Minnesota Real Estate News (Minneapolis, St. Paul: for sale, rentals, HOA)

[Robert P Stewart]

This past month was special in Minnesota real estate. For the first time in 3 years, the number of homes on the market this month actually DECREASED. Within this past week, there were 4,236 single family homes with 3 or more bedrooms on the market under $200,000 - and this may be why first-time homebuyers are ignoring townhomes and going straight to single family. Compare that to only 1,918 single family homes on the market this time 2 years ago.

I've also seen another trend which is interesting. Townhouse values are so low, that very few sellers can afford to sell. Instead, they are renting out their townhomes and moving on. This technique has been very successful (if done correctly) and is subject to association bylaws which permit rentals. Renting out a townhome also brings new tax and financial advantages that you'll certainly want to ask your accountant about. There are a few property management companies which actually specialize in handling these types of properties.

Townhouse owners: there is hope.

[AVguy]

Interesting analysis, Robert. There certainly seems to be a preference for detached single-family houses in my experience and market conditions are now allowing this to occur. (Glad that I don't have a townhouse right now!)

As an aside, let me ask you, by way of an example, whether you have seen the issue of negative equity. Let's say that a young couple purchased a house two years ago when housing prices were still on the rise. The couple purchased the house at the then current market price using 100-percent financing (based on the couple's historical income and good credit scores). Now the couple must move out of state because of a job transfer. Assuming that the couple is 'upside down' on the house (i.e., in a negative-equity position), what does the honest, credit-conscious couple do if the house sells at the current market price (i.e., a selling price significantly lower than couple's purchase price)?

At closing, would the couple need to obtain a personal line of credit to supplement the selling price of house? Is there any way to roll the balance of the first house into the mortgage of the couple's newly purchased house located out of state? (This seems unlikely.) What can you do, as a real estate agent, to help people who need to move but owe more on their house that what the house is worth?

(For the record, I do not know anyone in this position, but I do know several people my age who would move but for the fact that they owe more than the house is worth. Perhaps the mortgage brokers have thoughts?)

[TimtheGuy]

Originally Posted by AVguy

Interesting analysis, Robert. There certainly seems to be a preference for detached single-family houses in my experience and market conditions are now allowing this to occur. (Glad that I don't have a townhouse right now!)

As an aside, let me ask you, by way of an example, whether you have seen the issue of negative equity. Let's say that a young couple purchased a house two years ago when housing prices were still on the rise. The couple purchased the house at the then current market price using 100-percent financing (based on the couple's historical income and good credit scores). Now the couple must move out of state because of a job transfer. Assuming that the couple is 'upside down' on the house (i.e., in a negative-equity position), what does the honest, credit-conscious couple do if the house sells at the current market price (i.e., a selling price significantly lower than couple's purchase price)?

At closing, would the couple need to obtain a personal line of credit to supplement the selling price of house? Is there any way to roll the balance of the first house into the mortgage of the couple's newly purchased house located out of state? (This seems unlikely.) What can you do, as a real estate agent, to help people who need to move but owe more on their house that what the house is worth?

(For the record, I do not know anyone in this position, but I do know several people my age who would move but for the fact that they owe more than the house is worth. Perhaps the mortgage brokers have thoughts?)

Yes, your example would require the sellers to somehow bring a substantial check to the closing table. The would not be able to roll this debt into any kind of new home purchase. Where they would come up with the money would vary among individuals.

There are a lot of homeowners here in the metro that are upside down on their mortgages.

Other options include a 'short sale' where the lender agrees to satisfy the mortgage for less than is owed or walking.

[Robert P Stewart]

Excellent questions - and let me preface this by saying that I'm absolutely NOT a mortgage broker - just a lowly Realtor - but I've dealt with this situation quite a bit. Here are my thoughts -

The seller will have to bring money to closing. And that money can come from anywhere (gift, collateral, credit cards, loan from bank that is not against the home, etc). I don't recommend the credit card solution for obvious reasons - in fact, I don't recommend any of these solutions except for one situation: if you're getting a **smokin'** deal on the next house, you can use a home equity line to pay off the debt mentioned above. We've done that in the past with great success. The client who does this absolutely has to be aware of the payments they'll be making and has to be financially responsible. Done correctly, it is a beautiful thing.

If the home that is currently owned has an FHA of VA loan, it may be assumable. A buyer would need to meet the criteria of the lender and be able to qualify for the existing loan - and then they take over payments.

Short sales are only options for those with significant hardships. I do A LOT of short sales (successfully too), and I can tell you that no lender is going to release you from an obligation because you don't like the house anymore. Hardships include death, divorce, disability, loss of a job, or other uncontrollable circumstance that renders you unable to pay the mortgage. Then there's the question of whether or not the bank will seek to reclaim losses down the road. In our experience, banks have not tried to recoup the losses. I don't know why that is the case with us, but I'd never make that guarantee to a client. Short sales also have a significant impact on credit scores.

When I meet a client who owes more than their home is worth, I always try to go the rental route. Rents are at historic highs and people who own investment properties are doing QUITE well. There are certain property management companies who have perfected their model for this type of situation, and I recommend them early and often. The question then becomes if I have a rental property, how does that affect my ability to get another loan? I believe that 25% of the mortgage payment is counted as a debt to you. Basically, if you have a $1200/mo mortgage and that house is rented for $1,200/mo, the lender sees it as a $400/mo debt. You would need to qualify for your next loan with that debt in tow.

Does that help??

[Cruz Azul Guy]

Robert, do you have any data available that would suggest that people are moving closer into the city to decrease their commute distance as a direct result of the hike in gas prices? Does there seem to be a decreasing demand in houses/townhomes in the outer tier suburbs in comparison to the inner-tier and Minneapolis/St. Paul areas?

[Robert P Stewart]

You know, I'm embarrassed to say that I haven't given this much thought. But as I look at the stacks of closing files on my assistants desk, they're all for Mac/Groveland, Highland Park, and Longfellow. There are a few suburbs and even a Mankato or two - but that's interesting.

I just did a couple of market analyses for 3 home owners in the Standish neighborhood of Minneapolis this morning, and the prices I came up with are reasonably surprising. Surprisingly good for them - $215K-$240K, and that's based on actual sold data for that area. Average market time over the last 6 months for that area was 53 days which is QUITE good compared to surrounding areas.

I don't know if people are making a conscious decision based on fuel costs - they are probably making a fuzzy guesstimate that moving to the city will lower their expenses overall. What ISN'T expensive these days?

Robert

[Cruz Azul Guy]

Robert, if you asked me that question a few years ago I would've said eggs but even those seem to be getting pricey these days!

[MNNative]

Anyone see the article in the current issue of Mpls/St Paul Magazine? It's the front page story: 20 Great Neighborhoods Where Home Prices Are Strong!

I of course left my copy in the car and they don't seem to have it for view online. But it's an interesting perspective on the market here in the metro area.

Anyhow, my 2 cents on what has been said on this thread so far:
1. We totally looked right past townhomes cause first of all we thought it might be risky taking on a partnership with a HOA regardless of the deal we got on the home since if the HOA had any financial troubles or for whatever reason decided to raise the HOA fee, we might end up screwed over anyhow. Just a precaution on our part. Plus, we'd have to pay extra $ for the HOA fee each month anyhow, so why not apply that towards a mortgage instead? Also, any townhome we were looking at was priced at or higher than single family homes we liked. So it didn't seem worth it to bother.

2. Yes, everything seems to be affected by fuel costs/housing market/tough economy. It's a sticky situation but I'm thankful we're not living in other parts of the country, that's for sure.

[Robert P Stewart]

Eggs ARE expensive - Does St. Paul still have an urban chicken club??

HOA's: You're absolutely correct MNNative. An increasing number of HOA's are insolvent. And whenever I have a client expressing interest in a hometown, I always give them the "townhouse talk". It goes something like this:

Don't buy a townhome/condo/etc because you're looking for maintenance-free living. Don't do it because you want grass mowed and snow removed. Do it for a) cheap square footage, and b) association rules that prevent your neighbor from opening up an oil-change business in the driveway.

Imagine how far your $150/mo association fee would go on your single family home when it comes to lawn care and snow removal. $150/mo (and likely much less) would make your single family home quite maintenance free - or at least comparable to a townhome.

The talk is a bit longer than this, but you've got the jist.

Robert

[Robert P Stewart]

This past week, new pendings (a 'pending' represents an accepted purchase agreement on a home) were down 2.4% compared to this week last year. With normal fluctuation, my guess is that this doesn't really represent meaningful change.

In fact, there are 3 counties this week which actually had more pendings than last year. Those were Hennepin, Ramsey, and Dakota County. Ramsey County was up 4.7% compared to 2007.

This entire year in Minnesota real estate has been about stability and finding equilibrium. We've discovered the bottom of the market in a very solid, economic sense. The Wall Street Journal ran an article a few weeks ago proclaiming the bottom was here - and they used very sound analytical practices to come up with that statement.

But I'm going to explain the bottom of the Minnesota market a different way. The big question being asked is: "How low will prices go?" A better, more intuitive question is "What is a home worth?" And I'll tell you...

How much is a home worth? How much should it actually sell for? Truly, only one thing determines value - and it's not the mortgage amount, it's not about what else is for sale, and it is certainly not based on a homeowner's opinion. The only thing that determines a sales price is what a buyer is willing to pay. That's it. Nothing else, nada, zip (you get the point). So, how much are they willing to pay?

Here's how I figure out the base (lowest possible) value of a home. I do a rent survey, determine the highest monthy rent that can be obtained, and backpeddle the monthly rent to a monthly mortgage payment and ultimately a mortgage total amount. I like thinking of the housing market in this way because, different from other methods, it ties the value of a home to the interest rate (similar to stocks and commodities, and a house is a commodity). When the interest rate goes up, people obtain lower mortage amounts, and the value of a home (based on what a buyer can afford) goes down. Simple right?

So what happens if you price a property at or lower than this determined mortgage amount? It sells, and typically within 30 days. If I find a house that I can buy, rent it out, and make money each month doing so - I buy it.

Obviously other factors come into play. Buyers' desires for golfcourses, waterfront, exclusive areas, etc drive prices higher than my aforementioned model would predict. And that's fine - my model determines the lowest base value.

And you know what? We're there. Home prices have dropped to where mortgage amounts are the same as rents in most cases. That's why *I* think we're at the bottom. Leave the analytics to the Wall Street Journal.