Real estate: Recovery continues to vary by region, as well as by market segment

Few categories were hit harder by the Great Recession than real estate. Where I live—near Minneapolis/St. Paul, Minnesota—it seems like the market has begun to turn somewhat. A thriving segment has blossomed, comprised of realtors, contractors and carpenters who’ve made “flipping” a major focus. Modest, or even abandoned, damaged homes are bought on the cheap, then overhauled completely, and sold at a price that is both reasonable to the buyer and profitable for the seller. Such deals are available in a wide variety of neighborhoods and prices… from entry-level to near-luxury homes.

Some concern has been voiced about whether such "opportunity" sales might be extinguished in the absence of incentive programs. (See this story from Bloomberg.)

People still selling homes here could fit into two distinct categories. First, those who have owned a home for many years and did not withdraw significant equity from their property through refinancing or home equity loans (these folks can still look at this real estate market as an opportunity to upgrade). Second, those who are essentially forced to sell by changes in life stage or circumstance (such as a job change or job loss, change in marital status or family composition, a relocation inspired by health- or age-related issues, etc.)

Traveling and communicating with folks across the U.S. as a part of my work, I am reminded that some markets remain more deeply affected than others, when it comes to the real estate category. It’s easy to find evidence in the headlines: A December story in the New York Times explained how the migration of people to the Sun Belt has slowed dramatically. More recently, this in-depth report from CNN Money explained how the real estate downturn was created—and has impacted—the state of Colorado. (Watch the video immediately below, or click here for the link.)

Implications: I found the story from CNN particularly interesting because of the way it focused on cause and effect. It suggests a combination of three issues behind most foreclosures: 1) Buyers assumed (wrongly) the value of their property would continue to appreciate, 2) Buyers were not educated enough about the type and terms of the adjustable mortgages they were getting themselves into, and 3) Some folks just bought a home that was out of their financial reach.

Going forward, one could easily assume that folks will be cautious about the extent to which a property might appreciate over the length of anticipated ownership… even driving more people to rent longer before buying, or put-off their home purchase until they know they’re sure they will be living in an area for a long time. (Thus, issues like neighborhood quality, schools, and jobs become even more important.) One might also assume that future buyers will be more careful and educated in the future; beyond someone who’s willing to drive around and show houses, future buyers might expect much more expertise from their realtor or mortgage broker, as well as a more transparent buying process. And finally, one could expect more consumers to buy within their reach, drive either by their own sense of caution or one imposed by their financial institution.

Mike Anderson