John Murphy’s MEDINA REAL ESTATE REPORT

Miami, Florida based, Lennar, reported quarterly results today that continue to show the massive difficulties America’s home builders face in this real estate market.  Despite Lennar’s ability to cut expenses by 60% or $238.9 million for the quarter, the company still lost $120.9 million for the quarter.  Overall sales volume was down 61% compared to the same quarter last year! (emphasis added).

Lennar is Minnesota’s number one homebuilder in terms of units and sale volume.  I do not know the comparison information specifically for Minnesota.

Here’s the article that ran on Forbes.com.

One year chart of Citi Group.  The stock market acts as a discounting measure.  Typically it’s about 6 months ahead of the rest of the economy.  The housing market is driven by money on Wall Street which is driven by the big Wall Street banks.  Citi Group is hitting a 9 or 10 year low as of today.

The latest existing homes sales reports a 2% increase in sales for May 2008 compared to April 2008.  Median prices continue their decline down 6.3% from a year ago.

Inventory is slowly being worked off the market:

The inventory of unsold homes dropped by 1.4 percent to 4.49 million units, which represents a 10.8-month supply at the May sales pace, down from a 11.2-month supply in April. That’s still about double the inventory level that existed during the five-year housing boom.

This report comes on the heels of the Census Bureau’s new home sales report earlier this week that showed continued anemic activity new construction across the country.  Calculated Risk has some excellent commentary on the subject.  They also published excellent graphs depicting the decline in new construction inventory.

The key things that I see are:

1) New construction inventory is finally falling

2) Pending sales activity is up

3) Listing inventory is starting to decline

4) Still have between 10-11 months of inventory nationwide.  This doesn’t need to come back to 5 months, but the market would feel very different if this inventory level made it’s way back towards 7 months.  Perhaps we’ll see that by next spring.

Linked below is the Medina Speed Study letter from the Hennepin County Transportation Department regarding the MnDOT study for County Road 116 between Highway 55 and Hackamore.

Traffic will be slowed down to 30 MPH about 300 feet north of Clydedale. While this isn’t a huge reduction, it does seem like it will slow traffic down somewhat.

Any questions about this report should be directed to Chad Adams, Medina City Administrator rather than to MnDOT or Hennepin County. Chad can be reached at 763-473-4643.

Medina Speed Study Letter

The New York Times published this article recently and it calls in to question something I’ve been thinking a lot about lately.

It has seemed to me that we have been in a period of rapid price declines in the past 6 months especially. Part of it is sellers finally getting serious and starting to drop their prices to get offers. But the other part has been the rapid increase in the price of gasoline and the uncertainty that has caused for Americans’ budgets.

If gas can be $4 per gallon which it is now, it’s not hard to believe that it could easily be $6 per gallon in the future. If we have a real oil shock, we could see $8-$10 per gallon. Now I’m of the mind that I believe gas is more likely to settle down to $2.50 - $3.00 per gallon but the American psyche has been damaged, and we will not soon forget the challenges high priced gas can bring.

And that brings me to real estate. Much of the boom that we have experienced since 2001 was predicated on extremely low gas prices, building materials and interest rates. The only thing that has remained relatively low of the three is interest rates and that’s only for the 30 year fixed. The prices on ARMs (Ajustable Rate Mortgages) has sky rocketed in the past 3 years. Much of the buying activity had been a result of ARMs.

So what is to happen to our outer ring suburbs or exurben communities? According to Mark Zandi, “the fuel price change should be capitalized into the cost of houses,” Mr. Zandi said. “Prices in the outer suburbs will get clobbered.”

For the Twin Cities, we are definitely seeing a lot of difficulty in our outer ring suburbs - note the Star Tribune story this spring on the troubles in Wright County. Like what’s mentioned in this story about the Denver exurb, we have many communities here in western Hennepin County that also likely to experience significant softness in pricing giving the distance away from Minneapolis.

All that said, I am not one that is saying it’s going to be a total wipe out and everyone is going to want to move in to the core cities. Too often articles like this on in the NY Times are used to push a political agenda. There are many, many people and institutions and political movements that stand to benefit from high gas prices. Don’t get your hopes up too soon that there’s going to be a quick fix to this problem.

I for one am not prepared to give up my country setting in a nice suburban neighborhood in order to join the “new urbanism.” Not when my option here is Minneapolis. I’m not interested in being a spectator to the crime issue there.

The much touted S&P Case-Shiller Index was published today and of course the news remains grim for many housing markets across the U.S.

Today’s report shows that the Twin Cities are down 15.5% year over year according to this index. The Twin Cities had been lagging the overall composite number, but it now appears that the Twin Cities is now declining slightly more than the 20 city composite which was down 15.3%

The decline for the Twin Cities is continuing. Please note these data points are through April and not June. The study is always looking backwards by about 2 months.

The Minneapolis Area Association of Realtors published this week’s latest report last night and the trend that we’ve been seeing over the past several weeks is continuing.

It’s my personal opinion that we are in the process of bottoming out here in the Twin Cities provided there are no additional shocks to the U.S. economy.  For example, if gas were to go to $6 per gallon, all bets are off, but if we stay at $4 per gallon and start to see some relief at the pump, we’ll continue to clean out the housing supply.

I also believe there is no imminent turn for the real estate market here.  It’s still very difficult for sellers.  Homes need to be priced extremely well and must be absolutely “best in class” in order to sell.  That’s achieved by a combination of either being in outstanding condition or must be absolutely priced the best compared to anything else in the market.  The ideal is to have both those attributes.

While listing inventory continues to decline and pending activity continues to improve, I believe that price improvements are still likely at least 6 months away.   This doesn’t mean you shouldn’t be buying a home today.  No one can time the bottom perfectly.  Purchase a home, but go in with your eyes open and make sure you’re buying it at a price that you’re okay with if it continues to drop in value over the next 6-12 months.

The fact is, we haven’t seen a buying opportunity like this in many, many years in the Twin Cities.

Below is the note from the association regarding this week’s numbers:

Weekly Market Activity Report:

Home sales are continuing along a relatively smooth course so far this summer, with newly signed purchase agreements (pending sales) increasing by 3.8 percent over last year for the week ending June 14. Over the last six weeks, pending sales are behind the same time period in 2007 by only 30 sales, or 0.6 percent. When you compare that to the consistent 15–20 percent declines of the last few years, this is welcome news.

Simply matching last year’s numbers does not allow home sellers to celebrate recovering buyer interest in their properties. Plus, we need to keep some perspective on what types of sales are comprising this new stabilization of activity. A hearty 27.9 percent of purchase agreements from the last six weeks were made on lender-mediated foreclosures or short sales. Buyer activity is being propped up by the increased market share of these types of properties.

Traditional sales over the same six-week period are down 21.0 percent from last year, while lender-mediated sales are up 284.5 percent from 406 sales last year to 1,561 this year. So the traditional seller still faces some challenges—and some new and very different competition.

All told, heavy buyer interest in lender-mediated properties is viewed as a positive sign. We need the prevalent lender-mediated inventory to be absorbed before our market can return to some semblance of order. The sooner these properties are worked through the market cycle, the sooner that the mist of uncertainty they bring to negotiation, appraisal and home value will lift.

The Minneapolis Association of Realtors published this week’s report.  The news basically is that new listings inventory continues to drop.  This week’s new listings compared to the same week the year before is down a dramatic 23%.  Current inventory levels are down 4.1% overall compared to last year at this time.
Pending sales activity continues to show marked improvement compared to where we had been.  Frankly, I watch this number more than any of the others.  If buyers don’t have the appetite to write contracts, it’s not going to matter what happens with inventory.  We are starting to see buyers dip their toes back in to the market and we’ve seen pending activity improve for the past 4-5 weeks. As you’ll see the note below, this is the largest week over week increase in over 2 years!  For the past 18 months we have almost continuously seen comparative year over year (YOY) pending sales numbers down anywhere from 15-25%.  This pending sales activity is indeed welcome news to the market.

Sellers in the Twin Cities housing market continue to cut back on their output, while simultaneously we appear to have finally found the bottom for buyer activity. New listings for the week ending May 31 were a healthy 23.0 percent behind the same week in 2007, a drop of 522 units. For the same time period, pending sales increased by 4.9 percent over last year—the largest year-over-year increase in 117 weeks, and only the third recorded increase in that time. So even though home sales are still low by historical standards, they’re not falling any further for the time being.

Here’s this week’s report.

The Wayzata City Council held their big meeting last night at West Middle School.  About 300-400 people showed up for this very important vote.

I lost count of the number of people who stood up to publicly address the City Council, but it had to be at least 125 people.  By my count there were probably 6-7 people who spoke up against the project.  Everyone else was in support of it.

I left at about 9:45pm once the 125 people had spoken.  That took over 3 1/2 hours to get through that.  The council meeting then continued on.  I heard from someone still in attendance that the vote came at 1:40am and passed 3 to 2.

What amazes me is the overwhelming support demonstrated by the residents and business owners and employees who work in Wayzata and yet this project passed by the skin of its teeth because of a disproportionate amount of influence a few vocal dissenters had.  They clearly worked hard enough to keep this council wrapped up in deliberations for years about this project and the one before it that was shot down.

The public supported this 95/5 approximately and yet the vote barely passed.  It was great to see the peoples’ voices heard, but now it probably would make sense to unseat those who tried for so long to block this project.  I hope the citizens of Wayzata remember this vote when it comes to elections this fall.

Mortgage rates have jumped fairly significantly and rapidly in the past week.  Concerns about global inflation are causing bond investors to believe The Fed will be soon raising interest rates to fight the ongoing inflation risk.

The yield on the 2-year Treasuries have jumped .50% in the past week.  That is a very significant move.  Many bankers around the world are preparing for higher rates.