News from a tough real estate market: Metropolitan Detroit

Susan Carter, a Realtor from the Detroit area, writes:

As I thought about ways to best characterize the real estate market in Southeast Michigan in 2006 I looked at last year’s market report…and found I could almost repeat word for word the general market condition comments I made at the end of 2005. The characteristic optimism of Realtors has again been tested by the challenging economic issues facing Michigan AND continued consumer concerns about making major financial commitments. The supply of homes and condos for sale has been high all year and the number of motivated buyers low (especially in the over $250,000 price range)… a condition that can only be sustained for so long without discounted values…basic economics 101. 2006 saw a softening of prices in all areas and price ranges, in some cases up to 12-15 percent of 2004 values. Sellers who simply had to move in 2006 decided there was no point in waiting for a price recovery, especially as we saw the erosion of values tied to supply and demand as the market year progressed. People who wanted to trade up often could not sell their current house or condo, disrupting the typical home ownership cycle….first home, second home, then the keeper until retirement. The current soft real estate market is a complicated issue, one with many factors influencing the fundamentals of supply/demand/pricing, including…
1. Highly motivated sellers: relocation or long term owner sales. When employees are transferred or leave the area for new job opportunities some employers have guaranteed buy-out or sales support programs in place but most do not. At some point in a slow market people without relocation benefits just do not want to own or maintain homes here any longer….and they become the most motivated sellers in town. Owners undercut the market, reducing the list price to below the price of competing homes, to generate offers. When the property sells, the sales price is used to establish market value for future sales. Long time owners with a lot of home equity have started to do the same thing…undercut neighborhood pricing to sell instead of waiting for a market recovery. Buyers have access to sales data and make offers based on the lowest neighborhood price these days as opposed to overbidding in hot markets ten years ago.
2. I have said for the last 5 years that trendy, creative mortgage programs can be good tools when used in the right circumstances…the right buyer and the right home. Many of these programs are based on an assumption of appreciating real estate values, sustained employment and increasing incomes. Unfortunately most lenders do not explain the potential downside of interest only, balloon, adjustable, negative amortization or highly leveraged financing programs…and the impact of job loss or layoffs, which can make refinancing of adjustable or balloon mortgages impossible. Homeowners can be forced to sell if they cannot afford to refinance at current interest rates.
3. Michigan has the highest foreclosure rate per household in the country. Many people bought homes in the last few years counting on a continued robust, appreciating real estate market. Then the local market softened and people could not sell without bringing money they did not have to the closing table. Buyers just stopped making payments and waited for the inevitable. The number of foreclosed homes scares potential purchasers…they think that the bottom has fallen out of the real estate market and the only prudent thing to do is take a wait and see attitude while assessing the direction prices are heading.
4. The media often has banner headlines about the number of unsold homes without looking at the hard facts of real estate sales: there are a lot of reasons a home does not sell besides a weak local economy including a negative equity position that does not allow for price negotiation, changing buyer tastes in terms of style, location and lifestyle, a price that is way out market value range or the overall condition of the home. The power of the press in creating or killing consumer confidence has always amazed me.

While unemployment is high…almost 7 percent in Oakland County…I prefer to focus on the 93 percent of the people in the area who are working and could buy homes if they wanted or needed to. Housing corrections do not last forever and there are indications that consumers are feeling confident about local market conditions and are ready to move back into the housing market in 2007. Literally dozens of people have told me that they are tired of waiting; this will be the year to make a move. Once there is market activity I suspect that prices will rebound within 12-24 months. Our market is unique in that pricing still bears a relationship to actual construction costs. The number of sales tied to speculators is quite low here compared to other parts of the country. It seems to me that people are spooked by perceived loss of home equity…remember the dot.com stock market bust and the huge loss of paper wealth ….but they will not need a lot of encouragement to get back in the housing game if they need more space, want a different location or style of home. Home ownership can be a warm, fuzzy lifestyle benefit, hard to put a price tag on or quantify as strictly an investment.

While I think Susan overstates the power of the press, she is otherwise very much on target as to what is happening in her region. I also appreciate her remarks about exotic mortgage products.

I also think Susan demonstrates something that people don't think about very often when they think about Realtors--that the good ones know their markets exceptionally well, and that it takes a lot of diligence to know markets so well. The is the reason most people who go into the real estate business do not succeed--the median compensation for real estate agents is very low. As is the case in most businesses, long term success in the residential real estate market requires intelligence and hard work. I remember driving down a street in Madison some years ago with a well-known broker from that town, and he could tell me something about every single house on the street.

So how does one choose a good Realtor? When we are buying in Bethesda, we began by going to someone who was a leader in number of listings, a man named Gary Ditto. It turns out he was completely obsessed with the market. Susan seems pretty obsessed too. Go for the obsession.