The Twin Cities housing market had a banner summer, but unlike previous years, there are few “for sale” signs decorating yards to prove it. That’s because while median home prices were up between 12 and 17 percent April through June, fewer homes in the Twin Cities were on the market.
In fact, according to data from the Minneapolis Area Association of Realtors, total inventory in the metro decreased by 7 percent from April through June.
And that, says real estate experts, is a very positive sign that the seriously deflated housing bubble is taking its first deep breath in nearly eight years.
Herb Tousley, a real estate veteran and director of the real estate program at the University of St. Thomas, credits the improving housing market with the simple laws of supply and demand. “We’re seeing median prices go up and increased activity on the new homes side,” he says. “A major part of that is there simply aren’t a lot of existing homes to choose from.”
Part of the reason for the lack of supply in the Twin Cities (and nationally), Tousley says, is due to underwater mortgages—mortgages that are “upside-down,” where homeowners owe more than their home is worth. Instead of selling, they’re holding on to their homes, waiting to bob their heads above the equity mark.
Data released in June by CoreLogic, which provides real estate data and analytics, shows that more than 18 percent of all Minnesota residential properties with a mortgage had negative equity during the first quarter of 2013. (The national average was 19.8 percent for the same time period, down from 23.7 percent during the first quarter of 2012.)
But as median home prices steadily increase (up 17.5 percent in June) and homeowners begin to gain enough equity, Tousley says the growing demand will continue. Especially as our Twin Cities unemployment rate remains relatively low at 4.7 percent.
“People are coming here, or they’re in a position to [buy again],” Tousley says. “Many people are looking at new or rebuilt homes as an option. Now, all of a sudden, these lots that were sitting around waiting for someone to build on them, people are starting to build on, and now there is actually a shortage of lots.”
And that has builders and remodelers singing for joy.
New Builds and Remodels, Both
According to the National Association of Home Builders, confidence among homebuilders rose in July to its highest level since January 2006.
In the Twin Cities, that increased confidence has shown up in new building permits for single-family homes, which were up 29.5 percent over last year, according to the Builders Association of the Twin Cities.
Top cities for new-home builds include Lakeville, Woodbury, and Maple Grove, while Minneapolis leads the charge in total increased units, including new apartment units. Home remodelers are seeing a big uptick, too, as homeowners either hold on to their homes and try to make them current to their needs or they remodel in order to sell at the price they need.
“Our business is up 11 percent over last year, and last year we were up year over year 23 percent,” says Shawn Nelson, owner of New Spaces, which provides remodeling work throughout the Twin Cities metro.
During the recession, Nelson says, most clients were paying for things like kitchen and bath remodels with cash they’d squirreled away. Today, with an increase in median home values, they’re doing larger remodels and extensions, some taking advantage of the lower interest rates and refinancing to get the extra cash.
“What we see,” Nelson says, “is that it’s going to be a net positive for remodeling.” In other words, with the housing stock low, that means more homeowners are feeling forced to settle. But remodeling, Nelson says, is becoming an option many homeowners are choosing over settling for a home that doesn’t make their heart skip a bit.
Last year, 43-year-old Marcus Ekblom was searching for his first home in the Twin Cities. He loved the idea of a condo with an open floor plan and updated amenities. But he really wanted his own home where he didn’t have to share walls and where he could play his favorite jazz records at any volume he wanted.
When he did find a home, after four months, he immediately decided to fork over some long-saved cash to remodel it to his standards. “The home was almost what I was looking for but not quite,” he says. “And I knew just from seeing what was out there—and there wasn’t much—that it would not only be something I could enjoy now but take advantage of when I sold down the road.”
A home is an investment, and for the first time in eight years, the numbers show a new buy or a remodel to be a good one.
Total residential inventory in the metro decreased by 7 percent April through June.
Median home prices increased 17.5 percent in June over last year.
New building permits for single-family homes increased 29.5 percent over last year.
The interest rate for a 30-year fixed mortgage hovers at 4.25 percent.
The average sale price was $222,831, up from $198,248 over the previous year. The biggest spike was in homes priced higher than $350,000.
While interest rates have crept up slightly from their historic lows of 2012, they are still incredibly modest, hovering at about 4.25 percent for a 30-year fixed mortgage.
According to Alex Stenback, a mortgage banker and author of the real estate blog behindthemortgage.
com, a modest increase isn’t a sign that the market will slow down again. It simply means that people may buy a little less expensive real estate.
The average 12-month sale price from July 2012 to June 2013 was $222,831, up from $198,248 over the previous year, yet the biggest spike in sales was in homes priced higher than $350,000.
“We’re looking to find a place of equilibrium,” Stenback says. “We are finally looking at the housing market to balance itself out.”
With the lack of supply and the increased demand for higher-end homes and amenities, many builders are snatching up homes in the $400,000 range, gutting them, remodeling them, and turning around and selling them for $800,000. It’s a boon for both builders and homeowners.
“The fact is, there really isn’t a lot of existing stock right now. The inventory isn’t what people maybe need it to be—it needs updates or remodels. So this has been great for builders, but not so much homeowners with old housing stock they can’t update or sell because they’re underwater.”
Still, Stenback says if you can price the home right and make it attractive, there’s a lot of interest right now.
“You’d be surprised how many properties are selling in multiple offers again,” he says.
Multiple offers? Low interest rates? High-end homes? Does this mean we’re just blowing hot air into another bubble that’s inevitably going to burst?
Not quite, Stenback assures. He hopes we learned something from the previous housing boom and bust.
“The driving force behind that boom and bust was that people simply stopped underwriting loans. Now, unless you have stable income, acceptable credit, and a down payment, you’re not buying a house. And that’s how it should be. That’s how we avoid another boom and bust economy.”