John Murphy’s MEDINA REAL ESTATE REPORT

Bank of America analyst, Daniel Oppenheim, once an outspoken bear on the housing sector and raised his rating on the home builders based upon some improvements he’s seeing in various markets.  For more information, see here.

Each month the National Association of Home Builders publishes its home builder confidence report.  The confidence level has stablized from its free fall the past 18 months and is showing signs of slight improvement.

Check out the blog “Calculated Risk” for an excellent long term view of this important sentiment indicator.  We have not seen these kinds of levels since 1991.  This looks like a buying opportunity here for those willing to step in to the market and take the risk.

I work with buyers and sellers every day across the Twin Cities metro. Often times I will be asked “when will the market bottom out?” While none of us knows for sure as to when the bottom will be in for our market, I can tell you that inevitably most buyers will miss the bottom.

Many buyers are skittish today. No one wants to get hurt by their real estate purchase. The last thing someone wants to do is buy a home at $400,000 only to find out six months later it’s worth $360,000. That’s an unlikely scenario especially in the Twin Cities where we have seen much more moderate rates of growth and decline in home price appreciation compared to the coasts. However, that’s the psyche of many a buyer today.

But here’s the challenge in finding the bottom of the housing market. We won’t know when the bottom was put in until two to four months after the bottom is in. What do I mean? The only way we know the market has turned officially is to look backward at the home sales statistics. For instance, the best number to track to understand the state of the housing market is to look at the home builders confidence levels and new home sales. Builders have to sell their homes. A seller who has his/her home on the market often doesn’t have to sell. If they aren’t getting their price, they can take their home off the market and try it again in a few months or years. Builders don’t have that option. They are in the business of moving inventory. They will discount and provide enough incentives to sell the homes. We have certainly seen this here in the Twin Cities with Lennar.

Take a look at the Builders Confidence levels. On a national level, the wheels started to come off the real estate boom in June 2005. Since then, their confidence has crashed - literally.  (For a broader look at the index, see here). No one that I know of called the top in the market. It wasn’t for several months that we started to hear stories by the Wall Street Journal, New York Times, Business Week, ABC, NBC, CBS, CNN, Fox News etc about the slowing real estate market. In fact, if my memory serves me correctly we didn’t start hearing a lot about it until nearly the spring of ‘06. Remember, 2005 was a record year for real estate sales by volume and yet the builders confidence started to deteriorate in June ‘06 - fully seven months before the year closed out as the greatest year for residential real estate in U.S. history. Consider the home builders the canary in the mine.

Another thing we will hear more about is the rise in foreclosures. But it’s important to remember that foreclosures are a lagging indicator in the market. You read all the foreclosure stories at the bottom of the market. In the state of Minnesota, it takes one year to foreclose on a home. So when you hear the statistics today, those homes in foreclosure started the process in 2005. The Wall Street Journal just published an article November 29, 2006 entitled, “Distressed Real-Estate: Price to Sell.” In the article they talk about 2007 should be a good year for investors to get back in to the market to buy up the real estate being sold at a discount by banks. If you see a home listed as an REO property, that’s short for Real Estate Owned (by the bank). Most of these homes are marketed by real estate brokers.

In case you missed this past Sunday’s StarTribune, they published a front page story on the troubling rise in foreclosures in the Twin Cities.  I guess doom and gloom real estate stories must still sell papers.  There are a couple of things to note about this story and the story in general with regard to foreclosures.  Yes, foreclosures are on the rise.  For example, the paper states that the foreclosure rate for Minneapolis is up 79% this year over last.  But let’s put this in perspective…across the metro, foreclosures may represent somewhere between 1 - 1.5% of all homes for sale.  It may grow slightly more than that.  If you looked at the % of overall real estate sales in terms of dollars transacted, foreclosures would likely represent less than 1/4 of 1%.

Foreclosures are a problem in certain neighborhoods in Minneapolis and St. Paul, but as is typical of the StarTribune, they try to create an impression that the problems of the two big cities are the same for those in the suburbs.  It’s an inaccurate portrayal of the marketplace.

The Regional MLS system compiles statistics on a quarterly basis by county and zip code for the entire Twin Cities metro.  It’s available here.

After being in what has seemed like freefall for the housing markets, there is some sign of stablization according to the latest October home sales statistics released yesterday by the National Association of Realtors.   Home sales rose .5% in October ‘06 compared to September ‘06 and were off by 11.5% compared to one year ago.  Average home sales prices continued to drop by 3.5% to $221,000 for all housing compared to $229,000 for October ‘05.

In an article published yesterday by Realtor Magazine, they point to the gateway cities such as New York, San Francisco, Los Angeles and Seattle as key areas that still hold a lot of investor interest.  While many of these cities have seen some price declines in single family home prices during the past year, if history is our guide, these areas will see continued price increases in the near future.