How did we get here?

Filed in Minnesota Real Estate by on January 14, 2008 0 Comments

According to Glen Dorfman of the Minnesota Association of Realtors, the “public wants and deserves the most accurate assessment of current economic and housing market conditions as possible coated with a heavy dose of common sense.”

Although the media tends to sensationalize the negative side of any story, including the Minnesota real estate market downturn, it would be irresponsible to say that the story has no basis in fact.

What are the facts? According to Mr. Dorfman, there are three things that happened between 1999 and 2005. They are:

  1. After the stock market decline and 9-11, Federal Reserve provided money at the lowest interest rates available in forty five years. Low mortgage rates and costs inflated home values to a level that could not be maintained.
  2. Wall Street got into the borrowing frenzy and refinancing scene by creating a host of CDO’s that resulted in a myriad of poorly understood mortgage products.
  3. A strong economy created jobs and caused massive immigration to the United States at the same time that baby boomers reached their peak earning power. Home ownership jumped from 68% to 78% during that time.

Mr. Dorfman went on to point out that there are some bright notes to be heard in this sort of real estate market that generally only the wealthiest people take note of. They include the following:

  1. A declining market means that there are opportunities for making money. House sellers will be saving money, because they too, will be buying in a declining home value market. Also, sellers would do well to keep in mind that their home values rose in value from 50% to 85% from 1999 to 2005. During this spring market, sellers should be aware that inventories typically rise during the spring, and that the increase in foreclosures caused by ARM adjustments will keep supply higher the longer that sellers resist price reductions.
  2. This is a great buyers market, with good prices, good selection, and good terms, especially if you are looking to buy your own home and live in it for at least five years. It is hard to know when the market will turn again, but “buying at the bottom is like selling at the top – it never works.”
  3. Smart investors buy in a weak market, then hold and sell when they see a profit. If you are investing in a home, you can live in your investment in the meantime, fix it up, and enjoy great tax benefits.
  4. Residential real estate is a long-term investment. Fast money via flipping is mostly fantasy.

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