Go to your local daily newspaper or turn on the television or radio news station right now, and you’ll probably find a story on the collapsing real estate market. There are wildly contradictory predictions about what will happen and what it all means.
None of these experts really knows for sure because the double helix of real estate and mortgage lending has become so complex so quickly, it’s impossible for anyone to truly understand all of it.
Real estate, like politics, is local. While there is a serious housing crisis in much of the country, the extent and nature of the situation changes from town to town and from neighborhood to neighborhood.
Housing prices in South Minneapolis began to rise about seven years ago. For a while, the rise was simply a market correction, bringing the undervalued Twin Cities’ housing market on par with other urban areas. But as prices began to rise more rapidly, buyers got panicky, and thinking they’d be priced out of the market, began to offer more than list price to make sure they got the home they desired. Multiple offers were common, pushing up prices even more. It was a sellers’ market.
Lenders responded by creating loan products for people who previously couldn’t qualify to buy a home. At first, this was a good thing. Stated income loans (where buyers didn’t have to prove income to get a loan) helped people like school teachers, seasonal workers and commission-only employees to buy their first homes. People with good credit and good income but with little savings could get a zero-down loan, as well.
Most lenders remained honest, but greed tempted some toward fraud and lured others toward practices, that, while not illegal, were deceptive. The sub-prime mortgage, once a very small part of the mortgage market, became a mainstay of the industry. Mortgage companies began to create more exotic loans for people whose income and credit history indicated that they couldn’t and shouldn’t afford to take on serious debt.
Homeowners began to view homes (and the rising equity in their homes) as an investment, perhaps as their retirement nest egg or a way to pay off bills or buy luxury items, rather than as a place to live.
Some real estate agents, encouraged by insistent clients, began to routinely list houses up to 10 percent above current prices for similar homes.
High prices didn’t stop buyers, caught in the enthusiasm, from paying inflated list prices—or more. Prices in lower income neighborhoods in South Minneapolis rose the fastest. Homes in inner city neighborhoods were increasing by more than 20 percent a year. Speculators would buy and fix up homes, hoping to sell them quickly, counting on rising home prices to bring them instant equity and profit.
Then the market hit the top and turned around. The glut of buyers disappeared and previously sought after South Minneapolis homes were suddenly hard to sell. In 2002, the average time it took a South Minneapolis home to find a buyer was less than three weeks. In 2007, an average home stayed on the market for 120 days. Sellers, slow to understand the change, continued to overprice their homes.
Nationally and locally, foreclosures are at nearly record levels, many of these on sub-prime ARMs, loans with a very low interest for a short time, rising to a much higher rate when the “teaser rate” expires. Many people facing foreclosure are investors and speculators. But, many others were living in their homes when the bank came calling.
Many of these borrowers did not understand how much their monthly mortgage payment would rise. A response to the emergency, what’s been called “the Bush bailout” (more to keep the falling housing market from producing a recession than helping individuals) has helped only a few. Only those with an ARM loan with higher rates looming or implemented, and who are current with their payments, will be able to renegotiate the lower rate. Homeowners facing foreclosure because of homeowner hardship, like unexpected unemployment or illness, will have to find their own solutions.
For local home sellers, times are tough. Buyers remain skittish despite high home inventory (up 37 percent since a year ago), which gives them the advantage. Lending institutions (so far) are loathe to give sellers a break through short-sales (where mortgage holders allow the sale of a home for less than is owed or the house is worth).
Foreclosure can also hurt renters, many of whom don’t realize that if they have a lease, they have a right to continue to live in the property during the (usually) six months between the sheriff’s sale and the day the bank takes possession.
There is some good news, however. While the current national real estate market is experiencing hard times, the situation is not so dire in South Minneapolis. Home prices may be falling from two years ago, but they are not collapsing. In 2002, when the price surge was starting, the average South Minneapolis home was selling for around $202,000. But in 2007, similar houses sold for around $222,000. Prices may have gone down considerably from 2006, but they are still worth more than they were in 2002.
Right now, housing is becoming more affordable and it’s a strong buyers’ market in South Minneapolis. For first time buyers and those who do not have to sell a home to buy, there are a lot of nice homes waiting at bargain prices, if they are careful not to take on more debt than they can comfortably afford. Buyers, as well as sellers need to consult a professional before making financial housing decisions.
When will this crisis be over? Anyone can guess, but no one really knows. It might be a year, it might be longer. Still, in the 1980s, when mortgage interest rates were hovering around 17 percent, people continued to buy and sell their homes. Eventually, the rates came down and the market normalized. This market will also stabilize and home values will stop falling, and grow at a more normal rate of five to seven percent. Markets, like the seasons, are cyclical, and eventually, this long, cold housing winter will end.
Stephanie Fox is a freelance writer and licensed real estate agent at Coldwell Banker Burnet in South Minneapolis.