As we reach mid-summer it is an appropriate time to take stock of the Twin Cities housing market. We are now over five years removed from the end of the Great Recession which devastated the Twin Cities housing market. In most areas home values have returned to (or exceeded) pre-recession prices and we continue to experience robust housing sales. While some aspects of the housing market have changed in this past year, many have remained the same. Let’s take a closer look at some key factors affecting the market.
After years of speculation, the Federal Reserve (Fed) began its plan to steadily increase interest rates. As the US economy and employment numbers have improved, it became inevitable that interest rates would increase. Fortunately, the increases have had an insignificant impact on the housing market because they were slight and expected. The Fed’s plan is to continue to slowly ratchet up rates. There have been two increases in 2018, one more is nearly guaranteed, but two more are likely. The Fed’s confidence in the economy, as well as the strong job market, are factors for a potential 4th increase. This will be something to pay attention to in the coming months. Currently, mortgage interest rates are 4.5% – 5%. These are still excellent rates considering the long-term average for a 30-year fixed loan is 8.12% (see chart below). The effects of these rate increases on the general real estate market should be minor.
Extremely low listing inventory continues to challenge buyers in certain segments. As has been the case since 2013, the listing supply has been below 4 months, which is considered a “seller’s market” (a balanced market is commonly considered a 5-6 month’s supply). This is a general stat; month’s supply varies greatly in different price ranges and areas. For example, currently there is a 1.3 month’s supply for homes under $250,000, but an 11 month’s supply for homes priced over $1 million.
New construction is on the upswing in the Twin Cities market. This is certainly a positive development
considering the scarcity of listings. However, the housing type being built is not addressing where the demand is. In a perfect world, builders would be primarily building affordable single-family housing and townhomes. Instead, we are seeing most projects focused on higher priced homes and apartment buildings. The reason is financial. It is more profitable to build luxury homes than affordable ones due to costs. Costs have increased in the “4 L’s”, which are lumber, labor, land, and lending.
Sellers are enjoying a healthy increase in appreciation during this robust market. Due in large part to the lack of options for buyers, many sellers are receiving top dollar. The median sale price in the Twin Cities has increased 8.81% in the past 12 months to $260,000. As a reference point the previous, pre-crash, peak was $230,000 in June 2006. In the depths of the Great Recession, the median price bottomed out at $150,000 in January 2012.
There is no current housing bubble forming, but I am slightly concerned by the apparent loosening of lending standards. Like the pendulum of a clock, after the market crashed lending standards swung from too relaxed to overly strict very quickly. The pendulum appears to be swinging slowly toward looser lending standards, but nothing close to what we saw in the pre-crash era. This is something to be aware of, but you should not be concerned about another real estate bubble.
The market continues to be healthy, but complex. If you have any questions regarding the local real estate market I encourage you to contact your Fazendin agent. Thank you for your continued support.
Owner / Broker of Fazendin Realtors