Home is where bucks are

Jim Buchta
Star Tribune
Published January 12, 2005

Home sales in the Twin Cities area again broke records in 2004.

Several Twin Cities-area Realtors groups announced their year-end sales numbers Tuesday, and as expected, they showed that 2004 was another record year not only for home sales but also for median sale prices and the number of new listings on the market.

Realtors sold 58,233 houses, townhouses and condominiums for the year -- 3 percent more than in 2003 and an all-time record. The median sale price in the metro area set a record, too -- $215,900 -- an 8 percent increase over 2003.

That follows percentage increases of 8.1 percent in 2003, 8.8 percent in 2002 and 11.8 percent in 2001, making the past four years one of the most explosive periods in history for home sale price increases in the Twin Cities.

Homeowners might want to savor the moment, though, rather than bank on more big gains to come. The annual percentage increases in median sale prices have fallen for four consecutive years. Meanwhile, the number of houses for sale is at a five-year high and 13 percent higher than at this time last year.

What's more, mortgage interest rates are expected to rise slightly this year.

Mark Allen, chief executive officer of the Minneapolis Area Association of Realtors, said that buyers will enjoy a better selection but that sellers should expect slightly longer market times and more moderate sale price increases in the 4 to 6 percent range next year.

The home-building industry is already seeing a return to a more measured pace of activity. The Builders Association of the Twin Cities said Tuesday that during 2004 the number of permits issued to build houses fell 5 percent, while the number of units planned rose 2 percent to 18,591, about half of which were condos and townhouses.

Nevertheless, Metropolitan Council Chairman Peter Bell said the housing industry remains a bright spot in the economy with continued strong prospects. The population of the metro area is expected to increase by nearly a half-million households by 2030, and the region must add 16,000 to 18,000 housing units each year to keep pace with demand.

"More and more [Twin Cities] residents are moving into home ownership and more people are moving into the Twin Cites region," said Gregg Roeglin, president of the Minneapolis Area Association of Realtors.

Four of every 10 home buyers in the metro area last year were first-timers, Roeglin said.

The lowest mortgage interest rates in 40 years helped a significant number of renters, single people and immigrants become homeowners. Move-up buyers took advantage of low rates and rising values, too. Those who bought before the boom have been able to cash out their equity and trade up to more expensive digs.

Nowhere has the phenomenon been more pronounced than in downtown Minneapolis, where a residential construction boom is well under way. Several thousand condominiums and townhouses have been built there and several thousand more are on the way.

Grant Park Tower, the site of the Realtors' Tuesday news conference to announce the home-sales numbers, is a 288-unit condo building that opened last fall and is nearly fully sold out, including two $4 million-plus penthouses.

That high-end construction is just one reason that the MLS district that includes Grant Park Tower as well as downtown and the Central neighborhood posted the biggest sale price gain in the 13-county metro area. From 2003 to 2004 the median sale price there jumped 22 percent from $219,000 to $267,000.

The condos and townhouses being built downtown routinely sell for more than $300 a square foot. Older houses that are more typical of the neighborhood are more likely to sell for $100 a square foot or less.

Mayor R.T. Rybak said congestion and gridlock are driving many people to abandon life in the suburbs for downtown living.

"This is one of the reasons why so much downtown growth is happening," Rybak said. "People are sick of being stuck in traffic."

With prices out of reach of many buyers, Rybak said the city is stepping up to fund affordable housing programs. During the past year the city helped build 241 new units and renovate another 464. In 2003 the city set a three-year goal of building or renovating 2,100 affordable units by 2005.

St. Paul, too, is on its way toward meeting its affordable housing goals. Susan Kimberly, St. Paul Planning and Economic Development director, said the city hopes to reach its Housing 5000 initiative goals by September by building or renovating 5,000 units.

Affordability continues to be a growing problem throughout the suburbs, where median prices rose throughout the metro area. In Sunfish Lake, for example, the median sale price rose 20 percent to $807,500.

In most suburbs the annual increases were in the 5 to 9 percent range. In Prior Lake, for example, the median sale price rose 7 percent from $255,000 to $274,000 and in Burnsville the median sale price increased 6 percent from $208,450 to $221,500.

Jim Reiter, president of the St. Paul Area Association of Realtors, said it's common for a home that fetched $150,000 in 2000 to change hands for about $211,000 -- a more than 40 percent increase.

The median sale price fell in a few areas, though that doesn't necessarily indicate that housing there is becoming more affordable in general.

In the Calhoun-Isles area, the median sale price dropped 10 percent from $287,900 to $258,958. And in Northwest Hennepin County the median sale price dropped 5 percent from $359,950 to $343,000.

Mark Allen of the Minneapolis Association said these are areas with fewer than average transactions that are statistically vulnerable to a variety of changes in the market, including the construction and sale of lower-priced condos and townhouses. In addition, the median is simply a barometer of what's happening within each market, and throughout the metro area there are big variations in sale prices.

"It's almost like the weather," Allen said. "When they say there was 4 inches of snow, one area might have had 2 inches but on average there was 4."

After a rousing 2004, housing markets may cool

Jim Buchta
Star Tribune
Published January 8, 2005

2004 was a year of extremes for the housing market, and a year of contradictions too.

With mortgage rates near historic lows and the highest numbers of houses for sale and apartments for rent since 2000, renters and home buyers found themselves spoiled with choices.

For many sellers and landlords, however, it was a year of growing frustration as market times for rentals and for-sale housing stretched to weeks, sometimes months, and one-day market times faded to a sweet memory.

Nonetheless, when all the numbers are in the Minneapolis Area Association of Realtors expects 2004 to be another record year, and the Builders Association of the Twin Cities says 2004 will run a close second to its best year on record: 2003. Mortgage interest rates too will end the year at the lowest level in nearly 30 years.

Nationwide, new and existing home sales are expected to fall 5 percent as mortgage rates rise to 6.25 percent, according to Doug Duncan, chief economist with the Mortgage Bankers Association in Washington, D.C.

In the Twin Cities area, 2005 should usher in a relatively calm, slightly slower year for buyers and sellers, according to George Karvel, professor of real estate at the University of St. Thomas, who said people's fears of plummeting prices are unwarranted.

"There would be no expectation of any collapse in housing prices," Karvel said. "There is no bubble."

Existing home sales

During 2004 the market for existing homes went from great to good as the number of houses for sale peaked late in the year while the number of buyers remained fairly static. That caused market times to rise as buyers took advantage of the growing choices.

Even so, pending sales, closed sales and new listings all are expected to break records once the final numbers are tallied in early January, said Mark Allen, chief executive officer of the Minneapolis Area Association of Realtors.

According to preliminary data, there were 58,000 closed sales this year, up about 2.6 percent from 2003 -- the previous record-setting year, Allen said.

So if you were a buyer, you probably found yourself in the driver's seat. The number of houses for sale rose to the highest level in more than five years, giving buyers more options than they've had in years. That also gave many sellers a headache. After four years of market times in the single digits, that has increased to several weeks or more in some areas. Mid- to upper-bracket houses in the suburbs are among those taking the longest to sell.

What can buyers and sellers expect in the coming year? That largely depends on what happens to the economy and to mortgage interest rates. Current projections and a promising jobs outlook indicate that the market will remain healthy, but might not break records, Allen said.

Continued economic growth is expected to drive home sales through the coming year. But at the same time, a stronger economy is likely to cause mortgage rates to rise, softening the increased demand that could come with a better economy.

"The good combined with the bad should result in a year that's very similar to this year," Allen said.

Annual sale price increases over the past year are expected to finish above 7 percent during 2004, but drop into the 4 to 6 percent range this year, he said. Historically speaking, that's still not bad. During a normal market the median sale price increase is more likely to be in the 3 to 4 percent range.

"All signs are that growth of appreciation should moderate a little bit, which is ultimately healthy in the long run," Allen said.

Rental market

In many ways the rental market mirrored many of the dynamics of the for-sale housing market, but for different reasons.

There still were plenty of renters out there shopping for an apartment, but with a rising supply of new apartments hitting the market, landlords had to scramble to get renters to sign leases. For most of the year vacancy rates dipped slightly from the 7 percent range to the mid-6 percent range, but not enough to justify significant rent increases. That left rent prices stagnant. As of the end of the third quarter, the last period for which data is available, the average rent price was $851 -- just $6 higher than last year at this time.

"We saw some progress, but I don't think the progress met the expectations of many people in this market," said Brent Wittenberg, vice president of GVA Marquette Advisors. "We saw some job growth, but that didn't translate into apartment demand."

Wittenberg estimates that the vacancy rate in 2004 will be between 7 and 7.3 percent, down from 7.6 percent a year ago, but up considerably from 6.7 percent during the third quarter.

The rental market suffered at the hands of the housing market, which continued to steal renters who took advantage of historically low interest rates to become homeowners. However, when it came to low-income housing, demand still exceeded supply.

The market is considered to be at equilibrium when the vacancy rate hits 5 percent, Wittenberg said, and historically, a 7 percent vacancy rate isn't bad. But many landlords were spoiled by vacancy rates that dropped to the rock-bottom lows of 1 to 2 percent in the days before mortgage rates dropped to historic lows and the housing market went bonkers.

That's why property managers are digging deep to snag renters. Many are offering concessions of 1 to 2 months free rent, no application fee and other perks, particularly in communities where there's been significant construction.

In Plymouth, for example, competition increased when several new luxury projects hit the market. Some property managers are now reporting vacancy rates in the 10 percent range. In some areas the market got tighter because of the apartment-to- condominium conversion trend. In downtown Minneapolis, for example, where Riverwest Apartments is converting, the third-quarter vacancy rate fell to 5.1 percent.

During the coming year renters can expect a favorable market as long as mortgage rates remain fairly low. If rates spike, that could end the exodus from the rental market and increase the competition for apartments as potential home buyers fall out of the market. Wittenberg expects vacancy rates to remain in the 7 percent range with rent prices remaining steady.

"Hopefully we'll see a more robust job market resulting in more demand as interest rates rise," Wittenberg said.

New construction

Low mortgage rates have been a boon to home builders, too, and over the past couple years builders have been working year-round at break-neck pace trying to keep pace with demand.

Rick Kot, 2004 president of the Builders Association of the Twin Cities and president of R.A. Kot Homes Inc., said 2004 will go down as the second-most-active year in recent memory. From January through November, the number of permits issued in the Twin Cities is 3 percent behind last year.

Business is good largely because of strong demand for new townhouses and condominiums from baby boomers and empty nesters seeking liberation from snow shovels and rakes. Throughout the year attached housing has consistently comprised about half of all new units built in the metro area.

As of November, home builders were issued 10,073 permits for 17,010 planned units at a value of $3,038,984,769 in the metro area, according to the Keystone Report, which is commissioned monthly by the Builders Association. That report does not include downtown Minneapolis or St. Paul and a small number of suburbs.

During the coming months home builders could find themselves with a little more time on their work-weary hands as the market moderates. During the last months of 2004 the number of permits pulled -- new home sales are not tracked locally -- dropped precipitously compared with 2003. In November, for example, builders pulled 20 percent fewer permits with plans to build 11 percent fewer units.

During the coming year builders expect demand for new housing to slow slightly. That might translate into more incentives, including financing deals, option upgrades and closing cost assistance as they compete for business.

"Our builder members are relatively optimistic about 2005," Kot said. "All forecasts suggest the Twin Cities will continue to need new housing production."