Somebody's Got To Say It ...

Residential Activity is significantly down

Many groups and organizations try to place a positive "spin" on information in an effort to make everyone feel good. This is a new version of a practice your parents told you when you where a child - if you don't have anything good to say, don't say anything at all. By telling you everything is fine, they hope it will lift your spirits and encourage consumers that everything is just fine.

Unfortunately, telling your client a lie is not in their best interest, nor in yours. At the Minnesota REALTORS® we take our role as a fiduciary seriously. We represent REALTORS® in the State of Minnesota and they deserve to know what is going on and to the best of our ability why - so you can intelligently discuss the marketplace with your clients so they can make take appropriate action.

We have too much supply and not enough demand.

The number of listings (inventory) is substantially higher than it was last year or over the past five years. That means home buyers have more choices, more price points and less incentive that they will miss out on that perfect property. Some pockets areas of the state are doing fine, but these are mostly specialty properties versus the generalized marketplace.

Prices are flattening, and ever-so-slightly falling. This is as NAR Chief Economist David Learah states "Air slowly leaving the Housing-Bubble." That is not a dramatic decrease in home values - but a re-orientation after a five-year housing boom. This is caused by a number of reasons with three-primary ones: higher interest rates/energy prices, foreclosures/investors and the pool of home buyers are beginning to dry up.

Interest rates are higher today and expected to increase over the next 6-10 months. That means home buyers are losing purchasing power in the market place. It will take buyers a while to adjust to their loss of purchasing power. Because of higher interest rates, consumers will not be able to afford the same home they could afford 6-months ago.

Energy prices, especially gasoline, is causing a number of financially stretched families to reconsider home purchasing in areas that require longer drive times. These consumers who were looking at a brand new home in Ruralland, MN may not be motivated to purchase an older home in Metroland, MN. As a consumer they are disappointed that they are not able to purchase what they desired so strongly last fall. Many buyers who are in the current marketplace started looking via home shows and the Internet last October. They often have friends and business associates that have purchased, and now they find themselves left out.

Where are the buyers? Many have already purchased. In the last seven-years residential real estate sales have exploded. Low interest rates, solid appreciation and easy credit terms allowed a significant number of purchasers to buy - and often at an earlier point in their life than previous generations.

Generation X is significantly smaller than the Baby Boom Generation, which means at some point in time sellers will out number buyers. Without solid in-migration, Minnesota does not have enough natural birth rate increase to supply the number of buyers necessary to continue the red hot housing market.

Foreclosure/investor owned concerns are depressing prices. As Minnesota's foreclosure rate increases, that means banks who are motivated by a quick sale dominate the housing inventory. Lenders have a different motivation from home sellers who are looking to maximize profits. Lenders who own foreclosed properties are motivated by the quick sale and minimizing losses. That means a home seller is competing against the lender when trying to attract a buyer. Investors have a similar motivation in that they need to cut their losses and reinvest in an asset that will turn a profit.

Sellers who are motivated to sell will have success if they adjust their list prices down to attract consumers. This means doing more and more marketplace research for the seller so they can understand what is happening to the residential marketplace, how those changes will affect them and why they need to take action as quickly as possible if they are motivated to move. The key is how the buyer perceives the marketplace and the property price your seller is asking.

Interest rate hikes could push mortgage rates to 7.5 or 8 percent by late Summer. Energy prices are not likely to fall and may continue to increase especially if the US experiences an attack or the nuclear situation in Iran causes them to reduce oil production/sales significantly. Higher energy costs means higher transportation costs for all goods and services - which causes inflation and ever increasing interest rates.

Minnesota REALTORS® need to explain what is happening, why it is happening and how a seller can benefit from the marketplace. Sellers need to focus on the entire marketplace, not just the price they receive for their current home. Many properties will need price adjustments, which mean the sellers will likely be purchasing a home for less than they had anticipated originally. If they buy for less, they can afford to sell for less.

We hope this article will help you explain to your clients why the marketplace has changed and will continue to change as we move forward. If a seller needs to sell, price and competition are two largest factors they need to consider. Luckily, REALTORS® are in the best position to help sellers understand the changes.