We Tell it Like It Is

Mark Allen, CEO of the Minneapolis Area Association of Realtors, met with a group of us from TheMLSonline this morning. I'd like to share with you what the final word is on how the United States got into this housing market slump, according to the experts (relayed to us from Mr. Allen and interpreted by yours truly for your reading pleasure).

In the 1980's, the United States experienced a similar dismal housing market slump as we are infamously experiencing now. That somber situation gradually disappeared and the market begin its ascend in the early 1990's. Soon, however, a phenomenon occurred. Mortgage interest rates plunged to a record low and people realized it was time to take advantage of it. To the mortgage lenders' delight, an influx of people began applying for mortgages and soon, they were being given out like candy on Halloween. Lenders began to fight each other for business; tempting buyers with loans requiring no down payments, lower interest rates, and not many guidelines or stipulations when it came to income and credit.

Suddenly, the roughly 65,000 homes that were for sale each year in the late 1990's were disappearing within hours after going on the market. Home sellers would sit back and watch in shock as buyers battled each other for their property; eventually bidding & selling for well over the asking price. Sellers found themselves in the driver's seat with the buyers at their mercy; the normal 3% appreciation in home values were up to 5% and climbing.

By 2000, home values had increased to as high as 12% appreciation, as the demand far exceeded the supply. Soon, builders began building more inventory to appease the eager buyers and home owners decided to jump on the bandwagon, realizing they were sitting on a gold mine--putting their homes on the market solely to make a profit. In 2000-06, buyers were paying top dollar for homes that would normally sell for thousands less.

By the end of 2003, the normal 65,000 new listings per year shot up to 86,000. In 2006, that number increased to a record 108,000...everyone wanted a piece of the pie. However, the overzealous nature of sellers and builders would come back to haunt them sooner rather than later.

In 2005, there were 3 homes for every 1 buyer, but as the inventory increased, the amount of buyers began to decrease and by January of 2008, there were 10 homes for every 1 buyer. The tables turned and the demand eventually died down, leaving an obnoxious amount of supply. Home values dropped and today, many have decreased in value since they were purchased for an inflated amount a couple of years ago.

So, here we are. After roughly 13 years of a crazy buying & selling frenzy, what goes up must come down. Home owners who have to sell today--they paid $299,900 for their home and now have it listed for $265,000 and it still isn't selling. 10,000 licensed real estate agents in MSP have dropped down to 8,000--who are earnestly sweeping up the broken pieces and attending their weekly therapy sessions. And those lenders and buyers exchanging mortgages like candy...well, we now know how those situations ended up.