2008 "Dear Client" Letter

What Would Warren Buffett Say?

Note: Warren Buffett, the CEO of Berkshire Hathaway (which also happens to be the parent company of Edina Realty), is famous for his annual letter to shareholders. In that vein, I composed and distributed the following missive to several hundred of my clients and acquaintances this past January (if you want to avoid the 3 month lag, sign up for my e-mail distribution list!).

Dear Clients:

With real estate seemingly making news daily — and not the positive kind — I thought it might be timely for a quick, boots-on-the ground take (mine) on what’s going on now in the local real estate market:

●Notwithstanding predictions of huge price drops (see below), the big story now is a (continued) slow-down: buyers are nervous about values, and sellers want to sell for ’07 (or ’06!) prices. With buyers and sellers on different pages, the main consequence is a drop in deals.

●All real estate is local. Where there’s (foreclosure) pain, there’s a lot of it. In Minneapolis, that includes many parts of the Camden neighborhood on the north side, the Phillips neighborhood, and (increasingly) downtown condo’s. Ditto for the remote ‘burbs where most of the new construction was built. However, established, historically strong neighborhoods such as Linden Hills, Seward, and around Cedar Lake seem to be doing fine.

●Wall Street predictions. The same people who were remarkably quiet about the direction of real estate prices just two years ago — or who simply extrapolated gains indefinitely into the future — are now quite vocal that housing is (still) too expensive. Just last week, Merrill Lynch made headlines with a prediction that housing prices will fall another 15%-25% nationally the next two years. This from the same company that didn’t see tens of billions in sub prime losses on its own balance sheet until it was too late. Two of my favorite lines about Wall Street are: 1) “nobody knows ‘nothin”; and 2) “those who talk don’t know, and those who know, don’t talk.”

●At the risk of disqualifying myself, per above, my own best guess is that instead of housing prices coming down significantly, the price of everything else is going to go up. That’s called inflation. With gas well over $3 a gallon, food up dramatically, the dollar weak and gold strong, clearly that process is already under way, abetted by Federal Reserve easing.

●Capital flows: after the tech bubble burst in 2000, a lot of money that was formerly committed to stocks instead went into real estate. Then, as the stock market began to recover in 2003-2004, the process reversed and money flowed from real estate into stocks. With the exceptional volatility in stocks in 2007, and more of the same so far in 2008, the investing pendulum is set to again swing towards real estate. That’s not so much of a factor at the low-end of the market — first-time home buyers typically don’t have stock portfolios — but I see it (positively) affecting demand for more expensive housing as the Spring market kicks into gear.

●Rental market trends: although this isn’t my focus, all the anecdotal data suggest that the credit crunch is helping landlords raise rents. In the meantime, homeowners with some equity and good credit are taking advantage of lower rates.

With the foregoing as prelude, what should you be doing now?

For the vast majority of homeowners, probably nothing. If you are not contemplating moving this year, spare yourself the agitation and skip all the “What’s next for real estate” articles proliferating like kudzu. If you want to know what’s really happening in your neighborhood, just call me. As a former (and hopefully future) client, you’re always welcome to check in with me and get a market snapshot. (I’ll expect a family update in return, though.)

The one, proactive step that I do recommend now, depending on what kind of mortgage you have (assuming you do), is to consider refinancing. Courtesy of the Fed, 30 year rates are now below 6%; 15 year mortgage rates are 50 basis points or so less. As always, fees matter, and it’s a good idea to shop around. Just as with a purchase-money mortgage, lenders offering refinancing loans must provide you with both a timely Good Faith Estimate and a Truth-in Lending disclosure showing their fees.

Lastly . . . if you rented in Minnesota for any part of 2007, be sure to get a Certificate of Rent Paid to include with your 2007 tax return. Minnesota landlords are required to provide these forms by January 31. Depending on your circumstances, you may owe less tax as a result.

If somehow this letter doesn’t sate your appetite for real estate info, please don’t hesitate to call or e-mail, or, check out my blog at http://citylakes.blogspot.com/


Edina Realty — City Lakes Office
Cell: (612) 710-3282
E-mail: RossKaplan@EdinaRealty.com

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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