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AdNation News Exclusive Interviews: Real Estate Trends

AdNation News interviews Edina Realty executives Barb Jandric and Lynn Clare, Jonathan Miller, President & CEO of Miller Samuel Inc., and Dr. Jed Kolko, Chief Economist and Head of Analytics, at Trulia, Inc. about 2012 residential real estate trends and what’s in store for 2013.

An Increase in Sales that is Beyond Normal

Thus far in 2012, Edina Realty’s units of sale are up 20 percent over 2011, and this growth is in line with the growth that has occurred in the Minneapolis/St. Paul market, Jandric says. This growth has taken place as foreclosures have slowed drastically, as much as 60 percent from their high, she explains.

“If there is normal anymore, a normal rate of increase in sales is always single-digits,” Jandric says. “You can see what a strain being up 20 percent has on the inventory in the market,” she adds. “I do not want 20 percent growth, I think it might be more than the market can handle,” she explains. “We would be happy with growth being in the three to six percent range,” she comments, noting that growth is measured by the number of units, not by prices.

Plenty of Buyers, Not Enough Inventory

With inventory at a nine-year low, Edina Realty has a challenge that is being faced across the U.S. right now, and is echoed by our interviews with Miller and Dr. Kolko: plenty of buyers, and not enough inventory. In addition to the slowing of foreclosures, Jandric also attributes the lack of buyers to low interest rates. “So many people have refinanced, they stay put for now, because of these low rates,” she comments. Regarding the decline in inventory, “we saw this coming about a year ago,” Jandric says. “We are watching the market every day,” she adds.

At this time, many sellers cannot move forward because “they do not have any appreciation or any equity in their home,” Jandric says. Someone who bought from 2002 to 2008, “they really are not in a position where they can make a move and get some appreciation in their home,” she adds. In addition to homeowners who are “underwater” on their mortgages, there are some who would essentially walk away, even if they sold their home, because the equity in that home would mostly be swallowed by the remainder of the mortgage as well as closing costs. “At the end of the day, if they are walking away even, they don’t really have equity,” she explains.

Dr. Kolko notes that inventory is particularly tight in Arizona, California, and Nevada, which have relatively short foreclosure processes, “much less time than it takes in New York, New Jersey, Florida, or Illinois.” Those states with shorter processes “are much more of the way through their foreclosures than a lot of East Coast states are,” he says. With fewer foreclosed homes on the market, “that’s trunking the inventory,” he explains.

Miller, who is based in New York, explains that in New York and Miami, “you have got housing prices effectively stable or flat, and you have got inventory falling sharply, and falling fairly consistently for the last 18 to 24 months.” He adds, “There is a link between inventory falling and credit being tight.”

“Sellers become buyers when they sell, or they become renters,” Miller comments. “If you bought something five or seven years ago, and you sell it today, when you bought it, you bought it for 10 percent down,” he explains. “Today, you need 20 percent,” he notes.

Tighter credit has frustrated many who “are looking at low rates, and want to take advantage of the opportunity, but do not qualify to trade up,” Miller says. “Realtors are scratching their heads, with rates at record lows, and affordability higher than ever, but not enough inventory,” he comments.

Out-of-Home Marketing to Grow Inventory

Growing inventory was a focus of Edina’s 2012 campaign, and its new advertising agency, Preston Kelly, was selected to help Edina grow inventory more into 2013. As Lynn Clare, Vice President of Marketing since 2000, explains, “our out-of-home campaign this year will focus on encouraging people to list homes by demonstrating that homes are selling.”

Clare notes that out-of-home marketing will be a major emphasis for the company because “it gives us the best reach for our money.” She adds, “It allows us to capture maximum impressions along all of the main traffic arteries in our market with large 14 by 48 foot bulletins.” Edina will also be using “smaller boards to bring our message to specific neighborhoods, where we are in need of more inventory or market share,” she explains.

The Increased Importance of Digital Advertising

Miller notes that “97 percent of all home searches begin on the Internet.” Dr. Kolko explains that Trulia, an online real estate marketplace, is not a replacement for agents. “We help consumers find agents,” he adds. “One of the things that we offer is a national audience for listings,” he explains. “We find that about one-third of the searches on our site cross state lines,” he comments.

Edina Realty has eschewed television advertising for several years, due to its cost; digital advertising has become an increasingly important part of its messaging. In 2013, Edina’s “on-line campaign will focus on the launch of our new mobile, iPhone, and iPad apps,” Clare comments. Digital marketing “will also be used to support our open-house events, and drive consumers to begin their home search right from our banner ad widget.”

More Inventory on the Horizon?

Miller predicts that, in much of the U.S., we will soon see more foreclosures come into the market. In 2010, “there was a tsunami of foreclosures coming on the market,” he says. In October 2010, the “robo-signing” scandal erupted in the media, when major lenders were “rubber-stamping foreclosure notices by the tens of thousands.” As a result of this scandal, in 2011, “foreclosure volume fell by one-third, not because it was getting better, but because the servicers were afraid to foreclose, as they were subject to lawsuits and litigation.”

By all measures, new construction is rebounding. Dr. Kolko notes that in San Francisco, rates of new construction have already returned to normal, even as it is still quite low in Las Vegas, Phoenix, and Sacramento. In Minnesota, where most of Edina’s offices are, Jandric believes that a “normal market that brings in construction the way it needs to” is a couple of years away, although “we still have a tremendous amount of construction.”

High-End Real Estate as the New Global Currency

In New York and Miami, and in some other markets (including Phoenix), there has been growth at the high-end of the market due to foreign buyers, flush with cash. Affluent Brazilian buyers “single-handedly revived the Miami market,” Miller says. Prices of high-end real estate in Brazil “are so astronomical, they are coming here, it is a bargain.” High-net-worth buyers from overseas are treating U.S. luxury real estate “as some sort of safe haven, really for capital preservation, as opposed to making some sort of return,” he comments. Miller notes the irony of this, seeing as “real estate and mortgages were the cause of the credit crunch.” In San Francisco, Dr. Kolko notes, there has also been growth at the high-end of the market, and much of that growth has been fueled not from overseas but from those who have become wealthy from technology companies.

Thus far, this trend has not taken place in Minnesota, Jandric says. “I think 93 percent of the people who buy in Minnesota are from Minnesota,” she comments, noting that Minnesota is not a warm-weather location like Phoenix and thus does not draw as many second-home buyers. Jandric has seen one sign of growth at the high-end, however: lakeshore property as second homes. At one point, “lakeshore was absolutely dead in the water,” she explains. “We are starting to see that market pick up again, and have a pulse, although it still has a long way to go,” she adds.

Miller notes that there have been “record prices set at the top sliver of the market,” including a recent $47 million single-family home sold in Miami and two sales over $90 million in New York City.

Looking Ahead

Policy made in Washington always has the ability to impact the real estate market. “We are watching closely to see what happens with capital gains’ taxes, and with interest deductions on mortgages,” Jandric says. Edina Realty will continue to monitor potential policy changes, and this would be the case no matter who had been elected in the 2012 cycle.

Miller believes that uncertainties about future policy, i.e. the “fiscal cliff” that will occur when tax cuts signed by President Bush in 2001 and 2003 expire, have weighed on the minds of many potential sellers. “What do sellers do when they do not know what to do? They do not do anything; they sit,” Miller comments.

Much of the East Coast is still reeling from Hurricane Sandy. “Typically after a big disaster, lots of new home construction and sales are delayed,” Dr. Kolko says. “At the end of the construction season, new home construction might get pushed into next year,” he explains. “At the same time, there will be an urgent need for repair,” he adds.

“Demand for construction work and rebuilding goes way up after a disaster,” Dr. Kolko says. “Even though that will not be construction of new homes, there will be a lot of repair to existing homes,” he comments. “Hurricanes tend to push up prices a bit, depending on how much housing gets destroyed,” he adds.

“Aside from the most extreme disasters like Hurricane Katrina, people typically do not leave the area permanently,” Dr. Kolko says. “If the disaster reduces the housing stock a bit without reducing the population, that will push prices up,” he adds.