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Monday, December 31, 2007

Looking back on 2007


2007 was a tough year in the real estate business and in business in general in Michigan. This was another FUD (Fear, Uncertainly and Doubt) year for our state’s main industry – the automotive OEM’s and their suppliers. Try as they might, the states leaders (and I use that term very loosely as it applies right now to the folks in Lansing) can’t seem to make much progress towards a more balanced economy. Of course using the word balanced in any context with state politicians is likely an oxymoron. And speaking of morons… no we won’t go there, today. After the governor touted the health care industry as the future of the state, we all watched in disbelief as Pfizer made its announcement that it was effectively exiting the state. Now, tourism is being touted as our future big industry. But, enough about Michigan, let’s look at the real estate scene.

For at least the fourth year in a row we were locked into a buyers market. The inventory of houses for sale was way up, foreclosures were way up and buyers were still scarce, although that started to change in the last 1/3 of the year. Foreclosures continued to be the big story of the year, with our hero’s in Congress finally jumping into the act and the President using his bully-pulpit to jawbone the mortgage industry into doing more to restructure loans that are in jeopardy. A bit of after-the-fact legislation was finally passed that removed the threat of the IRS going after taxes on the forgiven debt portion of a foreclosure on the unfortunate people who lost their homes. Foreclosures represented about 6-8% of the active market for much of the year, but only .66 of the total housing mortgages in the state.

Across the country, state after state slid into the muck of this market mess and California fought for it’s usual role of being the largest (in this case the largest looser) in the foreclosure category, although Michigan, Ohio, Colorado and Nevada gave California a good run on that. For all of the year Michigan was in the top 10 of state with foreclosure issues and for much of it in the top five. In one category, Michigan and Ohio made California look like a piker, when it came to loss of property values (See post of Dec 22 – Oh Great! Were #1 Again!). We lost over $185 Million in the value of homes in Michigan, while California only lost $30 Million. Of course our local politicians were mainly concerned about the loss of tax revenues for their coffers.

Congress and the Administration also finally took notice of the plight of homeowners caught in the sub-prime mortgage mess and took some action, albeit a little late and a lot less than some wanted. Congress also finally got around to looking at the disaster in the housing market that Adjustable Rate Mortgages have been causing and which loom large for 2009. There are relief packages in the works for that too. And, at the last minute, the Senate passed a version of the FHA Modernization Act, which now goes to a compromise committee to be reconciled with the House version. That will help by freeing the FHA to take a more aggressive role in the housing market.

Of course the press had a field day with the whole thing, since there were great photo ops and lots of “film at 11” of people suffering hardships this past year. The new “reality show” approach to news seems to be a camera crew running up to someone who has just suffered through a disaster or personal loss and asking “How do you feel about this?” Well, it didn’t feel real good in 2007.

The "green" movement made minuscule progress in 2007, primarily because there was so little building of any kind going on. There was lots of press about it, much of it devoted to "green" ideas that one could implement in existing homes.

In our business many companies are suffering and some have already gone out of business. This includes builders, who just about stopped all work in 2007. Locally several builders sold off their developments and exited the state, some have gone bankrupt. The “collateral damage” has been high, too. Several mortgage companies disappeared and many of the title companies that did business here left as well. Those that have stayed have had to downsize in order to stay in business. Many other ancillary business that depend on the real estate market have suffered, too – home inspectors, home warranty companies, even building supply companies have all had down years.

In the real estate profession we’ve seen most of the marginal agents leave. Many of those were part-timers or fairly new agents trying to make a living, but who had not yet established themselves. It was a tough year to be a newbie, if you have to earn your living selling real estate. The across-the-board slowdown left many agents with large inventories of listings that just sat there the whole year, costing money for marketing but yielding no return. It was a challenge all year long to get the sellers to understand what was happening in the market and to adjust their pricing accordingly. Many just ended up taking their houses off the market, when the prices slipped below their break even point. There were many cases of sellers having to bring money to he closing, just to be able to sell.

For those of us with a little more time in the profession it was certainly a challenging year, but one could still survive – there were still people buying and selling houses. About half way through the year the focus for many buyers turned to seeking deals on foreclosures, so activity in that segment picked up noticeably. It is unfortunate that the misfortunes of others is what provides opportunities for buyers; but, it is what it is, so it was a great year to be a buyer or investor. We started to see the rise of young investors who are jumping into the market to snap up foreclosure properties. It remains to be seen if they’ve done enough homework on real estate investing and have the financial wherewithal to make a go of it or if they just become the next round of victims in this market.

So, all-in-all, 2007 wasn’t a very good year in real estate. I think our industry and the people in the market – sellers and buyers – have done a fair job of adapting to the market, even though all the participants weren’t happy. We will exit the year on some hopeful notes with the actions that Congress has finally taken. We appear to be at, or near, the bottom for our local market and have great hope that things will start to turn around in 2008. Almost everyone in the industry has made the major adjustments that were necessary to be successful in this market; so now is the time to get this lean, mean real estate selling machine cranked up and launch into 2008 with enthusiasm and confidence. People are still selling and buying houses! To paraphrase Ty Pennington’s opening cheer on Extreme Makeover Home Edition – “Let’s do it people! LET’S SELL THAT HOUSE!!!”

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