Monday, January 22, 2007

Short-term pain, long-term gain

Short-term pain, long-term gain
A prognostication for the Twin Cities 2007 real estate market
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 benefi t 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 fi nding 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 fi nished near 108,000—up 9 percent from the previous
record set in 2005.
The year started off
very 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 fi nally 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 fi rst 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.
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.

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