We Tell it Like It Is

Recently from Chris Galler, CEO of the MN Assoc. of Realtors:

Minnesota is experiencing tough economic times and a declining labor force. Our neighbors in most of the Dakota’s are seeing a stable and growing housing market. Fargo, Sioux Falls and Grand Forks are seeing good economic growth and consequently, a good housing market. The fundamentals of a good real estate market are really pretty simple and the order is important:

1. Economic Growth – people who are positive about their financial position/situation are more likely to take on additional debt.
2. Population Growth – in areas where the economy is strong, people with the appropriate job skills will move. Migration to an area means supply/demand can take effect.
3. Housing Affordability – units in the community must be priced according to the wage scale of the median worker. Interest rates and loose lending standards manipulate the market for short terms.
4. Access to Credit – Lenders must be willing to lend and in some situations take a chance. Not LIAR loans. Chances include building/development loans so units can be constructed for the new residents.
5. Sustainability – which in my opinion means consistent and predictable. Booms are not good for real estate in the long term. Real estate is a long term investment and best purchased by consumers who have sustainable employment and income prospects.

In my opinion, these are the five building blocks for a successful real estate community. If one piece is missing, or the order is off, real estate will have difficulty. As an example, in Minnesota during the 1990’s we had a strong economic climate. Skilled people migrated here in phenomenal numbers (+258,000) to take jobs and raise their families. Housing prices compared to median wages were balanced and interest rates were running around 7% - reasonable compared to 5 or 10 years prior. Lenders were competing for business which helped grow Minnesota business. Everyone thought the growth was sustainable. Even after the Dot.com bust, which really did not impact Minnesota, the future appeared bright and prosperous.

As more people arrived, the real estate market started to show the stresses of supply/demand. Builders/developers began option/purchasing huge tracks of land driving up the price. As the price increased above the median income, interest rates fell followed by a plague of subprime no doc loans, which in turn drove prices up further and spurred more development. After 5-6 years of double digit home price increases and moderate median income growth, the economic model was no longer sustainable.