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Short-term pain, long-term gain
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01/22/2007

Short-term pain, long-term gain
A prognostication for the Twin Cities 2007 real estate market
by Jeff Allen, MAAR staff

No matter what hysterics may grip public dialogue on the
issue, a bubble is not bursting in the Twin Cities residential
real estate market. Buyers aren’t gone and the sky isn’t falling.
Despite the slowdown, 2006 was still one of the best years in
history for home sales and 2007 will be just as active.

But it is important to understand that a quick and easy rebound
is not in the cards. We will continue to experience the necessary
and healthy growing pains of a changing market. In the end,
we’ll all benefit in the future from the happenings of the
present.

2006—Taking a Needed Breather

2006 was the year of the steady descent back to reasonable
expectations after several frenzied years of activity. Consumers
remembered that housing is a long-term investment. And they
remembered that finding a buyer is a little harder than placing a
“for sale” sign on the front lawn, but instead requires the skill,
experience and compassion of a professional.

As 2006 progressed, the market shifted further in the buyer’s
favor as they remained on the sidelines despite improving
affordability conditions. The year saw approximately 51,500
pending sales and 48,000 closed sales–down 19 and 22 percent
from 2005, respectively (Figure 1).

Conversely, 2006 saw a record high for seller activity. New
listings finished near 108,000—up 9 percent from the previous
record set in 2005.

The year started off 2007 Twin Cities Market Projectionsvery strong, with new
listings per month
going as high as 31
percent above their
2005 counterparts.
As new construction
slowed and builders
began to sell off their
excess inventory,
listings leveled off in
the latter part of the
year, but still easily set a
new record.

All that supply colliding with low demand meant the buyer had
relatively more control over the process. Home price growth
has been on the decline since the beginning of the year as
buyers recognize their relative advantage, with recent months
even posting small depreciation comparing 2006 to 2005.

2007—A Light at the End of the Tunnel

We are clearly in the midst of a downturn, but consternation
persists regarding when we’ll finally see a rebound. 2007 will
indeed be the year that the bounce back begins, but not right
away. Our market still faces some complex issues. Affordability.
Foreclosures. Overleveraged consumer debt. The “buy forward”
effect. These byproducts of the boom years will prevent a
quick bounce back and require some patience from armchair
economists.

The first half of 2007 should see an extension of current
conditions before buyers begin to reawaken later in the year.
The rebound will be gradual enough, faint enough in its
inception and occur late enough in the year that the net sales
activity for 2007 will hold relatively stable with 2006. But the
seeds of recovery will be sown, and the market should show
solid buyer gains in 2008.

Greeting the Pause With Open Arms

Much has been said by policymakers, the media and the real
estate community about the slowing sales and price growth of
the Twin Cities housing market, much of which is reasonable,
valid and accurate.

Figure 1 But what few seem to be

talking about is perhaps the

most important and relevant

aspect of this whole recent

housing slowdown: The

decline is not only natural

and expected, but it’s exactly

what we need right now. Some

make the mistake of viewing

the temporary price pause

as a harbinger of doom, but

it is actually the very cure to

what ails our regional housing

market.

Continued

97,737
64,325
58,156
99,211
62,613
57,246
108,000
51,500
48,000
52,000
48,500
101,000
New Listings Pending Sales Closed Sales
2004 2004 20042005 2006
(projected from
YTD)
2007
(projected)
2005 20052006
(projected from
YTD)
2006
(projected from
YTD)
2007
(projected)
2007
(projected)
Reprinted from the January/February issue of The REALTOR®. Copyright © 2007 by the Minneapolis Area Association of REALTORS®.


Short-term pain, long-term gain (continued)


During the early 2000s, conditions were characterized Figure 2
by skyrocketing consumer demand due to low interest
rates, demographic changes and the relative weakness
of the stock market as an investment vehicle. The
supply of homes available for sale struggled to keep
up with demand. As a result, home prices escalated
dramatically–from a median of $152,000 in 2000 to
$228,900 in 2005, a jump of 50 percent.

While the spending capabilities of Twin Cities
consumers did increase in the same time period
thanks to the aforementioned low interest rates and
a slow rise in wages, they didn’t keep pace with home
prices (Figure 2).

This is a chief cause for the current slowdown in
sales. Consumers will only spend what they are able

for goods and services, and housing is no exception.
The buying environment must become more
hospitable for consumers to return en masse. That will only
occur on a meaningful scale if there is a pause in home price
growth.

Thanks to the housing slowdown, that is exactly what’s
happening. After reaching the lowest point in the last two
decades in July 2006, affordability conditions have rebounded
since July to the highest point in 18 months (Figures 3 &
4) thanks to falling interest rates and a pause in home price
increases. This makes homeownership more likely and desirable
for first-time home buyers—a necessity for future growth
because an accessible market is a growing market.

Figures 3 and 4

Keeping Perspective

It’s important to remember that there is ample business
opportunity for REALTORS® no matter the market conditions.
What we’re currently experiencing may seem challenging if
viewed through the rose-colored glasses of the early 2000s. But
it pales in comparison to the near-lethal cocktail of high-interest
rates and stagflation of the early 1980s.

While a rapid return to boom-level sales is unrealistic, our
current buying conditions are incredibly favorable relative to
past history. 2006 was a sea change for our market, and as
the waves settle in 2007 and the market pause improves these
conditions even further, the stage will be set for a healthy
future.


Reprinted from the January/February issue of The REALTOR®. Copyright © 2007 by the Minneapolis Area Association of REALTORS®.


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