Minneapolis Real Estate Blog

While newspaper headlines continue to shout about the falling sky in the real estate market, there is a bright spot of hope for those who bought at the high end of the cycle. The way to capitalize on the current price deflation is to have one’s property taxes reassessed to more accurately reflect the current housing prices.

For example, if one bought a house for $400,000 in 2006 and similar properties are selling for $325,000 in your neighborhood now, contacting your county tax assessors office and having your tax assessed value redetermined makes sense.

 Usually the assessed value is only recalculated on the sale of the home and then increased according to the % scale being used by the county for that assessment period, which is set by law by the Minnesota State Legislature.

 By doing a quick search of homes in your neighborhood at our website, you can find out the comparable prices in your neighborhood and see if a reassessment makes sense.

Unfortunately for those of us with rather old houses or poorly built foundations, yesterday was the day that the snow melt seeped into our basements. My house was build in 1908 and consequently the foundation has a few defects. Hence, this morning I woke up to a basement filled with water which had soaked into the carpets. I am running dehumidifiers and fans to deal with the water, but ultimately I am going to have to invest in some water abatement or basement water fixes.

While there are many companies promising basement water fixes, a simple tile job with a few sump pumps is not enough. What I really need is a full blown water removal and humidity solution to ensure that mold doesn’t overtake the crevices in the concrete and the walls.

During the real estate boom of the last few years appraisers have been under pressure from realtors and home owners to inflate the prices of homes. Seller’s agents and home owners obviously wanted a higher price so that they could make more money. Banks were largely silent and complicit in this home price inflation because they were making money just writing the loans. But, boy how things have changed.

Because banks have been bitten recently with balance sheets full of junk loans written on inflated properties, there is now pressure on appraisers to deflate the prices of homes. Of course, banks only want to protect themselves from the current situation in which homeowners find themselves owing more on their house than it is currently estimated to be worth. These loan holders comprise the large majority of people just abandoning their homes to foreclosure.

The pressure to deflate homes and protect the banks is so strong that one major bank has downgraded the entire State of California for home loans.

 For anyone considering buying a house now, the way to avoid this situation is to buy quality. In real estate quality is always and only defined by one thing– location. But, what about the house itself. Well, in the short term the house itself may matter, but in the long term the only thing that matters in real estate is the property itself, the location, location, location.

Minneapolis and St. Paul real estate maintained their market value pretty well during the recent downturn because of the strength of the Minnesota economy. Now with the recent 1% reduction in the Fed Funds Rate, real estate in the Twin Cities is poised to make a complete recovery.

Single family foreclosure rates are up in the Twin Cities, but that is to be expected after the excesses of the Subprime lending boom. To quote Alan Greenspan, “irrational exhuberance” can’t last for ever. So now we are left with financially healthy buyers and sellers in a more rationalized market where values are more closely to tied to actual attributes of the underlying asset, rather than prices being artificially inflated by an unsustainable increase in demand.

Ultimately Minneapolis real estate benefits from this pruning of excess demand, because rationalized asset values benefit long term investors and traditional home owners and penalize flippers and others looking to make a quick buck in real estate.

The easiest way to analyze any market is to look at supply and demand. Right now in the Twin Cities, supplies are certainly higher than they were last year at this time. Sept 2006 supply/demand ratio was around 8.3, this year it was 12.2 in September. The good news is that projected November ratio is 11.2, meaning that sales are starting to clear out some of the backed up inventory.

Falling mortgage rates are another strong sign for Twin Cities Real Estate. With cheaper money available to finance low risk buyers and the end of the artificial inflation of the market by cheap subprime loans, market balance arrives naturally.

The Supply-Demand Ratio is calculated by comparing the number of homes for sale at the beginning of each month with the number of total pending sales for the month. The higher the Supply-Demand Ratio, the more supply there is relative to demand.

The truth about the current housing market  remains more complicated than a  30 second evening news soundbite can convey. While there are some  weak spots  created by the subprime mess, the overall picture is far from gloomy. Consider some of the facts presented recently by the NAR, the National Association of Realtors.

The National Association of Realtors reports that widening credit availability will help home sales rebound. Foreclosures have peaked so housing appears poised to come back.Consumers are becoming more savvy to the long term costs of a mortgage and as such are returning to traditional loans, which will help the recovery. Lawrence Yun, NAR senior economist, says “Conforming loans are abundantly available at historically favorable mortgage rates. Pricing has steadily improved on jumbo mortgages since the August credit crunch, and FHA loans are replacing subprime mortgages,”This past week the Mortgage Bankers Association reported mortgage loan activity increasing 2.4 percent over the week before.Treasury Secretary Henry Paulson spearheaded the formation of a mortgage industry coalition composed of the top 10 mortgage lenders to help consumers with at risk loans. The consortium has about 60 percent market share and whatever form the help takes, such as restructuring, debt forgiveness, interest rate discounts—any little bit should help take the bite out of the current downturn.

Granted, the consortium of lenders is not doing this out of charity, by bolstering the real estate market they are protecting their existing portfolio of loans from massive depreciation. A sector wide decrease in housing prices would hurt all lenders, not just sub-primes. “Although sales are off from an unsustainable peak in 2005, there is a historically high level of home sales taking place this year — a lot of people are, in fact, buying homes,” says Yun of the NAR. “One out of 16 American households is buying a home this year. The speculative excesses have been removed from the market and home sales are returning to fundamentally healthy levels, while prices remain near record highs, reflecting favorable mortgage rates and positive job gains.” NAR forecasts:

• the 30-year fixed-rate mortgage is expected to average 6.4 percent for the next two quarters and reach the 6.6 percent range in the second half 2008.
• growth in the U.S. gross domestic product (GDP) is estimated at 2.0 percent this year, below the 2.9 percent growth rate in 2006; GDP is likely to grow 2.7 percent in 2008.
• the unemployment rate is forecast to average 4.6 percent this year, unchanged from 2006.
• the median new-home price should drop 2.1 percent to $241,400 this year, and then increase 1.0 percent in 2008 to $243,900.
• that existing-home prices will probably slip 1.3 percent to a median of $219,000 in 2007 before rising 1.3 percent next year to $221,800.

Economy wide inflationi is a concern, reports the NAR.  Currently the Consumer Price Index, is expected to be 2.8 percent in 2007, compared with 3.2 percent last year. Inflation-adjusted disposable personal income will probably increase 3.6 percent in 2007, up from 3.1 percent last year, says NAR.  However, concerns about inflation have been hounding the US economy for at least the last 15 years, and have never materialized. Many economists were taught that inflation was a huge risk, but with increasing globalization, specialization and trade, inflation has not materialized, even in the face of record high oil prices.

The year 2007 will be the fifth highest ever for existing-home sales if the trend continues to total 5.78 million in 2007 and then rise to 6.12 million in 2008, which is still down from 6.48 million in 2006.

The bottom line is that sound home buying decisions with traditionally structured loans will continue to be the best way for Americans to save and invest. Peaks and valleys come and go, and some people got burned in this last boom, but most Americans who bought a place to live, rather than a lottery ticket mortgage, will earn a substantial return on their investment while continuing to benefit from the interest rate write off on their taxes.

It appears that stiffer credit requirements and increased down payments are finally percolating down to the new construction business. August home starts were down almost 9% year over year and reflect the larger trend towards a cooling in the housing market.   Twin Cities existing home sales are still strong, but the trend appears to be nationwide.

The robust economy that Minnesota characterized by increasing industrial output, financial sector expansion, dynamic retail sector driven by leaders like Best Buy and Target and overall healthy economic expansion is providing a great cushion for owners of homes in Minnesota. Minneapolis and St Paul are still showing strong demand for homes as people continue to relocate to the state and gravitate towards our high standard of living.

 Minnesota has always been a leader in education and our strong public school system driven by performance standards is an attractive benefit for families considering relocating.  Minnesota environmental protections also protect our high standard of living and attract highly-skilled educated workers to our state.

In an effort to preserve property values and retain the kid friendly character of their neighborhoods, hundreds of people have petitioned the St Paul City Council over the last year to limit sober houses. Residents of certain areas of St Paul, such as Merriam Park, have complained that the density of facilities that house recovering alcoholics and addicts has gotten to be a public nuisance.

New sober houses will be prohibited in St. Paul, unless approved by the City Council, under a resolution that passed unanimously Wednesday.

“This issue has evolved in the last few years, and all I’m trying to do is to see what we can do,” said Council Member Jay Benanav. By some estimates,  St. Paul has more than 50 sober houses, private residences set up for people recovering from alcohol or chemical dependence.

Most cities, including St. Paul, limit the number of unrelated people living in a residence, but sober houses are excluded from such restrictions, in accordance with the 1988 Amendments to the Federal Fair Housing Act.

There are sure to be legal challenges to the new City Council Regulations, because Alcoholics and Addicts are protected from discrimination by the Americans with Disabilities Act. Numerous communities around the country have tried to regulate so called sober houses, but each time the regulations have been struck down by the courts as unconsitutional.

I helped a couple find an investment property in

NE Minneapolis.  We found a duplex that needed little to no maintenance.  They calculated what they would need to cover the rents on both sides to cover the mortgage payments and utilities.  They took out financing at 100%, found renters and moved forward.  It all seemed to work out well.  What they did not think about is the late rent payments, turnover of tenants, things getting broken and the upkeep of the grounds.  If you want to be a landlord, there is a lot of work to it and your payoff will not come in the first couple of years.  Rental properties are LONG term investments.  They now want me to list their rental property.

Kellie Clifford

Over the past couple of weeks I was working with a woman who was active in the Army; she was approved for a VA loan through Wells Fargo.  We made an offer on a loft downtown, two weeks before closing Wells Fargo notified us saying the building was not VA approved…  It would have cost the owner of the building quite a bit of money to get the building approved by the VA and it would have taken up to 3 to 4 months for the process.  The woman did qualify for other loan programs but the interest rates were much higher, so she couldn’t make the payments.  We ended up canceling the Agreement on the non-VA approved building and finding her a great new town home that was VA approved.

VA loans are a great vehicle for many people who can’t get traditional loans and can benefit from the lower down payment requirements, however sometimes there are restrictions such as the above case that come with the VA loan.

Kellie Clifford