2017 Residential Real Estate Outlook
2017 Residential Real Estate Outlook By: Chris Galler, CEO
Is the real estate market in Minnesota becoming too hot? Are we going to face another housing bubble like the situation we experienced during 2008-2012? We make presentations to many groups and these are a few of the reoccurring questions we hear. Many are from consumers trying to determine if 2017 is the year they should put their home on the market or enter homeownership. Here are a few comments that you can share with people interested in what is happening in Minnesota. IS THE MARKET OVER-HEATING? NO. The conditions that led to the housing bubble don’t exist in this marketplace. Lending guidelines have tightened significantly, including laws that require lenders to verify the future financial capacity of the borrower. Similar to the “no-qualify assumable mortgages” of the 1980’s, the “low-to-no qualifications” of the last decade do not exist today and will not return in the future. AFFORDABILITY. Another important factor leading to the bubble is affordability. In February 2007, the Minnesota Housing Affordability Index was at 85. That means the median family income was 15 percent lower than the amount of income required to purchase a median priced home. If the number was 100 – then Minnesota families would have the exact amount required to purchase a median priced home. Clearly housing affordability was a problem in the spring of 2007. Unfortunately, because lending standards had become so loose, the demand segment of the market was not operating appropriately. As of January 2017, the Housing Affordability Index is at 197. That means the median family income is almost double the amount required to purchase a median priced home. This is historically high when compared to the period of 1972-2008 when it rarely moved above 150. Minnesota’s median incomes are generally high enough, with the current interest rates, to afford a home without being stretched like they were a decade ago. PRICES. Median home values have been increasing at a very steady rate. Since January of 2012, the median price has increased every year (2011 was the low point for housing prices statewide at $137.000). Today, the statewide median price is $199,900. The annual increases in median value have outpaced inflation (+7% annually) over the last 5 years. A significant portion of that increase is attributable to the removal of Lender Mediated transactions that drove median prices down from 2008-2012. At its worst, lender mediated sales accounted for 40.7% of all transactions in the state. In 2016, we finished the year with lender mediated transactions at 6.9%. That number is still more than twice as high as the pre-recession number of about 3%. We anticipate that the median home price in Minnesota will increase, but moderate in 2017. It will be stronger in the spring and early summer, with a slowdown latter in the year. Interest rates will be a key indicator as to when median values begin to slow. INVENTORY. The biggest problem facing many parts of the state is an appropriate level of inventory. Household formation has been increasing and many of those newly formed households are looking for homes. Unfortunately, finding an appropriate property has been a challenge.
In many situations, today’s consumer is unwilling to purchase the same type of home their parents bought at this stage in their life. Dual-incomes and a lack of time/skill has placed a premium on homes that have been updated and in good condition. School districts, transportation, day care and energy efficiency are also important factors to these buyers. Unfortunately, inventory levels have been limited by three primary factors: 1) GEN X – many in this age demographic purchased in the late 1990’s and early 2000’s before the recession. Financing availability led many to take out large speculative loans and/or seconds, thirds, etc. Those that did not go through a lender mediated transaction, saw the resale value of their property fall significantly during this period. In most parts of the state, the median home value has returned to pre-recession levels. That means the re-sale values are finally back to the amounts they paid or are very close. Many in this demographic group still need values to increase more before they have enough equity to enter the market. That means a significant number of homes that would naturally be on the market today, are not yet available. 2) BABY BOOMERS – many have been in their home for years and have low or no mortgage payments. This is a group facing a new “empty nest” scenario as children move back home for extended periods. This makes selling difficult and provides an excuse for staying where they are. A second issue is the accumulation of “stuff.” Those working with Baby Boomers looking to downsize know that many want a house with new amenities and floor plans, but do not want to get rid of their “stuff.” This causes a price problem. Many Boomers are looking for a new house, with new amenities and at a price point lower than the home they are leaving. Which leads us to: pending retirement. During the recession, many had to use their savings for living expenses or to help a parent or child. Some took out second mortgages to weather a job loss or medical situation. Because of these reasons, many Boomers find staying in their current home is the most comfortable decision in these unsure economic times. 3) NEW CONSTRUCTION – builders across the state have recovered from the housing bubble. However, lot inventory, skilled labor and municipal regulations/fees have made it nearly impossible to build homes affordable to first-time home buyers. Townhome and condo development is very low when compared to current demand and past building trends. Single family lot development is just beginning to catch up after years of financing problems, high land prices and very low demand. Skilled labor is an issue that many do not equate to the problem, but during the recession many skilled personnel left the area or made career changes. K-12 school focus has also shifted over the last 20 years away from the trades and career for students who do not go on to college. Residential conditions today are better than they have been for decades. If you look back 10, 20, 30 or even 40 years ago, todays residential marketplace has many more positive factors than negative ones. Interest rates and inventory are the two factors that will most influence the 2017 housing market. Even with that said, Minnesota has a strong and diverse employment base, schools/universities preforming far above the national average, and a quality of life that is regularly recognized as one of the best. We faced challenges before, we’ll face challenges again. But for right now, we should enjoy the real estate marketplace that has many positives than negatives.
Is the real estate market in Minnesota becoming too hot? Are we going to face another housing bubble like the situation we experienced during 2008-2012? We make presentations to many groups and these are a few of the reoccurring questions we hear. Many are from consumers trying to determine if 2017 is the year they should put their home on the market or enter homeownership. Here are a few comments that you can share with people interested in what is happening in Minnesota. IS THE MARKET OVER-HEATING? NO. The conditions that led to the housing bubble don’t exist in this marketplace. Lending guidelines have tightened significantly, including laws that require lenders to verify the future financial capacity of the borrower. Similar to the “no-qualify assumable mortgages” of the 1980’s, the “low-to-no qualifications” of the last decade do not exist today and will not return in the future. AFFORDABILITY. Another important factor leading to the bubble is affordability. In February 2007, the Minnesota Housing Affordability Index was at 85. That means the median family income was 15 percent lower than the amount of income required to purchase a median priced home. If the number was 100 – then Minnesota families would have the exact amount required to purchase a median priced home. Clearly housing affordability was a problem in the spring of 2007. Unfortunately, because lending standards had become so loose, the demand segment of the market was not operating appropriately. As of January 2017, the Housing Affordability Index is at 197. That means the median family income is almost double the amount required to purchase a median priced home. This is historically high when compared to the period of 1972-2008 when it rarely moved above 150. Minnesota’s median incomes are generally high enough, with the current interest rates, to afford a home without being stretched like they were a decade ago. PRICES. Median home values have been increasing at a very steady rate. Since January of 2012, the median price has increased every year (2011 was the low point for housing prices statewide at $137.000). Today, the statewide median price is $199,900. The annual increases in median value have outpaced inflation (+7% annually) over the last 5 years. A significant portion of that increase is attributable to the removal of Lender Mediated transactions that drove median prices down from 2008-2012. At its worst, lender mediated sales accounted for 40.7% of all transactions in the state. In 2016, we finished the year with lender mediated transactions at 6.9%. That number is still more than twice as high as the pre-recession number of about 3%. We anticipate that the median home price in Minnesota will increase, but moderate in 2017. It will be stronger in the spring and early summer, with a slowdown latter in the year. Interest rates will be a key indicator as to when median values begin to slow. INVENTORY. The biggest problem facing many parts of the state is an appropriate level of inventory. Household formation has been increasing and many of those newly formed households are looking for homes. Unfortunately, finding an appropriate property has been a challenge.
In many situations, today’s consumer is unwilling to purchase the same type of home their parents bought at this stage in their life. Dual-incomes and a lack of time/skill has placed a premium on homes that have been updated and in good condition. School districts, transportation, day care and energy efficiency are also important factors to these buyers. Unfortunately, inventory levels have been limited by three primary factors: 1) GEN X – many in this age demographic purchased in the late 1990’s and early 2000’s before the recession. Financing availability led many to take out large speculative loans and/or seconds, thirds, etc. Those that did not go through a lender mediated transaction, saw the resale value of their property fall significantly during this period. In most parts of the state, the median home value has returned to pre-recession levels. That means the re-sale values are finally back to the amounts they paid or are very close. Many in this demographic group still need values to increase more before they have enough equity to enter the market. That means a significant number of homes that would naturally be on the market today, are not yet available. 2) BABY BOOMERS – many have been in their home for years and have low or no mortgage payments. This is a group facing a new “empty nest” scenario as children move back home for extended periods. This makes selling difficult and provides an excuse for staying where they are. A second issue is the accumulation of “stuff.” Those working with Baby Boomers looking to downsize know that many want a house with new amenities and floor plans, but do not want to get rid of their “stuff.” This causes a price problem. Many Boomers are looking for a new house, with new amenities and at a price point lower than the home they are leaving. Which leads us to: pending retirement. During the recession, many had to use their savings for living expenses or to help a parent or child. Some took out second mortgages to weather a job loss or medical situation. Because of these reasons, many Boomers find staying in their current home is the most comfortable decision in these unsure economic times. 3) NEW CONSTRUCTION – builders across the state have recovered from the housing bubble. However, lot inventory, skilled labor and municipal regulations/fees have made it nearly impossible to build homes affordable to first-time home buyers. Townhome and condo development is very low when compared to current demand and past building trends. Single family lot development is just beginning to catch up after years of financing problems, high land prices and very low demand. Skilled labor is an issue that many do not equate to the problem, but during the recession many skilled personnel left the area or made career changes. K-12 school focus has also shifted over the last 20 years away from the trades and career for students who do not go on to college. Residential conditions today are better than they have been for decades. If you look back 10, 20, 30 or even 40 years ago, todays residential marketplace has many more positive factors than negative ones. Interest rates and inventory are the two factors that will most influence the 2017 housing market. Even with that said, Minnesota has a strong and diverse employment base, schools/universities preforming far above the national average, and a quality of life that is regularly recognized as one of the best. We faced challenges before, we’ll face challenges again. But for right now, we should enjoy the real estate marketplace that has many positives than negatives.
