Thursday, January 17, 2008

Real Estate and the Web

We recently moved to the country. It's all I can talk about. I enjoy nature and animals. We regularly see deer, racoon , possum, coyotes. We even had a black bear visit us. We have a Red Tailed hawk that occasionally flies by with a snake dangling from its talons.

The mice are everywhere out here. I've got an old Ford Pickup truck I use to plow our driveway. They, the mice get into the truck and make nests in the glove compartment. They also made nests in the heater and at least one crawled down the defroster vent and died.

Sometimes I feel like I'd like to get rid of all the mice. But if I could ever manage to do that, I'd lose my hawk, the coyotes and who knows what else. Everyone knows about the food chain. Everything depends on the smallest creatures at the bottom. Though it is not quite as simple as a chain, its more like a web of living things all dependant on each other.

The real estate market is like a food chain. The first time buyer is at the base. They buy an existing home and the owners of that home buy another, probably more expensive, home and so on. The builder who builds expensive new homes is dependat on the first time buyer even if they never meet.

Our real estate market is not suffering from a lack of buyers. At this point they are still out there. In Red Wing, where I work, the low end is almost normal in terms of number of homes sold. First time buyers are purchasing homes and getting deals like you've never seen before.

Let's define the low end of our market as $150,000 and under. Right now there are around 60 homes in that price range. That's a lot more than normal. More than half of those are vacant foreclosures. In any give quarter you can expect 20 to thirty homes in that price range to sell.

Today in our real estate crisis that remains true. The problem is that when a vacant house sells, no one moves up. The "move up" or second time buyer has been removed from the food chain. It's hard for them to sell their homes when they are competing with banks who have to sell at any price.

Our market will not get better until first time buyers are buying mostly occupied homes. As long as foreclosures continue to flood the market, we are stuck. Mortgage rates don't matter as long as the inventory is all vacant homes.

With the current market conditions we can sell our inventory of foreclosures in three months. The problem is that they just keep coming.

The price of new construction can not drop in the same way as existing homes. Steel, copper and petrolium have all increased in price. Builders are scaling back and going out of business.

What happens when we reach the end of the vacant house inventory? Rates will be low, builders will not have the capacity to fill demand. All of the move up buyers who have been defering their move because of the market will find ready buyers. The market will take off in an unhealthy way.

There will be competitive offers and prices will sky rocket. The quality bulding we see today will be left in the past as builders jump to fill demand and make quick money. We have seen this before in the 70's and 80's. Maybe we will see inflation and recession at the same time again.

Low interest rates should not be the reaction to our current situation. If there is anything to be done it would be steps to stall coming foreclosures so there is a softer bounce as we come out of this.

This is Real Estate and the Web, the food chain and we are in for a ride, no matter what happens.


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