MAAR’s Allen: Case-Shiller drop reflects glut of distress sales

MAAR CEO Mark Allen
MAAR CEO Mark Allen

This morning I talked to Mark Allen, the CEO of the Minneapolis Area Association of Realtors, about those abysmal Case-Shiller numbers for March that I wrote about yesterday–a 6.1 percent single-month drop in local sale prices that set a record not only for the Minneapolis/St. Paul metro but for all markets in the 20-city CS index in its 21-year history.

According to Allen, “The primary reason is the impact of distressed, lender-mediated properties on the marketplace. It’s got a lot to do with a shift in where the buyers are. In April, the most recent month we’ve got numbers for, the activity in the under $200,000 range was much higher than it had been a year earlier, and over $200,000 it was much lower.

“Right now,” he continues, “we really have two marketplaces going on. There are the lender-mediated sales”–foreclosures as well as short sales in which the lender agrees to take an equity hit–“and in April, that was 46 percent of the business being done. Then there are the traditional sellers, which is a very different marketplace.” April MAAR figures show lender-mediated sales at a median price of $120,000, down 21.5 percent from a year earlier, while the median for traditional sales was $205,000, down a comparatively modest 8.5 percent from the previous year.

Allen thinks the volume of lender-mediated sales may be peaking now, though he says it’s also possible the peak is still as much as a year away. Despite that, he says he believes the local residential market overall has reached a floor and started to stabilize. As evidence, Allen cites the consistency of monthly median prices since the start of 2009: $155,000 in January, $150,000 in February, $154,000 in March, and $153,000 in April. “The question,” he adds, “is when will they start to rise again? It’s going to be very slow and very gradual when it happens, but it should begin late this year or early next year.”

A longtime local realtor who wishes to be anonymous concurs with Allen about the glut of distress sales driving the Case-Shiller numbers: “As far as I can tell, the reason for any kind of decline now–my guess is that that accurately reflects what’s happening in the foreclosure market.

“If you look at what’s happening in Brooklyn Center, Brooklyn Park, even Robbinsdale–any of the first-ring suburbs–and then look at the base in north, near-north, and south Minneapolis, properties are coming on the market and being scooped up in two to three days for $25,000, $30,000, that a year ago would have been on the market for $60,000. Banks are doing fire sales now trying to clear out as much as they can, because there’s a whole other wave of foreclosures coming in the 3rd and 4th ring suburbs as Alt-A mortgages start to adjust.”

All this leaves one question unanswered, though: If lender-mediated sales are driving what turned out to be a record decline, why is their relative weight so much greater here than elsewhere? This is a near-universal phenomenon. I’ll keep casting around for ideas on that count. Anybody here have ideas?

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Comments (5)

  1. Submitted by Richard Schulze on 05/27/2009 - 12:43 pm.

    Look, this is not a regular environment. Investments are down, savings are down, credit is down.

    Any vacant house, should be considered a house waiting to be sold.

    I haven’t checked recently, but the vacancy rate never declined post S&L crisis which means that we are working off more than one real estate bubble. The numbers I remember are 12mn vacant year round, 7mn seasonally vacant, 128mn total units, 108mn households.

    I also remember asking the question how many fewer households would there be if people couldn’t afford to buy, say a move from the national average from current up to California’s level. It adds another 10mn vacant units, or a 25% vacancy nationally.

    There is enough guaranteed inventory for this year and the next. Prices don’t stabilize until you have at least less than 6 months of inventory in the relevant market. Prices will keep falling. Probably to significantly below material cost. We’ve already seen some of that in Phoenix.

    We haven’t even processed local and State responses to their drop in revenue. Vegas is empty today, so what if they boost taxes? My sense is that most state revenues are -10 to -20%. Personal income tax makes up about half of revenues in the states that have it. So closing the gap with income tax increases alone would be an effective rate increase.

  2. Submitted by Josh McCabe on 05/27/2009 - 02:02 pm.

    Consider the makeup of our economy. The better jobs being lost are not being replaced. There is no capacity to land on one’s feet when life is built around a $200,000 annual income and it suddenly goes away. Most importantly, unemployment doesn’t cover the basics for this scenario, whereas it does a fair job of stabilizing life after being fired for people making closer to $50,000 annually. Loss of the house for one accustomed to a higher pay setting is practically inevitable, more so for those with good jobs than those with lower level payscales. Facts that could confirm this would be found in the demographics of Twin Cities suburban job loss. If the loss is clustered heavily in mid to upper level professional jobs, perhaps you have your answer why the houses they live in are suddenly in play.

  3. Submitted by Ross Williams on 05/27/2009 - 02:29 pm.

    My understanding is that US Bank’s first time home buyers program is backed up because they can’t process the loans fast enough.

    So, one thing to look at is whether the Twin Cities has additional programs to support first time home buyers. That may mean there are proportionally more first time home buyers in the local housing market.

    Case-Shiller compares prices on actual sales. Its perfectly possible that first time home buyers are extremely price/value conscious and are picking up houses whose value has declined faster than average.

    As for a floor on prices, I suspect that is a long way off. What people forget is that as the sales prices fall, so does the price that anyone who sells a home can pay for their next home.

    If case-shiller is correct, homes are selling for about 9% more than they were in January 2000. Homes bought after August 2000 are worth less than people paid for them. And anyone who put 20% or less down on a home after August 2002 is likely under water.

    So, even once the new home buyers have snatched up all the excess inventory, there are still going to be a lot of homeowners under water on their current home who can’t move up even if they can afford the payments on a larger loan.

    And that doesn’t even deal with the question of whether we can sustain the historically low interest rates we have had for the last decade. A lot of those new home buyers are going to be paying rates that won’t be available if they decide to move in 5 years.

    The reality is that the real estate market is in for a very long period where there is a lot of downside pressure on prices. Essentially, people’s wealth is going to continue to bleed away for a very long time. The redeeming factor is that the cost of housing will also continue to be lower than it has been for a very long time.

    If you bought a house thinking you were going to retire on its “investment” value you are in trouble. If you bought a home to live in and aren’t under water, not much will have changed.

  4. Submitted by Paul Schatz on 05/27/2009 - 02:37 pm.

    Numbers don’t lie.
    Realtors do a lot of spinning. The truth is sale prices are down. It’s that simple. And all those distressed sales and foreclosures affect the prices of every house in their area. Mr. Allen may be trying to spin it differently but
    When I thought about putting my house on the market, well, the spin stopped. The realtor did a market analysis and, due to the foreclosures and distressed sales, those sales the realty spinners want us to ignore, told me that I would have to adjust my sales price down. Appraisers take all of those sale prices into account when they set a value.

  5. Submitted by Paul Udstrand on 05/28/2009 - 09:26 am.

    The problem is that in real terms wages and salaries for most people have been flat for the last 30 years. Were it not for the repeal of usury laws, and various credit bubbles people would’ve had to live off their earnings, and the economy would’ve stalled long ago. In other words, during the bubble people weren’t buying homes because they could afford them, they were buying them because they were getting the loans.

    Speaking of bubbles, what part of the word “bubble” are people not getting here? Houses were way way over priced. I can understand why realtors want to re-inflate the bubble, but what does everyone else have against affordable housing? The numbers over the last couple decades have never reflected reality because they’re based on averages rather than the mode, or most frequently occurring number. For this reason housing inflation has been way underestimated. I live in a post war rambler in St. Louis Park. We bought our house in 1992 for $85,000. At the height of the bubble the house across the street was sold for $235,000. Some houses on my block were listed for $300,000. That’s over around 200% inflation, not the 30% – 45% that’s typically reported by realtors. Now I like my house, but it was never actually worth $250,000. I’m not living with a bunch of millionaires here. If people had been seeing 30%-40% increases in their incomes those prices would have been sustainable, but most people saw flat or decreasing income.

    House prices are still too high relative to wages and salaries. Even if we could re-inflate the bubble, it would be a bad idea. The market will stabilize and grow when prices are actually affordable. The recession will be over when people are working and seeing a real increase in wages.

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