The residential real estate market has developed as anticipated thus far in 2017; interest rates have edged higher, buyer demand continued to be strong (particularly in the more modest price ranges) and inventory levels remain chronically low in many areas and price ranges. New listings and pending sales are on trend with 2016 numbers, while median sale price has increased 6.2 percent above 2016 (year to date) and month’s supply of homes has decreased a whopping 20 percent! In general, the residential real estate market has been robust in 2017.
It has become apparent that the new construction sector is not going to help with the market’s current low inventory challenges. The primary area of demand is for modestly priced homes, under $300,000. However, due to construction costs few builders are building at this price point. There are four reasons for this, let’s call them “the four Ls”: labor, land, lumber and lending.
As the real estate market has recovered it has become apparent that costs have increased significantly for land, labor and lumber. Concurrently, demand has skyrocketed when compared to 2008 – 2012. We are feeling the aftershocks of the real estate recession.
During the recession period land was cheap as many investors who speculated on land became insolvent and sold at below market prices. This is no longer the case; escalating land costs and fees for high demand areas make it difficult for builders to make a profit while building lower priced homes. As a result, many builders have focused on higher priced housing.
Another casualty of the real estate recession is labor. Many tradesmen left the industry during the 2008 – 2012 period because there were no jobs. These people have moved into different industries and are not coming back. As a result, we have fewer skilled tradesman and demand for labor has increased, which has increased the cost of construction.
As the world markets have evolved, worldwide demand for lumber has increased as have prices. Like many things finite, prices have increased and there is little expectation that demand or cost will decrease. Much like labor, supply and demand for lumber is out of balance. As a result, lumber prices have increased 22-30 percent in 2017. Additionally, costs for most building materials, from bricks to nails, have increased.
Lending, for buliders, has changed dramatically from the early 2000s when loans were cheap and easy to access. Interest rates are still low, but access to capital has become increasingly difficult. The primarily reason for this is banking regulations. While it was too easy for builders to finance 15 years ago, now it has become too difficult. As a result, smart builders tend to play it safe. Which means building fewer homes at higher points. The hope is that banking regulation will ease slightly, allowing builders easier access to capital.
In summation, the real estate market is stable and strong in the Twin Cities. The National Association of Realtors predicts that the residential real estate market will remain robust for at least the next 5 years. The most prominent challenge, locally and nationally, is low listing inventory. This challenge may persist longer because new construction is not keeping up with demand.