Real estate: Listing glut of 2006 may shrink

The real estate forecast for 2007 focuses on "absorption,'' as some sellers step back and more buyers step forward.

By Jim Buchta, Star Tribune
In a stagnant housing market, optimists already are calling 2007 the year of recovery.

"To me, the stars are all starting to align," said Todd Shipman, outgoing president of the Minneapolis Area Association of Realtors. "It won't be a boom year, but we're back on track."

Is that shameless optimism or an educated guess?

Shipman, a sales agent with Sky Sotheby's International Realty in Edina, said several facts point to a turnaround: Mortgage interest rates are lower than expected, the inventory buildup has started to slow and housing affordability has risen to its highest level in more than a year.

Still, the market will face plenty of challenges during the coming months, including increasing mortgage foreclosures, stagnant home prices and a glut of homes for sale.

According to a forecast released Thursday by the Minneapolis Area Association of Realtors, the number of closed home sales in the Twin Cities metro area during 2007 is expected to increase only about 1 to 2 percent, with the median sale price -- the point where half sell for more, half for less -- increasing about the same amount.

"It's going to be a slow recovery," Shipman said.

Still, those are enviable numbers compared with overheated markets such as Boston and Las Vegas, where median sale prices have fallen more dramatically.

Nationwide, existing home sales during 2007 are expected to decrease just 1 percent compared with 2006, according to the National Association of Realtors. In addition, the median sale price is projected to rise only 1.4 percent during 2006, to $222,600, and only another 1 percent during 2007.

"It should be a rather unexciting year in real estate," said George Karvel, professor of real estate at the University of St. Thomas in St. Paul. "The most exciting part will be that it should not be as hyperactive as it had been."

Absorbing a big supply

The theme of the coming year will be absorption, as sellers step back to avoid stiff competition and buyers step forward to take advantage of low interest rates and seller flexibility.

Karvel said that during the recent five-year run-up in prices, future demand was satisfied, leaving a dearth of buyers and too many listings.

At the end of the December, a seven-month supply of existing homes was on the market in the Twin Cities metro area, according to the Minneapolis association's weekly housing-supply outlook.

Mark Allen, association CEO, is confident that inventories will level off in the coming year, as home builders slow the pace of new construction. There will be fewer "opportunity sales" of the type created in recent years by the strong demand and double-digit price increases.

Allen predicted that the inventory level of 2006 will be a record, with new listings falling slightly during 2007 to the second-highest ever.

Home builders, who have experienced one of the worst years in a decade, are expected to see some improvement during 2007 as buyers regain their confidence -- and sell their existing homes.

Nationwide, the Commerce Department said that at the November sales pace, it would take 6.3 months to sell the nation's entire inventory of new homes.

"I think we're all feeling quite cautiously optimistic that the worst is behind us," said Wendy Danks, marketing director for the Builders Association of the Twin Cities. "Builders have paid attention and have stopped putting things in the ground" if they don't have buyers.

Through November, the number of planned new units in the Twin Cities metro area was down almost 26 percent compared with the first 11 months of 2005.

David Lereah, chief economist for the National Association of Realtors, predicted that sales of new homes will fall 17.7 percent in 2006 and then fall another 9.4 percent during 2007.

That shift is directly tied to the number of existing-home sales, as prospective new-home buyers delay their purchases for fear of not being able to sell their existing homes.

Plus, the high cost of new construction makes less-expensive existing homes all the more attractive to budget-conscious buyers.

Condo supplies are high

The condo market, which has been sagging under the weight of excess supply and has contributed to the bulk of all new construction in the metro area this year, has been particularly vulnerable.

But Tom Melchior, multifamily real estate analyst for Larson, Allen, Weishair & Co., said there could be a very modest turnaround in the condo market during 2007 as sellers get more realistic about pricing and unsold inventory finally moves.

"It won't be a great year, but it will be better than 2006," Melchior said.

Based on current demographic trends and buying patterns, he expected the pool of condo buyers to remain steady during the coming year but the supply-demand ratio to equalize somewhat as the number of new projects dwindles.

Whether buyers are shopping for new construction or existing homes, it's going to be a standout year, particularly for those who were priced out of the market during record sales periods and are now able to take advantage of seller discounts.

On Thursday, the National Association of Realtors said that home sales in November dipped 10.7 percent compared with November 2005, pushing the median sale price down 3.1 percent. That was the fourth monthly median-price decline and an indication that sellers are dropping prices.

The association predicted that mortgage interest rates will gradually increase during 2007, but marginally, to 6.7 percent for a 30-year fixed rate mortgage, by the fourth quarter of 2007.

Still, for some, the hangover isn't going to subside anytime soon. Sellers will struggle, buyers will worry and builders will hope.

And it's also going to be a year of reckoning for people who bought at the peak of the market a year or two ago and have to move, for homeowners with adjustable-rate mortgages they can't afford, and for buyers with subprime mortgages that they can't pay.

Subsequently, foreclosure rates are expected to rise dramatically as modest appreciation rates make it difficult for some people who are forced to sell to recover what they owe on their mortgages.

"For some people this hasn't hit home," said Tom Musil, director of the Shenehon Center for Real Estate at the University of St. Thomas.

"People got used to prices going up and up and up. ... This is when the reality comes to your doorstep."

Downtown Whole Foods-condo project clears hurdle

Minneapolis/St. Paul Business Journal - August 15, 2006
by John Vomhof Jr.
Staff Writer

A $200 million downtown Minneapolis condo project that includes a Whole Foods Market is moving forward.

The Minneapolis Planning Commission on Monday unanimously approved Don Milliken's plans for a 33-story, 290-unit condo project on the Jaguar dealership site at Washington and Hennepin Avenues.

Milliken is a well-known developer from the Pacific Northwest who developed a similar condo project with a Whole Foods in Seattle.

Milliken plans to break ground on his Minneapolis project, called Two Twenty Two, next spring when the Jaguar dealership relocates. Construction will take a little more than two years, with the project expected to open in summer 2009.

The project's key features include the 75,000-square-foot Whole Foods (NASDAQ: WFMI), an additional 7,500 to 8,000 square feet of retail and more than an acre of green space located 30 feet above street. The plans also call for three levels of underground parking for tenants, separate from the Whole Foods parking lot.

Milliken expects condo sales to start next May, once construction is already underway. Units will likely run from $300,000 to $1 million, with three penthouses going for $2 million each.

"They're going to be high-end, well-finished, well-designed," he said.

Milliken said he is not worried about the number of condo projects planned for the Twin Cities area and believes his project will stand out among the rest because it includes a supermarket.

"We are very confident in what we are selling," he said. "We think the quality of our site is second to none."

While Two Twenty Two is Milliken's only development currently underway in the Twin Cities, he said he would like to do more projects here in the future.

"It makes sense as we get to know the market well, to capitalize on that knowledge and to do something else."

Are prices hot, or not so hot? It depends

The third-quarter house price index shows prices are up, down or steady, depending on where you live.

Kenneth Harney, Washington Post Writers Group
Is real estate heating up, cooling down, headed for a deeper freeze, or just hanging in there despite the challenges?

Pick your theory, as the latest federal report on home real estate price appreciation offers support for each scenario. The third-quarter "house price index" compiled by the Office of Federal Housing Enterprise Oversight examined changes underway in 275 of the largest U.S. markets.

Unlike other studies, the index survey tracks actual value shifts in millions of existing houses whose mortgages are owned or included in securities guaranteed by Fannie Mae or Freddie Mac.

Now to the four scenarios: Yes, real estate is heating up. You have to be in the right markets, of course, but there are several dozen hot spots spread nationwide. Take Bend, Ore., where house values appreciated at a stunning 30.7 percent during the 12 months ending Oct. 1, according to the survey. No dramatic bust or correction going on there. Or Myrtle Beach, S.C. (21.7 percent), Salt Lake City (20.4 percent) or El Paso, Texas (18.6 percent).

Overall, 37 metro markets saw average home appreciation rates of at least 15 percent during the 12 months covered by the survey, and 16 states had average gains above 10 percent. If that's not hot, it's at least warm -- exceptionally for a post-boom correction cycle. All these local markets continue to defy the gloom and doom predictions of the real estate bears.

The fastest-appreciating states for home prices this past year? Idaho (average 17.5 percent gain), Utah (17.4 percent), Oregon (16.9 percent) and Arizona (16.4 percent).

Everybody knows about the second scenario: Yes, real estate is cooling down. The third-quarter index documented that conclusively. The average appreciation rate for houses nationwide dropped to 0.86 percent during the quarter, or just 3.4 percent annualized. That's chillier than it has been since mid-1998. In five states -- Michigan, New York, Rhode Island, New Hampshire and Massachusetts -- the quarterly rate actually went slightly negative. It's unusual for an entire state to show net price depreciation for a quarter, but houses in economically hard-pressed Michigan slipped below zero for the entire 12 months of the study, depreciating by an average of 0.06 percent.

The deeper-freeze scenario? There's less hard evidence in the latest federal statistics, but some sobering trends appear in two categories of real estate markets: First are those areas where the regional economy has been struggling, where corporate layoffs and plant closings have pushed unemployment higher, and where there is little in the way of immediate relief in sight.

Examples include large swaths of the industrial Midwest -- Canton, Cleveland and Akron, Ohio, for instance, and Detroit -- each of which saw quarterly net depreciation slightly below 1 percent. Other areas fared even worse, such as Lima, Ohio, where the average house lost 3 percent of its market value during the quarter. Burlington, N.C., took the heaviest quarterly hit in the country -- 3.4 percent depreciation, an annualized 13.6 percent.

In the second category are the boom-era shooting stars where excess appreciation has burned itself out and prices are now flat at best: Half of all California markets saw quarterly declines in market values in the latest survey. San Diego and San Francisco both registered 0.2 percent depreciation for the quarter or nearly 1 percent on an annualized basis; Santa Rosa and Santa Barbara, Calif., and Sarasota, Fla., (all down 1.2 percent for the quarter, nearly 5 percent annualized); New York's Long Island counties of Nassau and Suffolk (0.7 declines), Boston (down 0.4 percent), and Barnstable, Mass. (2.1 percent decline).

Without question the most impressively documented scenario is that many large metro markets -- including some that experienced high gains during the boom years -- are still hanging in there and registering net appreciation, albeit at lower rates.

Examples include Fort Lauderdale (10.3 percent annualized quarterly gain), Naples, Fla. (10.8 percent), Los Angeles (7.4 percent), metropolitan Washington, D.C. (3 percent), New York City and its northern New Jersey suburbs (3 percent), Seattle (14.8 percent), Miami-Miami Beach (14.7 percent), Chicago (5.2 percent), Orlando (6.5 percent) and San Antonio (9.9 percent).

Twin Cities-area prices rose 0.06 for the quarter and 2.82 for the year.

The takeaway message from these seemingly contradictory patterns: Even in a general national cooling trend, the performances of individual local real estate markets are governed by the fundamentals of their own economies. There is no single scenario at work here.

But there is some positive news overall: In the words of Patrick Lawler, chief economist for the agency that produces the price index, "the transition from sizzling markets to normal or weak markets has been orderly so far, and recent drops in interest rates lessen the likelihood that precipitous changes will occur." (To see the full third-quarter house price index, go to www.ofheo.gov.)

Kenneth Harney is a nationally syndicated real estate columnist. He can be reached at the Washington Post Writers Group, 1150 15th St. NW., Washington, DC 20071-9200 or by e-mail at kenharney@earthlink.net.

TOP 10 AREAS

Percent change in house prices for period ended Sept. 30, 2006
Metropolitan statistical area 1-Yr. Qtr.
Bend, Ore. 30.37 2.82
Boise City-Nampa, Idaho 26.48 4.19
Gulfport-Biloxi, Miss. 23.26 6.91
Miami-Miami Beach-Kendall, Fla. 22.14 3.67
Wenatchee, Wash. 21.96 6.80
Myrtle Beach-Conway-North Myrtle Beach, S.C. 21.74 5.96
Flagstaff, Ariz. 21.67 2.96
Longview, Wash. 20.60 6.21
St. George, Utah 20.58 4.37
Salt Lake City, Utah 20.43 5.19

Rankings based on annual percentage change for all MSAs containing at least 15,000 transactions over the past 10 years

Source: Office of Federal Housing Enterprise Oversight

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