Last year was another terrific year for residential real estate in the Twin Cities. Most every metric used to measure the residential real estate industry was positive for home owners. Highlights include: more homes were closed in 2017 than any previous year, the median sale price reached a new high, the average days on market for listings were lowest ever and sellers received the highest percentage of list price in history.
As the market transitions to 2018, it is time to focus on the current and future real estate market. Let’s begin with the Tax Cuts and Jobs Act signed late in 2017. While we are still waiting to learn how the IRS will interpret this bill, it has caused acrimony within the real estate industry. Several popular incentives were reduced which will have a slightly negative impact on some home values. Specifically, the mortgage interest deduction was decreased along with the tax deduction for property taxes. While these modifications to the tax law are mostly bad for home owners, the impact will be minor and there are far greater advantages to owning real estate beyond these incentives. Real estate is an investment that has historically performed well. It is also a tangible asset that typically appreciates in value while you use it for a home or a rental. Regardless of the tax bill, residential real estate will remain a sound financial investment and a cornerstone of the United States economy.
The residential real estate forecast for the 2018 is shaping up to be very similar to that of 2016 and 2017; we predict a strong year for sales with one notable challenge for home buyers. We are nearing the spring market with a chronic shortage of listings from which to choose. In fact, listing supply is the lowest in recorded history with roughly 7000 previously owned single-family homes currently for sale in the Twin Cities region. To put this into perspective, heading into 2008 there were 28,000 homes for sale. That is a 76% decrease in supply!
The extent of the listing shortage varies depending primarily on location and price. In general, modestly priced homes near urban centers are the hardest to find and in highest demand, while homes priced over $1 million located farther from the city have a lower demand and higher supply. For example, there is a mere 1.5 month’s supply of homes for sale in St. Louis Park, while Medina has a 9.3 month’s supply. However, consider the more distant location for Medina along with the price variation: in December the median sale price in St. Louis Park was $290,000, the median sale price in Medina was $672,000.
After years of historically low mortgage interest rates, it appears the Federal Reserve is committed to ramping up interest rates in 2018. The Federal Reserve increased rates at its December meeting and is expected to have a minimum of 3 more increases in 2018 with the next increase in March. With unemployment at the lowest level since 2000 and the economy continuing to improve, many view the Fed’s decision to increase rates as a positive sign that the US economy is healthy enough to withstand a gradual increase in rates. This is no guarantee, so stay tuned.
I am optimistic about the residential real estate market in 2018. The advantages and benefits to home ownership far outweigh the challenges. The top three developments I will be tracking in 2018 are listing supply, mortgage interest rates and the IRS’s interpretation of the tax bill.
Residential real estate is very local: prices and market conditions vary greatly from city to city and sometimes block to block. To gather information regarding your own property, or one you wish to purchase, I encourage you to contact your Fazendin agent. Thank you for your continued support.
Andy Fazendin – Owner / Broker