend: Negative

Fewer Foreclosure and Short Sale Listings
While it is clear that foreclosures and short sales are different animals from Traditional Sellers, they do have a strong influence on the housing market direction and we need to see them reduce in both number and market share before we can see a strong turnaround.  These listings are still coming on strong and while their number and market share hasn’t changed much in recent months, they still account for slightly more than 1 in 4 sales in the Twin Cities.
Trend: Negative

Low Mortgage Rates
Mortgage rates still continue to bounce between approximately 5.75% - 6.25% on a 30yr fixed rate, which is still phenomenally low.  As long as these rates stay below 7%, buyers will have strong buying power in this market. If rates climb above 7%, buyers will pull back hard.
Trend: Positive

More Flexible Financing Options
I’m not talking about the return of subprime, I’m only talking about more options for borrowers with little/no down payment.  Fannie Mae reversed their position on “declining markets,” FHA is looking at lower down payment requirements, more risk-based pricing options coming back… while it isn’t going to be the world of free money like it was before, financing options seem to be improving.
Trend: Positive

Increased Market Optimism
Markets are often self-fulfilling prophecies… while the general public (and the media) are still down on the real estate market, the market will continue to perform badly.  This is something that only time and continued good news can cure.
Trend: Negative

The Return of the Professional Investor
I’m seeing and hearing a lot more about investors lately… more so than I have for at least a year or two. The Professional Investor will go out and cherry-pick the best inventory even if a market bottom hasn’t been called… they know a good deal when they see one.
Trend: Positive

What does this mean? There’s approximately 600 fewer homes for sale today than there was a year ago and if c