Steve Townley & Chris Deming
Experienced, Professional Real Estate Service

You've likely heard a lot of media reports about the current real estate market being dead in the water. It would certainly appear that the market is in the tank and is likely to stay there, but is it? Make no mistake about it, homes are selling, but they're not selling in record numbers like they have for the past 5 or 6 years. So the market's dead, right? Here's a slightly different perspective, one to seriously consider for the near future.

I have been a Realtor and a rental property owner since 1973. As a result, I have watched the real estate market from two different viewpoints through a number of up-and-down cycles. Obviously, we are in a down residential cycle right now, but at the same we are in an upward rental cycle. In my work, I am often asked whether or not residential real estate will ever recover from this down cycle, and if so, when? Here is my main point: real estate has always been cyclical, yet over the long haul, the trend in values has always been upwards!

Real estate cycles ebb and flow, and over time I have observed some regularity in the factors that foreshadow a shifting in market conditions. The factors listed below have preceded each "bottoming out" of the real estate market during my 34 years in the business:

1. Low rental vacancies and rising rents.
2. Reasonably stable employment figures.
3. Stable or increasing population numbers.
4. Low mortgage interest rates and reasonably available financing.
5. A wide selection of homes for sale from which buyers may choose.
6. Motivated sellers.

It's very difficult, if not impossible, to know precisely when the market has bottomed out and is changing to an upward trend. Real estate professionals have been trying to predict that for decades without a great deal of success. Some luck is involved, but if you look at history, it is possible to make an educated guess.

In the early to middle 1970's, financing was difficult to get and relatively expensive. Rents were high; vacancies were low; and there were lots of home owners who were desperate - highly motivated - to sell. Foreclosures were fairly common, and the residential real estate business was definitely in a down cycle. Then, in 1976, the rates started coming down and financing became much easier to obtain. The real estate business was "off to the races." Prices started to climb as inventory (available homes for sale) became scarce, and the real estate business was all of a sudden in the midst of a boom.

Then, in 1980 the interest rates started to rise rapidly until, in 1982, mortgage rates were hovering above 15%! Naturally, the real estate business suffered. But rates started to drop, and by 1984 the mortgage rate was finally back under 12%. We were told at that time that there would never again be a fixed-rate mortgage because of the wildly fluctuating financial markets. So when people could get one of the "last" fixed-rate mortgages available at under 12%, they grabbed it and felt very fortunate. Two years later, they were refinancing those 11% and 12% fixed-rate mortgages at 8% and 9% (also fixed-rate). A few years later, they were refinancing again, but this time at 6% and 7% (again, fixed-rate). Real estate again was booming and would continue to be in an upward cycle until the year 2000.

In 2000, rates went up from around 7% to almost 8½%, which, at the time, seemed incredibly high, but historically were still very low. Again the real estate business slowed down, but this time, the slow-down only lasted a year or so. From 2001 until 2005, the real estate business boomed again. Real estate has always been a supply-and-demand business. Demand is created when more buyers enter the market, and with the population increasing and easier-than-normal financing available, more and more buyers were able to purchase homes. Also, lots of people took their investments out of the stock market, which was stagnant, and put their money into real estate investments. So, demand during the early 2000's was at a record high. Then, in mid-2005, real estate itself started to stagnate as that 5-year up-cycle began to level off. It just ran out of gas!

Now, mortgage companies are foreclosing on lots of those exotic mortgages and as a result, the homeowners who are losing their homes are now creating demand in the rental market. Therefore, vacancies in apartments are way down, and rents are rising. Many of the first-time investors who had purchased homes as investment real estate have tired of the management issues associated with rental real estate, and are now selling off their properties. The foreclosed homes, the investor properties, and the normal number of properties needing to be sold in a typical market have combined to flood the market with available inventory. Supply, therefore, is high and real estate is now in a downward cycle.

In January, 2006, the national and local media finally picked up on the slow-down in real estate sales. Article after article and TV news story after TV news story began sounding the alarm that real estate was slowing down, and the predictions were very dire indeed! The negative media reports have continued to this day, and have put buyers in a very patient mood. Why buy today, when prices will be lower tomorrow? But, given the cyclical nature of the real estate market, how long will this last?

Looking at history, it would seem that the downward cycle may be bottoming out as I write this! Unemployment is very stable. Over 95% of those seeking jobs are able to find them. Rents are rising and vacancies are way down. The population in the Twin Cities is steadily rising. Interest rates on fixed-rate mortgages are very low, and mortgages are easy to get if you have any reasonable down payment and good credit. Sellers are very motivated right now, and, yes, there is a tremendous amount of property for sale.

First-time buyers will lead the charge in changing the real estate climate here in Minnesota and probably across the nation. Many potential first-time buyers are currently renting, and they are seeing their rents rise dramatically. They are also watching real estate prices come down to the point that the cost of buying is starting to be equivalent to or even less than the cost of renting. Many of these first-time buyers want to own a home during their lifetime and are now realizing they may never see a better time to begin their period of ownership than right now. Interestingly, single women now comprise the largest group of first-time buyers. According to Minnesota Association of Realtors statistics, only 9% of first-time home sales are to single men, while a whopping 22% are to single women. Ladies, are you ready for some football real estate?

If you are waiting for the market to bottom out, don't rely on the newspapers to tell you when it's happening; it will be too late. I predict we will soon begin to see the "starter" homes sell as tenants tire of paying rent and decide it is now time to own a piece of the American Dream. In most cases, when a starter home sells, the owner of that home will then be in a position to purchase a step-up home, and the seller of the step-up home will also buy up, and so on. So as these first-timers tiptoe into the market, they will find lots of willing sellers ready to make a deal. A SOLD sign here and a SOLD sign there will signal the beginnings of the market's recovery. That beginning will be very subtle and won't get any media coverage until it's well underway.

So, it's my opinion that there is hope. We are in a somewhat normal real estate cycle that is greatly accentuated by the vast number of media outlets, and we'll begin to see the signs of recovery within just a few months. I am advising my clients, and particularly the adult children of my clients, to consider a purchase now, right now. In service to my best clients over the next year or so, my goal is to represent as many buyers as possible, especially first-time buyers, in their search for a new home. There may never be a better time to be a buyer. Currently, I am in the market myself, looking for some of these bargains that permeate the marketplace. The upside potential looks very good! All the market indicators with which I am familiar point to the market bottoming out now, and beginning to rise again in time for next year's spring sales. I'm especially encouraged by the availability, for the time being, of 30 year fixed rate mortgages in the 6% range. Real estate's dead in the water? It may seem like it at the moment, but the recovery is right around the corner, and now, right now, is the time to jump in!

Steve Townley
Re/Max Results
651-698-1000
sjtownley@aol.com