Anybody who knows anybody house hunting in the Twin Cities right now has probably heard the horror stories: in the current real estate market, some people are putting offers on houses far and above the sellers’ asking price — and getting beat by people making even higher offers.
In recent years, low interest rates and high demand for a limited number of houses currently on the market has driven home prices up and up and up — and up, and up — even through a pandemic recession.
Even with mortgage interest rates rising — and expected to rise more soon — home price increases show no signs of slowing down, yet.
Why prices are up
The rise in housing prices is nothing new, though prices weren’t rising quite this steeply until the pandemic hit. If you go back to about 2012, the market started to show a steady recovery from the price plummet of the Great Recession.
“The market rebuilt strong all the way through, up until the COVID pandemic,” said Chris Galler, the CEO of Minnesota Realtors. Then, the market picked up — for a few major reasons on both the demand and supply side of the equation.
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Zillow Home Value Index by month for the Twin Cities, 2000-present
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On the demand side, things went a little nuts during the pandemic. Many office workers were suddenly using their homes as offices. The kids were home from school, too, which caused many to re-think their living situations and what they wanted out of a home.
Between government stimulus checks and staying home, household savings increased, allowing some people to save up for down payments. At the same time, low mortgage interest rates — under 3 percent for a 30-year fixed-rate mortgage at times during the pandemic — made it cheaper to borrow money.
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30-Year fixed rate mortgage interest rate, averaged by year, 1971-2021
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And on top of all that are generational dynamics. Many millennials — people in mid-late-20s to early 40s — are the biggest generation since baby boomers — are in a prime home buying age group, which means a lot of people are in the market. At the same time, baby boomers are living longer and staying in their houses longer than past generations had, restricting the supply of units on the market.
The supply-side issues have roots in the Great Recession, when the construction of homes ground to a halt after the bottom fell out of the real estate market. In Minnesota as elsewhere, the number of homes built lagged behind growth in the population.
“Supply is lagging demand at tremendous levels,” said Libby Starling, director of the Federal Reserve Bank of Minneapolis’ Community Development and Engagement Department, who estimates that the seven-county Twin Cities metro’s housing stock is short 80,000 housing units relative to what’s needed to keep pace with population growth. “What we’re seeing is the pressure of demand when there’s simply not enough supply to meet it.”
While home construction has picked up, it’s not making up for the lost years. Additionally, the rising cost of building materials means new homes are less affordable than they might be otherwise.
Put the demand and supply issues together and you have a lot of competition for a limited housing stock. Realtors often consider the market to have good inventory levels if there are six months worth of homes for sale, meaning it would take about six months to sell all the houses on the market. Inventory has been a lot lower than that lately, dropping from 0.9 months last February to 0.7 months this February in the Twin Cities, according to Minnesota Realtors.
Low inventory and high demand has prompted realtors to try to entice sellers into the market. In high-demand neighborhoods, some realtors knock on doors or drop off flyers that encourage homeowners to sell their houses or specify the types of homes their clients are looking for, including their budget.
“We’re having to actually go and pursue things through all different avenues to find things for [buyers],” said Tracy Baglio, who has been a realtor in the Twin Cities for decades and is the former president of the St. Paul Area Association of Realtors.
It’s in this environment that houses are selling quickly. Stories of multiple over-asking offers within the first day on the market are common. And in the Twin Cities, sellers, on average, are getting 100.9 percent of the list price for their homes compared to 100.2 percent a year ago, according to Minnesota Realtors.
All the supply and demand mismatch has created an especially tough homebuying environment for people looking to buy in the lower end of the market, Starling said.
Starling said some analysis suggests that with tight inventory in the middle of the market, households that can afford $400,000 or $500,000 homes are instead placing high bids on homes under that budget, beating out lower bids. Investors, too, are able to put attractive offers on homes, driving up prices.
“[That’s having the subsequent effect on affordability for lower income households, for whom these are the only options,” Starling said.
Another bubble?
Given fast-rising home values, Starling said it’s valid to ask whether this is another housing bubble, like the one that preceded the Great Recession. But the situation today is different in many ways that make it unlikely housing prices will see a major recession like they did at that time.
[image_caption]Chris Galler[/image_caption]
Today, Galler said, is different. Lending standards are stricter. Lots of houses are being bought with 20 percent or more down.
At a basic level, the fundamentals are pretty different now compared to then, Starling said, and without some huge factor — like the shutdown of a major Twin Cities employer that moves thousands and thousands of jobs out of the state, it’s not likely.
“I think the fundamentals are very much that we need more housing to keep up with household growth in our region,” she said. “Household growth is slowing but still we have a lot of housing needs to catch up on.”
Slowdown ahead?
While housing prices don’t seem likely to drop rapidly like they did when the 2008 bubble burst, there are some signs that the rapid growth in prices may start to slow down.
During the pandemic, there were a lot of factors injecting money into the economy: government stimulus payments, an increase in savings as people stayed home and low interest rates helped money flow, contributing to faster-than-usual inflation.
Mortgage interest rates began to tick up in early 2021. In mid-March, the Federal Reserve raised interest rates, and has signaled they will rise further – an effort to slow down inflation — in the future.
Even with interest rates rising steadily over last year and the recent rate hike — weekly 30-year fixed-rate mortgage interest rates averaged 4.7 percent in the last week, a jump from less than 4 percent in March — the housing market hasn’t shown signs of slowing down yet.
The effect of the recent rate hike, mid-March, likely hasn’t been seen in the market yet, said Andrew Babula, director of the real estate program at the University of St. Thomas Opus College of Business. Many people closing on houses now were locked into rates before the hike.
Behavior around housing doesn’t change as quickly as it does around, say, grocery store or gasoline purchases, Galler said. If you look at the trajectory of interest rates over time, they still remain very low.
“People say, well, once we hit the high interest rates people won’t buy homes,” Galler said. “They will. They did during the ’80s, when we had 15, 16, 17, 18 percent interest rates.”
Now, with interest rates expected to rise further, some people may be trying to buy quickly before they rise more.
But the effect of the rate hikes are likely to show up eventually, Babula said.
“The expectation is that is going to slow things down,” he said. Given that supply and demand issues remain, the rate will likely have some dampening effect on price increases but not stop them entirely.
“Prices will probably not continue to increase at the rate … they have been, but they’ll either remain pretty steady or slowly go up,” he said.
Still a good time to buy?
Given all the factors at play — rising prices and rising interest rates, a lot of buyers may be asking themselves whether now is a good time to buy a house.
That depends more on the homebuyer’s situation than it does on market factors, Galler said.
If people feel secure in their job, like the neighborhood they’re buying in, can afford the mortgage payment and plan to stay for at least five to seven years, those are good reasons to buy a house, Galler said.
“Price appreciation has been significant because of low inventory the last few years and very, very low interest rates. But it probably will go back to a more normalized marketplace and that’s where that five to seven years really comes in,” he said.
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Baglio said the fact that investors — who buy based on numbers and not emotions — are buying is an indication the market is strong.
Her biggest advice for prospective buyers in this market is to have patience in this competitive market.
“Just have patience for the right thing,” she said.
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2022 Real EstateValuation Notices
Inflation is currently hitting many Minnesotans hard with significant increases in the costs of gasoline, food, clothing and real estate taxes. I just received our homestead property “Valuation Notice” for taxes payable in 2023. The Estimated Market Value (EMV) on our real estate rose 24.12% in just one year while the Taxable Market Value (TMV) rose a huge 28.93%. I don’t recall ever seeing increases before above single digits. The increases in valuations in 2021 for 2022 taxes were only 7.13% for EMV and 8.73% for TMV. I’ve lived in our home with my wife now for 33 years.
My wife and I, like many seniors, are retired, in our mid-70s and on a fixed income except for nominal increases in Social Security and retirement benefits. We received a 5.95% increase in our Social Security retirement benefits this year but 29% of that increase went to pay for the increase in Medicare Medical Insurance premiums. Minnesota ranks #5 for having the highest state income taxes and currently has a huge budget surplus.
Where is the need to tax Minnesotans more on their real estate properties?
I am assuming that many Minnesotans are also seeing these huge increases in their real estate valuations while struggling with the effects of high inflation. I am are wondering if our Cities, our State Senators and Representatives and our County Commissioners can do something in addressing these huge increases in real estate valuations which lead to significant increases in real estate taxes.
The valuation is probably accurate. However, the valuation does not set the property tax rates. If everyone’s value goes up the same percentage then the levy will still be spread evenly among the residents in the same manner (this also happens if everyone’s value drops the same percentage). The property tax levy is going up due to those same inflationary pressures.
Legislators absolutely could “do something in addressing these huge increases in real estate valuations which lead to significant increases in real estate taxes,” but they appear to have little-to-no motivation do consider that action. Most of their talk is about “easing the burden” of the 1% who actually pay minimal taxes in the state while finding ways (like property taxation) to shift the tax load on to working class, retired, and poor people. Oddly, that group appears to want that to happen because rural poor and middle class are overwhelmingly Republican in this state and everywhere. Republicans have loved their “borrow and spend” approach to avoiding responsibility for my lifetime and their ability to sell “tax and spend” as irresponsible has convinced me that “you can fool some of the people all of the time” that those people are close to half of the current population.
The valuation notices being sent out have updated home values that are alarmingly high. There are many online discussion groups in the past few weeks where people are very, very concerned about the assessed values and worry that their taxes are going to skyrocket. Many don’t quite understand the levying and taxing process for property taxes, but they are very concerned nonetheless.
It is a real concern and many do not qualify for the state property rebate for property taxes and many seniors are just over the income threshold to qualify for any subsidy programs. Add to it, many, not just those under 50, were not able to afford a home until later in life and have a mortgage when they retire. Many also do not realize how the county portion of taxes affects property taxes.
“Libby Starling, director of the Federal Reserve Bank of Minneapolis’ Community Development and Engagement Department, who estimates that the seven-county Twin Cities metro’s housing stock is short 80,000 housing units relative to what’s needed to keep pace with population growth. ”
How exactly does someone like Starling calculate that shortage? What is the ratio for population growth to housing and where does that come from? Obviously we don’t have 80+k people living in their cars or under bridges, when people move here they ARE finding places to live, or they wouldn’t actually be able to move here. Obviously we don’t have refugee camps set up on the State Fair Grounds with 80k people waiting for their housing to be built, so what exactly is the formula?
Let’s see some actual data: How many people moved into the subject area in a given number of years and how many housing units were built or came online in that period of time? What does this figure actually mean or refer to? Is that 80k this year right now, or is it 80k since some past date, or is it an annual figure of some kind?
No mention of investors gobbling up houses for use as short-term rentals or boomers buying their 2nd or 3rd vacation home in this article. As long as housing remains a commodified product; the supply of housing will forever remain inadequate. Where I live on the Arrowhead, house horny boomers from the cities have driven out many young working class families in our area and these same idle folks constantly complain that nobody wants to work.
Real estate markets are very regional in the USA. Typically the Twin Cities is not a “leading indicator” it tends to have a delayed response to markets compared to places like Chicago and other major metro areas. Nationwide new construction and new construction permits for residential properties has increased dramatically. At the same time inflation is running at a high level , mortgage rates in early April are above 4%, the Fed will increase probably 50 basis points at its next rate setting meeting further making homeowning more expensive for lower and middle income people. The possibility of a mild recession is becoming more likely by the 3rd or 4th quarter of 2022 due to inflation, global supply chain issues, the Ukraine war and the continuing toll of Covid.(particularly in China which are a key reason for inflation and supply chain issues) The Strib had an article on April 03 indicating that the + 1 million home price range, once a slow mover is now one of the most active property markets in the Twin Cities. I tend to think it is because lower and middle income buyers are being priced out of the market. Inventory is currently still lower than average the Twin Cities, but it is possible by mid to late summer inventory might start eventually getting near to more normal. Many of those senior homeowners who have withheld properties from the market now getting higher tax estimates for 2023 might decide to sell?
Finally the other article in the Strib that was enlightening was on March 27, it described wholesale increases in the number of real estate agents and people taking the courses to pass the real estate agency tests. In the previous home bubble of 2005-2008 the first time I really realized things were out of hand was on a trip for a wedding to San Diego in late summer 2006. I walked a block away to a Lucky Supermarket to buy a bottle of wine and some snacks for our hotel room. As I paid in the aisle, the check out person gave me my receipt and handed me her real estate agent business card. At that moment I knew that things weren’t going to end well.
Your checkout experiences sounds like a story from Michael Lewis’ “The Big Short.”
Many do not understand that if your taxable market value increases 29% while all your neighbors have had a 30% increase, you will potentially see your property taxes drop. You would absolutely see your property taxes drop if commercial property values increase faster than residential property values. All that really matters is that your market value does not increase faster than the average of your neighbors properties.
There is not a strong correlation between taxable market value rate increases and property tax rate increases.
I’ll repeat Mark’s response: “Many don’t quite understand the levying and taxing process for property taxes”
Yeah, we keep seeing these “simple” supply and demand explanations that are based on some kind of modeling, but when you crack those models open they’re not as rock solid at they always appear to be. Basically anyone who predicts that housing prices will increase is going to be right for the last three decades so the reliability of this model may actually be coincidental.
Some of these observations may have little or nothing to do with home availability. For instance as Bryce points out the lengths that realters are going to in order to get more houses on the market may simply reflect increased competition among a glut of realtors. Realtors need people to move, buy, and sell whether they NEED to or not and regardless of inventory. So are these models telling us how many houses we need, or are they telling us how many houses need to be bought and sold in order for the real estate market to thrive? So when say something like we’re 80k short on housing, what does that actually mean? Does it mean 80k people can’t find a place to live right now? Does it mean if we built 80k units, the prices would come down, and if so how much would they come down? Does it mean we need 80k unit right now, or is this a projection based on growth? Can you tell us what the price would be if we had all those units available today? I could go on but you get the point.
These models also never consider the simple fact that while mere volume of sales is a factor, when EVERYONE except the buyer makes more money by selling property for as much money as they can, regardless of actual supply, you have an industry that always trying to drive prices up. Prices are inflated in this market buy a variety of practices and strategies no the least of which is inventory control. Housing inventory isn’t a natural phenomena that rises and falls like the wind.
This isn’t to say that model has NOTHING to do with housing prices, the question is what percentage of housing prices does this model really account for? As Mr. Marshal points out, this is a complex scenario wherein multiple factors influence expenses and pricing, so a simple correlation between some number of units and the population can’t account for the majority of fluctuations.
When I retired and we decided to leave the noise, pollution, and congestion of the Cities, I tried selling my house myself without much luck. I talked to a few realtors and pretty much everything they said was evidence that the Freakonomics guys were dead-on target (https://freakonomics.com/2008/02/real-estate-agents-revisited/). They talked a big game about how much work they were going to be doing, but they also seemed to be clueless that the recession was over in the Cities (in 2014-15) and wanted to list our house for at least $75k less than our real estate lawyer suggested it was worth. With $40k of selling/closing costs estimated, I kept looking for an alternative and found “fixed rate realtors.” We listed our house with a national fixed rate company and closed in a few months at a price that was $80k higher than the three major realtors quoted with $900 in selling realtor costs, $2,000 for a real estate lawyer (far better money spent than a realtor), and the buyers paid their own costs. It’s hard to imagine an easier, higher-paying gig that the one realtors have carved out for themselves, but change is a-comin’.
Maybe I’m just talking to myself at this point but let me finish a thought regarding the nature of real estate markets.
One factor that has consistently driven price increases is the ongoing drive to simply keep the real estate market profitable for realtors. Even if the population growth is zero, or declining, realtors need to sell property in order to make a living. They promote this in a variety of ways. Back in the late 80’s and 90’s they (with their financial partners) created the notion of “starter homes” and a succession of home buying as part of a wealth building strategy. Prior to that people bought homes and rented apartments because they needed places to live. You would only move if you REALLY had a reason, like more space, closer to work, better schools, less crime, etc. etc. In the 90’s realtors and bankers invented a new reason to move based in the assumption that you can sell every house you buy today for more money a few years from now. In theory this guarantees a perpetual market with home buyers that are constantly moving for purely financial reasons. Of course this model collapsed during the Great Recession when the illusion of wealth creation gave way to the reality of debt accumulation but the industry hasn’t given up on the model. When we get those “invitations” to sell from local realtors they never ask “why” we would want to move, they just assume we want to make money selling our home. Meanwhile staying right where we are in our “starter” home for 30 years has converted our $65k mortgage into a $300+k asset. Had we followed their model of wealth building we’d be in a bigger house with a larger mortgage somewhere else but beyond our higher income we wouldn’t be any wealthier.
So this demonstrates how the industry tries to manipulate inventory regardless of population or housing growth. On the supply side they manage development by building in selective locations. On the demand side they try to manufacture demand with a “growth” model that claims to build wealth via constant housing “upgrades” for home buyers. This entire model only make sense (and even then just barely) as long as housing prices continually rise regardless of any influences such as population growth or even decline. The entire model requires perpetual price increases to work. You can’t explain decades of continual housing cost increases without factoring for influences like this.
Well said, Paul. The whole “starter” product thing has expanded from homes to practically every major purchase Americans make. The invention of credit cards, easy credit, and the dumbing-down or elimination of math requirements and consumer education courses in our K-12 school system has provided the “financial industry” (aka “scammers” and banksters) with ready access to an easily duped customer base (we’re customers now, not citizens). There is a reason one political party “loves the uneducated.”
You have to be really careful about taking economic “experts” seriously. They were almost all chanting the same “buy, buy, buy” nonsense well into 2007 and many of them pretended not to have been spewing that foolishness by 2008. The first person I read saying the “”Buy land, they’re not making it anymore” was Mark Twain and he went broke on that and the 1900’s version of the Dot.com bust. Like most of his wisdom, the same chant was repeated in the 1920’s by Will Rogers and he didn’t do well with it, either. Value is always determined by buyers and when buyers decide a 1920’s house that needs $100k in repairs, upkeep, and modernization is not worth $300k it won’t be. I’m 74 and I’ve seen 5 real estate value crashes, regionally and nationally, in my lifetime, living in 7 states chasing employment and escaping a crashing economy from the Midwest and Southwest to the far West and back. I’ve seen a few friends do well in real estate and lots of them either living their whole lives in debt or ending up working the state and national park host game hoping a bank won’t find them and repossess their camper.
From my perspective, too many people have raised their lifestyle expectations to the unrealistic and many of them (mostly my generation) are suddenly discovering that a 3,000-5,000 square foot house is more than one of two people need. (Go figure!) Not far from that realization will be a herd of Boomers looking for no-maintenance 1-2 bedroom apartments and a surplus of oversized houses in the ‘burbs and rural areas.
Greta, prices didn’t plummet in 2012 or anytime after the Global Crash of 2007-08. They remained either steady or slightly (2% or so) reduced. Homeowners won’t sell during a recession; they wait for the market to support their equity position. This, of course, does not apply to corporate relocations when homeowners need to sell their homes to move to another position. Normally, it’s a guaranteed price proposal for their current home. (or at least this used to be the case)