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It's time to get realistic about Burnett County waterfront properties.  Agents and sellers are living in la la land.  Properties are grotesquely over priced for the market.  Here it is December 20, and there are 162 waterfront properties on the market according to the MLS.   In the good years there were hardly any listed at this point.  Since the beginning of the year there were 96 MLS listings that sold.  In 2007 111 sold, in 2006 119 sold, in 2005 152 sold, in 2004 129 sold, in 2003 120 sold, in 2002 140 sold, in 2001 110 sold.  The average sale price the past year was 263,381.  And the average list price for properties currently listed is 299,958.  What a disconnect!  The average home is over priced by 13%.  That's huge in a soft market.

What does this tell us?  The peak was in 2005 and it has been sliding since.  I do not see any reason to think that next year conditions will be better.  Indeed I have every reason to believe they could be worse.  Therefore prices are going to have to come down significantly to get the market back in balance.  There is nothing sacred about waterfront properties.   They are subject to market forces like anything else.  In the early part of the century properties went up 15 to 25 percent per year.  I see no reason why the reverse should not be true in the next two to three years.  It's happened in other markets, and it will have to occur in this market.  The sooner we realize it the less dramatic the decline will be.

There were 65 closed MLS sales of non-watefront homes in Burnett County in the past six months.  The average sales price was about 114,000, and the median sale price was 94,500.  That is an aborption rate of about 10 homes per month.  There are 170 MLS listings on the market at this point.  This means that we have about a 17 month supply on the market. 

There were 60 closed MLS sales of non-waterfront homes in Washburn County in the past six months.  The average sale price was about 106,000 and the median price was 95,500.  This is an absorption rate of about 10 homes per month.  At present there are 175 MLS listings on the market.  This means that there is about a 17 month supply on the market.

These are stunning statistics and demonstrate just how slow the market is.  A healthy market would only have about a six month supply on the market.

People are anxiously waiting for this housing decline to bottom out.  I know I will be glad.  I hate being the guy letting people know their house declined in value so that they owe more on their house than what it is worth.  I don't like being the bearer of bad news.

So the big question remains, "How long?"  The answer is, "No one knows."  Some of this will depend upon how long and how deep this recession lasts.  Unfortunately 2.8% of U.S. mortgages are now at least three months in arrears, up from 1.4% a year ago.  That rate is projected to peak in early 2009.  That is according to a new CNN report.  That's not good news. 

Also if this recession lasts more than three quarters and people loose their jobs it could be a lousy year for real estate.  And S&P/Case-Shiller home price index which tracts income and housing values believes that we are in for a 20% decline in home prices next year.  Another forecaster is looking at a 15% decline.  The fact is it can't help but decline.  The supply is too high, and the demand is too low.  It's basic economics.

So what do you do, if you have to sell?

• Wait it out.
• Make your place shine if you intend to sell.
• Price it below market to get people to look at it and buy it.

If you are buying....

• Look for home that have been listed a long time and drive a hard bargain.
• Improve your credit score.

It's just plain ugly.  The good news is that in some areas of the country activity is picking up because of the reduced prices.  And remember all real estate is local, so my advice is talk to a good appraiser to give you the scoop on what is really happening in the local market.  And PLEASE before you buy a house get it appraised to make sure you are not paying more than you should.  You hire the appraiser, and do it BEFORE you make an offer.  You could save thousands, and in this market that could be really important.

Today the statistic came out that one in six owe more on their home than it is worth.  Not sure how they derive that statistic, but that is probably true.  But please remember that all real estate markets are local.  Those markets that had the fastest increase in values are the hardest hit.  If you bought a home in a market that went up slowly you are probably alright.

The biggest issue for Washburn, Sawyer, and Burnett Counties where there is a large volume of second homes on lakes and rivers is where are values going in the long run.  I recently did an appraisal of a nice lake home on the border of Sawyer and Washburn Counties.  So I looked at both counties to see what the aborption rate is.  For example if 120 homes sold last year the aborption rate is 10 homes per month.   What I learned was that there is a 45 month supply of waterfront homes on the market. That is a HUGE over supply, and it is going to have a significant impact on future values.  It just has to. 

What will it take to reduce that over supply?  Ultimately it is a matter of setting a price and getting buyers back to the market.  But here's the problem.  How far will values have to come down?  That's hard to say, because I don't think second home buyers will be around until the general real estate market comes back.  In otherwords I'm not sure we can coax people back to buying a second home until other economic factors are rectified.  It may be that we have a situation where price is somewhat inelastic.  What do I mean by that?

A commodity that is sensitive to pricing is elastic.  As soon as it comes down people will buy it in larger supplies.  It is a commodity that is more sensitive to market conditions.  A commodity that is inelastic is something that no matter what price it is people either have to buy or don't have to buy.  For example the consumption of heating oil is somewhat inelastic to price sensitivity.  People have to heat their homes if they have an oil furnace. They can cut back in temperature a bit, but not totally. So they will cut back on other areas to pay more for oil.  On the otherhand it can work the other way.  It really doesn't matter what price it is, people really won't buy it because there simply isn't the demand for it.  I suppose an example of this is a plane ticket to Libya.  The fact is that if you don't have to go to Libya no matter how low that ticket gets you aren't going to buy one.  You just don't need it.

And thus we have the problem with second homes.  It may be that no matter how low prices get people simply aren't going to stream back to the market in large numbers.  People don't need second homes.  They are nice, but they can do without them.  So therefore it is really hard to know what kind of pricing should occur on these homes if that is the case.  And personally I suspect that is true to a large extent.  

Well the data is in.  Northern Wisconsin showed a median price decline of 6.9% from the second quarter of 2007 to the second quarter of 2008.  There was a 31.2% decline in existing home sales.  Generally speaking brokers believe that inventories will rise or stay the same, and that the number of buyers has declined. 

So what does this mean? 

1) Expect prices to decline as inventory rises and demand falls.

This is good for home buyers that have good credit, and it is bad for sellers that have high mortgage balances on their homes.  The fact that prices have not fallen significantly is probably and indication that many sellers can't budge on prices.

2) The availability of credit has affected the number of qualified buyers.

I have talked with numerous banking and mortgage people and the bottom line is that credit is tight.  This of course has made headlines the past few weeks with Wall Street in a financial crisis.  Things have indeed clogged up, and banks are very cautious.  It has swung to far the other way.  If the Fed and Treasury can figure out how to undue things it would really help.  If not this could be catastrophic.  Let's hope for the best.

What do we do?  Prepare for a significant recession.

1)  Stay calm. Panic feeds on panic.  We've come through this before.

2)  Don't borrow against your home to pay off credit cards.  Figure out a way of negotiating with creditors without using your house as an ATM. 

3)  Start getting your financial house in order.  Don't use credit cards.  Pay off credit cards as fast as you can. Cut expenses any way you can.

4)  Pray for the next President, because he's got a real mess on his hands.  There are no easy solutions.  We are going to have to bite the bullet and do the least painful thing which in and of itself will be painful.

5) Count your blessings.  We are better off than 90% of the people in the world.

Today Obama blamed the Bush Administration for the housing crisis and ultimately the demise of some financial institutions. That tells us just how little Obama knows about economics. The fact is that the mortgage crisis is something that is occurring world wide because of an unsustainable bubble in the housing market fueled by low interest rates in the past decade. Bubbles in markets occur throughout history and this is not unlike the bubble in the late part of the Clinton Administration when many people lost a fortune in the crash of the stock market because of the over valuation of dot.com stocks.

A bubble occurs when people expect prices to rise even further and there is a kind of feeding frenzy going on. People just thought real estate values were going to continue to rise as in the past and they never thought the opposite could occur. I remember telling people in real estate in about 2003 that we were pricing ourselves into oblivion.

This continual rise in prices simply could not sustain itself. But many just scoffed at me and told me I was just being negative. Many were sounding the alarm in the financial markets, but it was going so good that people just didn’t listen. But the history of economics teaches us that all hyper-inflationary trends end in a crash. Remember the stock market crash before the Great Depression? It was the same thing. Sooner or later the market goes out of balance and the opposite affect occurs.

A good example of this is oil. There was a feeding frenzy of speculation with oil. It was fueled by an unrealistic expectation that oil would simply go higher and higher and higher. It hit $147 a barrel. It has now dropped to under $100 as of today. It was a commodity bubble. Those people that bought on the futures at $147 have lost a lot of money. People in the industry were sounding a warning signal that this could not be sustained. Few listened. Sure enough demand began to drop and that caused the oil markets to decline more rapidly than they went up. This is an example of what occurred in the housing market. The difference is that in real estate it takes longer for balance to occur because of the imperfect nature of the market.

This should be a good economic lesson to all. A period of hyper-inflation in any sector of the economy will end with a crash of that sector at some point in time. Some people will ride the bubble for awhile and make money, but many will end up on the scrap heap of economic ruin. And just remember that greed which often fuels these bubbles is one of the seven deadly sins. It wasn’t Bush, it was greed; pure and simple greed.

This leads to the next problem:  ethics.  It seems like in the past decade the ethics of too many leaders have been focused on selfishly making money for themselves and not looking out for their workers, consumers, and the good of society as a whole.  This ethical demise has been a problem in the mortgage industry with lenders getting people into mortgages that simply were not good for them and very risky.  They were cheap at the time, but the downside would put the home owner under.  It also came down to dishonest appraisers that worked to hit numbers irrespective of what the home is worth.  I have seen that so often in doing reviews it is very scary.  I wonder how many people have had their homes grossly over valued; by that I mean 20 to 40%.  Yes, that's right I have seen homes over valued by nearly 40% on a regular basis.

My son, also an appraiser, was at a party some time ago and was approached by a mortgage broker that promised 30,000 in business if we hit the numbers.  This is the kind of dishonesty that has led to demise.  This occurred on a small scale.  What we are witnessing today on a larger scale is the same kind of ethical lapses when financial institutions falsely represented the mortgages they were selling on the market.  The fact is that someone really needs to be held accountable.  But all this is very hard to prove.  And how does one show culpability?

Will more regulation help?  Maybe.  But human behavior is one of the most difficult things to control.  If it was so easy we wouldn't have so many in prison.  In my opinion it is a result of the secularization of society where  "God" has become the dollar.  Values cannot be legislated.  It comes down to core personal values that are taught at a very young age.  The old adage is "I learned most of what I know before I was five years old" is very true.

The Fed took over Fannie and Freddie this last week.  What does that mean?  Well first of all we the taxpayers are now in the lending business.  Second it means that the government is going to prevent a meltdown in confidence in the home mortgage industry.  Rates went down .5% the day it happened.  So hopefully this will stabilize a very unstable situation in home mortgages.

The bad news is that pending sales fell 3.2% nationwide.  That means that buyers are not comfortable yet.  That's what I have been seeing in Northwest Wisconsin.  Many buyers are just waiting until prices come down more.  And they will if supplies continue to grow or not go down.  Maybe now that rates fell it will light a fire under a few buyers.  We'll see.  Credit is still pretty tight.

Inventories here and around the country are still too high.  In Burnett County we have over a 1.5 year supply on the market.  It is especially bad for recreational waterfront with nearly a 2.5 year supply!  Sellers must start reducing their asking prices or they can expect to hold on until next year.  And they will probably get less next year.  Also when we hit November real estate comes to a screeching halt. 

The macro information I have been reading is that this isn't going to bottom until 2010 at the earliest.  And in Burnett County it may take longer because of the nature of the market and the huge over supply.

Robert Shiller is famous for his house pricing index that he developed with Karl Case.  Both are economists that have looked at housing values throughout history in the US.  He made an interesting point on a recent interview.  He stated that when you adjust for inflation the values of homes in 1990 were about the same as in 1890.  He also pointed out that people in general have an unrealistic expectation that their homes will continue to go up and up and up and somehow be the cash cow to save their financial future.  But this simply isn't true. 

Let's understand an appraisal principle.  Houses depreciate in value.  They are not made of materials that last forever.  On the contrary they wear out over time or loose their functionality because of changing markets (a four bedroom home with just one bath).   It is the land that actually can increase in value because it doesn't wear out.  I suppose it could erode.  But generally speaking it is the only thing in a real estate transaction that remains stable.

So if you are out there thinking that your homes is always going to go up in value, please realize that generally speaking when adjusted for inflation your value will most likely remain pretty stable in the long run. 

Hit the link below for the interview.  It's very interesting.

http://finance.yahoo.com/tech-ticker/article/53094/U.S.-House-Price-Decline-Could-Be-Worse-than-Great-Depression?tickers=%5Egspc,fre,fnm

http://rismedia.com/wp/2008-08-17/8-reasons-your-home-hasnt-sold-yet-advice-for-frustrated-clients/

The above link is an excellent article from Rismedia about why a home isn't selling.  The following are the major bullets:

• First offer is often the best offer
• Be realistic about price
• Listen to the experts
• Be aware of getting stale
• Go for the "pottery barn" look
• Understand buyer psychology
• Don't expect buyers to renovate
• Play to your home's strength

If you are trying to sell your home I encourage you to read the entire article.

If you are buying a home most of the time a lender will order an appraisal.  But really the buyer should order an appraisal to make sure they are getting what they are paying for.  Is this home worth it?  Below is an AP article on the subject.  Afterwards is my response.

AP
Questions and answers on hiring an appraiser
Sunday August 17, 1:10 pm ET
By Mitch Weiss, Associated Press Writer

With some digging, consumers can investigate before hiring a real estate appraiser

My response:

Go to the web, and search for an appraiser in a particular area.  There are many sites by appraisers and other companies that have a list of available appraisers.  www.appraisers.com; www.appraiserusa.com; www.zipappraisers.com are a few sites to search.

When you call one ask, "How long have you been in the business?  Do you have any references?  What kind of appraisals have you done?  What is your education level?  How many appraisals do you do a year?"

Just because an appraiser is licensed or certified doesn't mean they are competent.  Real Estate appraising can be complex.  It is an art as well as a science.  Go with someone who has has significant time in the business and has a very good knowledge in an area.