Pat Paulson, Realtor Minneapolis, Minnesota

The question is best answered with an example. A hypothetical buyer looks at 24 homes in a strong buyers market.* The market includes eight months of inventory, meaning three of the 24 homes will sell this month. Of the 24 homes, six are of good quality and condition, six are poor quality, and 12 have potential. Two of the six good ones and one of the 12 potentials are priced very competitively and are the three that will sell.

Our buyer recognizes the three as the best available opportunities and decides to offer on one. The other buyers looking in our market also choose these three homes to focus and offer on. The three properties attract multiple offers, and the others are ignored. As a result, the three sell at or above their list (asking) price.

This is a fairly typical scenario. Buyers of any product or service seek quality and value. In the following month, some new homes will come on the market and some will reduce their prices. The three perceived by the market as the best quality and value will sell. There are exceptions to the rule and some buyers will occasionally choose to offer on one of the other properties and buy at a discount. So although we can sometimes buy homes that we don't want at a discount, we usually have to make a strong offer and pay a good price for the ones we want. Even within a buyers market, it's a sellers market for some homes.

*It is generally agreed that a balanced real estate market includes about four to six months of inventory of homes for sale. A smaller inventory would be considered a sellers market and a larger inventory would be a buyers market.

Pat Paulson,

May 8, 2010

Discussion about real estate markets usually tends to focus on prices. And the Twin Cities market has had encouraging price news this year. After three and one half years of declining prices, we've now had three consecutive months of increases in the median price compared to a year ago. But price trends usually follow supply/demand trends, and while most of us have been talking about prices, an important supply development has taken place.

An important factor leading to the three years of price declines was a multi-year build up in supply of houses for sale. The supply peaked at an unhealthy level in the spring of 2008 and then started a steady decline. Price declines followed and hit their lowest point of the cycle in early 2009. But as supply declined and demand increased during 2009, price declines became smaller, until this year and the stabilization that we now see.

The new development is that in three short months, the two year trend of declining supply has stopped. We now are at a higher supply of houses for sale than a year ago. This is a predictable event, since sellers had been discouraged by poor market conditions and have now been given new hope by the positive price news. New listings are coming on the market at the highest rate since 2007. The increased activity comes from traditional sellers, as opposed to bank owned foreclosures, and is most noticeable in the middle price ranges, from about $120,000 to $250,000.

Markets always change and adapt, and there exists a pent-up desire among many owners to sell, along with many more foreclosures to work through the system. For these reasons, our housing supply is not likely to fall to levels that will put much upward pressure on prices. Now that we've reached a reasonable supply/demand balance and price stability, we may not have significant market movement, up or down, for a while. We will be keeping a close eye on supply/demand trends to see how sellers and buyers respond to the upcoming expiration of the federal homebuyer tax credit.

So the Twin Cities real estate market has finally posted a year over year price increase for the first time in 41 months this January. Certainly good news but let’s not break out the champagne yet. The recovery/rebound…whatever you want to call it, is a long process and this is just another sign that we are going in the right direction as opposed to a destination we’ve been seeking.

The price increase means that the median price of this January’s sales was higher than last January. Key point: this year’s sales are different houses than last year’s sales. 2009 started with a huge number of lender owned, foreclosed properties on the market. At bargain basement prices, they sold in huge numbers, reducing the inventory by 62% in one year. With all the demand for and sales of lender owned properties, 2009 was a year with a large increase in sales and a large decrease in median or average price. Median and average prices are not entirely an indicator of changes in value, but also indicative of what is selling.

January 2010 included a large increase in sales of (higher priced) traditional homes and short sales, and a huge decrease in sales of (lower priced) lender owned properties. So while much attention is given to our price increase, it really has more to do with what is selling rather than an actual increase in value.

That said, I find other data in the January numbers to be more revealing of where we are in the process. The large increase in traditional pending sales (28%), and pending short sales (115%), is a very positive sign that buyers are moving into those markets. This is a much needed step in the right direction. But with the median price of traditional sales down 8% from last year, it is clear that we have a ways to go.

A surprise to me as I have taken a larger leadership role in our local Realtor association is that I can get a message out without saying anything. The following quote was written for me: “A lot of progress has been made in the last year,” said MAAR President-Elect, Pat Paulson. “But the recovery

process still isn’t over. There are going to be some more bumps in the road.”

I approved the quote because I agreed with it and it sounded like something I would say. We have a fantastic staff at MAAR, with great skill at not only presenting the data in a meaningful and pleasing way, but they can actually intuit the way that I would describe it. I am impressed.

But if I were to use one word to describe the market in 2010, it would not be recovering, or rebounding. Those words imply that we are recovering something lost, or rebounding back to a place, perhaps the price peak of the last cycle – in 2005 or 2006. We are not heading to a market like that in 2010, or anytime soon. My word for 2010 is stabilizing. Markets always tend towards balance, and ours has been out of balance, swinging back and forth for some time. Some of the 2009 trends will carry over, like low supply and high demand in the lower price ranges. But the January data and other trends indicate to me that the market is stabilizing. There will be more bumps in the road, but we are moving along in the right direction.

A local non profit used the City of Minneapolis ‘First Look' program to purchase one of my foreclosure listings in June. They literally snatched it away from a couple that had made a full price offer on this home in a nice South Minneapolis neighborhood. After letting it grow for six weeks they finally cut the foot tall grass on the vacant property.

First Look is part of the Minneapolis Foreclosure Recovery Plan, the component used to "pursue aggressive property acquisition". The plan is for the city to purchase for itself and it's Coordinated Development Partners nearly one third (over nine hundred properties per year), of the foreclosures in the city. They have negotiated agreements with the major banks to have a ‘First Look' opportunity to purchase foreclosed properties before they are available to the public market.

As the foreclosure crisis unfolded city officials prepared their response. There were thousands of vacant foreclosed homes creating problems for neighborhoods. But markets can change faster than government can create and implement plans. And the lesson that markets have forever taught yet we never seem to learn is: "Markets always seek balance and thus, will correct imbalances if left alone".

As the media has continued to focus their reporting on next to meaningless price data, the important Supply/Demand Ratio (SDR) has been shrinking. And while the traditional market and median to upper price ranges have continued to be slow, the foreclosure market and lower price ranges are booming. New data fields are now used widely enough to provide reliable SDR data on foreclosures. As of July 27, 2009, the SDR for foreclosures in Minneapolis was a remarkably low 1.41 based on closed sales over the previous month. A balanced SDR is considered somewhere between 4 and 6. Assuming an average listing period of four to six months, there are currently three or more buyers for every foreclosure in the city. We don't need help selling these foreclosures!

The bright side of the foreclosure crisis is that prices have come down so low that there currently exists a window of opportunity for home buyers and investors. Many of the properties are in good condition or have the potential to be good quality homes. The City's intervention threatens to shut this window of opportunity.

Minneapolis and the non profits have a long history of positive influence in our housing markets. Other components of the foreclosure plan are beneficial and ‘First Look' can be, if used sparingly and selectively. The good people of this city wish to take advantage of today's opportunities. Here's a call to the city and the non profits to keep your hands off the good deals!

As we know, the Supply Demand Ratio (SDR), is perhaps the most important leading indicator for predicting future price movement in real estate markets. Sometimes, significant other factors such as foreclosures moving through the market or lack of quality Jumbo financing, can overshadow or diminish the SDR effect, but that's another story for another day.

Unfortunately, there is no formula to determine the exact influence the SDR will have on prices. We know that if it's too low, prices will go up; too high, they will drop; and balanced, prices will be stable. Opinions vary, but most observers consider a range of 4 to 6 months of inventory to be a balanced SDR. We also know that what constitutes balance, or high or low, and how it can affect prices, can change depending on area, price range or time.

Our Twin Cities market can be divided into many submarkets that are vastly different. There are areas with high numbers of lender mediated (foreclosure and short sales) properties, such as Brooklyn Center, representing 67.9% of its inventory. Other areas have low levels, such as Edina, with 5.4%.*

One recent trend has been the rapid change to a sellers market in the lower price ranges. An analysis of SDR's demonstrates this.

A selection of high foreclosure impacted areas, Brooklyn Center, Brooklyn Park, North Minneapolis, Powderhorn and Camden reveals the activity in the low price range market. The SDR in these areas for properties listed at $80,000 or below is an unusually low 1.35, based on Pendings and Solds with an off market date in the last month (March 28 - April 27, 2009). For properties in these areas with a list price above $150,000, the SDR is 5.81.

A selection of low foreclosure impacted areas, Edina, Eden Prairie, Minnetonka, and Plymouth, reveals similar differences based on price range. In these areas, the SDR for properties listed at $250,000 or below is just 2.55. For properties listed at $400,000 or higher the SDR sits at 9.95.

What this tells us beyond the fact that there are currently distinctly different markets is a matter of interpretation. It appears clear that the bottom of the market will be rising, but we are nowhere near any upward price pressure on the middle or upper price ranges. It also appears that the downward correction has overshot the target in the high impact areas and we'll likely see prices moving towards more balance relative to other markets in the future.

As always, money flows towards quality and value, and future movement in the markets will reflect this.

* Data from www.mplsrealtor.com, Lender Mediated Report, authored by Jeff Allen and Aaron Dickinson.