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Local real estate outlook: Lots of trouble, but a few positive signs too

MAAR CEO Mark Allen
MAAR CEO Mark Allen

At the Minneapolis Area Association of Realtors, the watchwords of the hour seem to be “measured optimism.” MAAR and groups like it are hardly disinterested observers of the local residential real estate scene, we should all remember; they are cheerleaders and diplomats for the people who make their living selling homes. But they are also the closest observers of movements in the market, and their data sets can be invaluable.

Yesterday I spoke to Mark Allen, the CEO at MAAR, about the state of the local market; the transcript follows below. First, though, let’s take a brief spin through some of the fourth quarter 2008 foreclosure and short sale figures in MAAR’s sortable online database

10 Twin Cities areas where foreclosure and short sale listings make up the greatest share of homes for sale. Since these properties take a much bigger price hit than conventional home sales, this is in part an index of downward pricing pressures in those areas as a whole: 1) Brooklyn Center, 65.9 percent; 2) Minneapolis North, 64.9; 3) St. Paul Central, 59.1; 4) St. Paul Phalen, 58.8; 5) Big Lake, 56.8; 6) Minneapolis Camden; 56.3; 7) St. Paul Hillcrest, Hazel Park, Dayton’s Bluff 56.0; 8) Spring Lake Park, 54.1; 9) Minneapolis Powderhorn 53.9; 10) Brooklyn Park 52.7.

10 local areas where the prices of foreclosed or short sale properties saw the biggest year-over-year drop. This offers a graphic reminder of how much poorer the Twin Cities’s poorest areas are getting as a result of this crisis: 1) Minneapolis Phillips, -52.6 percent; 2) St. Paul Central, -44.9; 3) Minneapolis Camden, -43.9; 4) St. Paul Hillcrest, Hazel Park, Dayton’s Bluff, -42.7; 5) St. Paul Riverview/Cherokee -41.0; 6) Minneapolis Powderhorn, -37.9; 7) Hopkins, -36.7; 8) Minneapolis North, -36.6; 9) St. Paul St. Anthony/Midway, -35.0; 10) Northeast Anoka County, -33.0. 

10 local areas with the biggest backlog of “traditional” (i.e., not foreclosed or otherwise bank-involved) sale listings. Think of this, in part, as a testament to how unattractive and overbuilt the far-flung suburbs have become, and potentially a harbinger of foreclosure increases to come: 1) Lakeland/Afton/Denmark, 23.7 months’ supply; 2) Hennepin Northwest, 21.5; 3) Ham Lake, 21.3; 4) Southern Chisago County, 18.8; 5) Northwestern Anoka County, 18.6; 6) Lake Minnetonka area, 18.1; 7) Prior Lake, 17.0; 8) Northfield, 16.9; 9) Northeast Anoka County, 16.6; 10) Stillwater/Bayport, 16.3.

And check out the implosion going on in Brooklyn Park: It’s got more lender-mediated properties on the market than any other pocket of the Twin Cities metro, at 419. That’s nearly 53 percent of the housing on the market there. So it’s hardly surprising that the city has also seen the 14th largest drop in prices for traditional sales among the 100 local statistical areas in the MAAR database (at -12.6 percent). That’s an ugly picture, and it’s hard to see how it gets anything but uglier in 2009.

At the same time, as I mentioned above, not all the signs in the local market are unambiguously bad. Here’s what Mark Allen had to say when we spoke on the phone Thursday afternoon. 

SP: There were a handful of positive signs in the local market in the fourth quarter. Tell me about those, and what you make of them.

Mark Allen: I would even say they started in the third quarter. One was a decline in inventory activity, specifically in two areas–one, a decline in new listing activity, and two, a decline in total inventory. Quite often those two things will occur at the same time. Which is an important sign in a market that you’re hoping is going to move toward recovery. We’ve seen that trend continuing now for several months in a row, and we have every expectation that it will continue this year.

As we moved into the second half, we started to see increases in buyer activity on a year-over-year comparison. That increase has continued into this year as well so far. The numbers are in the range of a 10 percent increase compared to the year prior. That shows that there are at least some buyers coming back into the marketplace. It’s also part of what’s causing listing inventory to decline. It’s declining, one, because there are more buyers out there, but even more so because there are people in a variety of categories who are choosing not to put houses on the market right now. One is the construction industry, which was producing 19,000 units a year four or five years ago and was down this past year to levels in the 4,000 range.

SP: There was also the first quarterly decline since 2003 in the number of lender-mediated properties coming on the market, right?

Allen: Correct. That’s positive, but it’s too early to tell whether that’s a trend or just a brief hiccup in what’s going on. We’re very confident that we will see lender-mediated activity–that includes bank-owned properties, foreclosed properties, and short-sale properties–we expect that’s going to be an active part of the marketplace for the next two to three years. But we also expect that sometime this year or next year, we’ll have moved to the downside of that hump. And then it will gradually dissipate until we get back to a more normal market.

SP: Do you have any notion of the volume of Alt-A mortgage resets that will be coming into play here in 2009?

Allen: It’s a great question and we’ve been asking it as well. We’ve seen some information, but we’ve not been able to verify that information to our satisfaction. From what we’ve seen, we think we’re just barely over the hump in terms of subprime mortgage resets. Minnesota was one of the leading states in terms of using subprime mortgage products in the first half of this decade.

Based on what we’ve seen, Minnesota–while it was active in the area of Alt-A product–was not active to the same degree.

SP: Do you have any notion of Alt-A volume in the Twin Cities area?

Allen: Not at all. I wish I did. We’re trying to find that out, but we haven’t found a good source yet. If it’s true that there was less activity here with the Alt-A product, that’s part of the reason we might see lender-mediated activity dissipate. Because those mortgages are now just moving into their peak of reset activity. I think they’ll be peaking next year, if I remember correctly.

SP: As you look back on 2008, what were the most troubled areas in the Twin Cities?

Allen: Certainly the lender-mediated has been a real struggle, because, one, people are being moved out of their homes and that’s always a tragedy. Two, because it’s putting more inventory in a market that’s already oversupplied. It has an impact not just on that house and that family, but neighborhoods and communities. Those areas that have had a higher level of foreclosures and short sales and what-not have been challenged by what it’s doing: boarded-up homes, declining property values, the neighbors who have to live with that, and the cities that have to try to deal with the problems it creates in their budgets.

SP: This problem has radiated outward to a large extent. There were problems in the core cities that then moved to suburban areas like Richfield, Brooklyn Center, east Bloomington, and is now hitting the third- and fourth-ring suburbs.

Allen: Some of that, especially when you get into fourth-ring or exurban areas–they were lumped into the early part of that picture, and it was due to over-production in the construction industry. There were neighborhoods of houses that were sitting, and not enough buyers to start to absorb that. That’s where some of the mortgage fraud and construction fraud were taking place as well, unfortunately. That left some communities with a large number of houses that wound up in foreclosure.

SP: How big a part of the local mortgage crisis will fraud prove to be?

Allen: I would say that market forces have solved a lot of that. The investors are not making the money available that was being used for that purpose. And the processes that buyers have to go through have been tightened up considerably. But the group of people that’s willing to commit fraud is a very creative group, and there’s going to be new methods and new forms of committing the same old crimes. There’s a big news story that came out today about a group that was selling houses it didn’t own to an unsuspecting public, especially in immigrant communities.

That problem’s out there, but it’s a tremendously small segment of the market. Its impact on the market is certainly much less than the impact of the distressed properties on the market. That said, where it is happening it’s certainly a tragedy for the people who are touched by it. As I’m sure you’re aware, there are a few neighborhoods in a couple of exurban areas that had a significant [amount] of that in a small geographic area, and that’s created a real tragedy for those areas.

 

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