My New Blog

Time to look at the stats for the first half of the year for Washburn and Burnett Counties.  It looks like Burnett County watefront properties have been holding their own.  Last year through the first 6 months there were 58 closings on the MLS.  This year there were 59 closings on the MLS.  The median price for the first half of the year was 233,500 and the average was 255,592.  Last year the median price to date was 225,000 and the average was 241,690.  So at least the volume is staying up there from last year.

Burnett County residential (non-waterfront) properties it isn't so good.  So far the number of closings was 61, and the median price for the first half of this year was 85,000 and the average was 96,037.  Compare this to last year were the total number of residential (non-watefront) properties closing was 77 and the median price was 115,000 and the average sale price was 120,994. 

In Wasbhurn County the opposite is the case.  Waterfront property closings are down from 59 to 41 for the first half of the year.  The median price for waterfront properties is 250,000 and the average is 253,878 for the first half of this year.  Last year it was 239,900 and 272,032.  So it is interesting that although the total number of sales is down the sale prices are remaining steady.

Residential (non-waterfront) properties in Washburn county show a better picture.  The total number of sales last year were 62 up to this point, and the median price was 104,450 while the average was 118,366.  This year the total number of sales for the first half was 114,500 and the average was 116,733.  Total sales up, but the actual sales price is pretty steady.

The problem with statistics is that it always doesn't show the true picture.    All this is saying is that in general people are not willing to pay significantly more than in the past, and the question is, "Are they expecting more for their money?"  We still have a large supply of homes on the market.  So we know that it is a buyers market.  Are people paying about the same, but getting more?  That's something only time will tell as we actually begin doing appraisals on these properties.  From my experience in doing appraisals my hunch is people are paying about the same but expecting more.  But that is very hard to quantify.

Right now it is a buyers market.  One of the places that buyers should really be looking at are those foreclosure bargains out there.  I do appraisals on these and you can often get them at bargain prices because companies want to get rid of them.  But remember that you will not be buying "a finished product".  Most foreclosures will require significant work.  You just won't be able to buy and move in.  But if you have some skills, don't have a large amount of money, and want to put some sweat equity into a place this is really the way to go.  You many not be able to get a traditional loan right of way.  It may mean getting a short term construction loan that you can later roll over into a fixed rate.  But rates are still historically low.  So best not to wait until the market starts heating up to buy. 

But be careful!  ALWAYS get as building inspector to give you the scoop on a house.  You may not be able to see a major problem.  An example is that I did an appraisal on a property that had a septic system.  It wasn't that old of a house and I can't tell what the septic system is like from just a visual inspection in the winter.  But I heard that the septic system was froze up, and the buyers were able to buy the house and get the new system from the lender.  That's at least a $5,000 savings.  So get inspections!

When one looks at the long term gain in real estate values it can vary from area to area.  But let's say the long term rate of appreciation in housing is 7% for the past 30 years.  If housing grows at a very fast rate of 20% to 30% for two or three years then in the next few years housing will regress back to the mean or the normal appreciation levels.  In otherwords housing values will decrease over time until it catches up to the historical appreciation levels.

The above graphic is taken from an article that I am referencing on the web.  It is a chart that represents Phoenix.  In this chart regression to the mean can vary at different rates.  But if it does so in a few years, say 2008, then a home purchased for 380,000 would drop to 225,000.  That's a 34% drop!  If it regresses to the mean in 2010 it would necessitate a 10% drop in the original value. 

See the link below for a complete discussion.

http://usmarket.seekingalpha.com/article/18667

How does this apply to our local markets?  Well if appreciation on our lakes was 7% before the big surge in values which occurred in the 2000 to 2005 period, then over the next number of years values will drop to regress to that mean.  We are going to return to the "normal levels of appreciation".  Thus the bigger the growth spurt the greater the adjustment to the normal levels of appreciation.  How long that adjustment will take one cannot be sure of.   That it will take place is pretty certain.

Now might be a good time to buy rental property. 

Foreclosures are going to be up which means there may be some good buys on homes that could easily be fixed up at a reasonable cost.  Most lenders are not going to want to keep them long so you can get them at liquidation values.

Second as lenders become more stringent on credit there will be more people looking for rental housing.  This should mean rents may go up a bit.  This is already happening in the Twin Cities.  My son lives there and says that rentals are being gobbled up very quickly.

Third the real estate market will not stay soft forever.  It may take a few years for things to turn around, and don't expect the same crazy price increases of the past, but if you can get into a house at a liquidation value, pay for the majority of the costs through rent, then after  three to four years it might be possible to sell the house for a nice profit.  The key is to buy a property in an area with a good history for primary housing.

So how do I know if the property might be a good rental?  We look at the Gross Rent Multiplier as one indicator.  The Gross Rent Multiplier is a market derived indicator of value.  If a typical house sells for $100,000 and it gets $1,000 a month rent then the Gross Rent Multiplier would be 100.   This should be indicative of all similar houses that are rented in that area.  A GRM is usually derived from numerous sales of rentals. 

An appraiser should be able to give you the GRM for a particular neighborhood and style of house.  So then let's say the GRM for a neighborhood is 125.  You are looking at purchasing a house as a rental that you can get $750 a month rent based upon market data.  The projected market value as an income producing property would be $750 X 125 or $93750.  What this means is that if you can get the home cheaper than $93750 it may make sense to buy.

Typically good rental property will be older homes.  And remember there is going to be a cap on market rents.  Some areas will not command above a certain rent.  So do your homework.  Best of all hire an appraiser to help you sort things out.