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Herb Tousley

Affordable Housing, Home Prices, Housing, Housing Trends, Industry News, Minneapolis / St. Paul Housing, Real Estate Trends, Residential Real Estate, Residential Real Estate Index, Twin Cities Real Estate

University of St. Thomas Real Estate Analysis for April 2017: High Demand and Low Supply Continue to Put Upward Pressure on Sale Prices

Negative Equity – Continued Improvement in 2016 but Still an Issue

The number of homeowners with negative or near negative equity continues to decline but is still high by historical standards. Lack of equity is a reason that many homeowners are not willing or able to put their homes up for sale which is a contributing factor to the very low number of homes for sale in the Twin Cities. As can be seen in the table below about 1 in 5 homeowners in the metro area with a mortgage is in a negative or near negative situation.

% of Home Owners in the Twin Cities with Negative or Near Negative Equity

County Negative Equity* Near Negative Equity**   County Negative Equity* Near Negative Equity**
Hennepin 8.0% 20.4% Scott 6.1% 20.1%
Ramsey 6.6% 18.7% Carver 5.9% 21.3%
Dakota 6.6% 20.5% Chisago 8.5% 22.9%
Washington 6.6% 21.1% St. Croix (WI) 7.9% 23.0%
Anoka 7.0% 23.6% Pierce (WI) 11.3% 27.5%
Twin Cities 7.3% National 10.5%

     Source: Zillow

* Negative Equity – Owes more than the house is worth

** Near Negative Equity – Equity is less than 20% of value

“The problem with near negative equity is that home owners are not actually underwater, but in many cases they do not have enough equity after they sell their home to pay for the costs of buying a new home, including a down payment, commissions and taxes” said Herb Tousley, director of real estate programs at the University of St. Thomas. In 2017, home prices are expected to increase about 5% – 6% in the Twin Cities, which will free many more homeowners from negative equity Rising prices and loan repayments will also continue to improve the equity position for homeowners, but this will be a slow process and we should be prepared for higher than normal negative and near negative equity to be a part the housing market for a long time to come.

 High demand and low supply of homes for sale continue to put upward pressure on sale prices in April. The overall median sale price jumped from $237,300 in March to $246,000 in April. The traditional, non-distressed median sale price is at a new all-time high at $250,000, a 4.2% increase compared to April 2016. On the supply side in April there were 10,969 homes available for sale, 19.9% less than April 2016. Again, the shortage is most acute in the low to moderately priced homes. See the table below.

Homes For Sale vs. Closed Sales –  Where The Action Is

Price Range Number of Homes For Sale % of Total Homes For Sale Number of Closed Sales % of Total Sales Months Supply
0 – $200,000 1992 18.2% 1449 30.7% 1.2
$200,000 – $400,000 4554 41.5% 2484 52.5% 1.9
$400,000 – $600,000 2270 20.7% 563 11.9% 4.2
$600,000 + 2095 19.0% 230 4.9% 8.5
       Total 10969 4726

The number of homes sold in April was 4,726 compared to 4,348 in March and 5,252 in April 2016. That is 10% less than the number of sales recorded in the same period a year ago. We believe that this is a reflection that extreme the low supply of homes for sale is beginning to impact the number of homes sold in April. This this the first time since 2011 that the number of closed sales has declined on a year over year basis. The number of new listings was 7,747, which is 8.3% less than recorded in April 2016. That decrease is a sign that the short supply situation is likely to continue for at least the next several months. We believe that the changes observed in April are the beginning of an indication that the supply and demand sides of the market are becoming slightly less imbalanced.

 The St. Thomas Indexes

Here are the Shenehon Center’s monthly composite index scores for April 2017. The index, which tracks nine data elements for the three types of sales (traditional, short sales and foreclosures) started in January 2005. For that month, the center gave each of the three indexes a value of 1,000.

At a level of 1172 the April UST Residential Real Estate Traditional Sale Composite Index is up significantly, registering a 3.1% monthly increase compared to the level of 1137 that was recorded in March.

The UST Residential Real Estate Short Sale Composite Market Health Index was 1045 in April, up 3.1% from the 1014 recorded in March.

The UST Residential Real Estate Foreclosure Composite Index was observed in April at 924 a significant increase over the 901 recorded in March.

For more information, visit the Shenehon Center’s complete report for March 2017 at http://www.stthomas.edu/business/centers/shenehon/research/default.html.The report is also available for free via email from Tousley at hwtousley1@stthomas.edu.

 

Commercial Real Estate, Industry News, Retail Real Estate

Is the U.S. Over-Retailed?

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When and where will we see the impact from the store closures?

Reposted from nreionline – Barbara Byrne Denham, Victor Calanog | May 15, 2017

When looking at the numbers, the story is not as bad as many have reported. The retail vacancy rate for neighborhood and community shopping centers was flat in the first quarter at 9.9 percent, the same as in the first quarter of 2016. Moreover, rent growth was positive, at 0.3 percent for the quarter. The mall vacancy rate only climbed to 7.9 percent from 7.8 percent at the end of 2016 and rent growth was 0.4 percent during the quarter.

So when and where will we see the impact from the store closures?

First, many of the store announcements have yet to translate into actual closings. Thus, we should see more vacancies in the next three or four quarters. Second, a number of other retailers are expanding into retail space, we are seeing quite a bit of this in the properties we survey. Third, many of the stores closing are in less densely populated or more rural areas beyond the 80 primary metros that we track. Indeed, our tertiary market statistics show an aggregate retail vacancy rate increase to 13.5 percent from 13.2 percent at the end of 2016 and no rent growth.

We are seeing consistent results in the employment numbers. That is, only 14 of 82 primary metros tracked by Reis show a year-over-year loss in retail jobs, but 35 tertiary markets show an employment loss as of the first quarter. It should be noted that nearly all of the retail losses at the national level are in “general merchandise” stores that include department stores as well as supercenters. It should also be noted that the U.S. added retail jobs in April, yet the media stayed mum.

 Still, anyone looking at this industry will say the same thing: we are over-retailed. Retail development exploded in the late 1980s through the 1990s. It has subsided in this last cycle as many developers and lenders got burned in the recession. But there are likely still more stores than we need. And with the overwhelming growth in e-commerce we probably need fewer than we currently have in a number of markets. But where to start?

A good way of measuring what markets may be over-retailed is to compare retail employment to population. The table below shows the markets with the highest and lowest ratios of retail employees per 1,000 people and the respective growth in retail rent over the last four years.

As the tables above show, there is a pretty wide gap between the metros that have a high retail employment per population ratio and those that have a low ratio (39 to 66). What’s more significant is the differences in the range of rent growth rates between the top and bottom tables. That is, those with a high ratio had persistently slower rent growth than those with a low ratio. In fact, for the 80 metros tracked by Reis, the correlation coefficient for the four-year retail rent growth and retail employment per 1,000 residents is -22.3 percent. In other words, markets that look to be over-retailed (i.e. with a high retail-employee-to-population ratio) have generally seen lower retail rent growth than those that seem to be relatively under-retailed.

While this correlation coefficient is negative as one would expect, it is still pretty low. This suggests that far more variables are impacting retail rent growth. In fact, the correlation coefficient between population growth and retail rent growth was significantly higher: 42 percent. Thus, population growth drives retail rent growth more than the saturation of the retail industry.

 While the numbers show that the retail industry could in fact be over-saturated, the impact of this saturation on the real estate industry may not be as troublesome as many would presume. Again, other businesses are expanding in formerly empty stores, especially non-traditional tenants such as yoga studios and urgent care medical centers. In sum, while the media may overreact to the next jobs report as doom and gloom for the retail industry, it is important to consider what is likely not being reported in the press, which is that the retail industry is performing better than many would assume.

Barbara Byrne Denham serves as an economist and Victor Calanog as chief economist with Reis, Inc, a provider of commercial real estate data and analytics.

Commercial Real Estate, Development, Economics, Executive Insight Series, Housing, Industry News, Investment Real Estate, Real Estate Programs, Real Estate Trends, Think Outside The Box, Twin Cities Real Estate, Upcoming UST Events

Real Estate Executive Insight Speaker Series Bob Lux – Inside the Mind of A Developer

 

Real Estate Executive Insight Series

Bob Lux – Inside the Mind of A Developer 

Event Details Tuesday, March 28th 2017 5:30 p.m. University of St. Thomas, Minneapolis Campus Schulze Hall, Room 127

A candid conversation with industry leader Bob Lux, Founder Alatus LLC

Quality real estate development requires innovative thinking. Bob Lux, founder of Alatus LLC, has been in the real estate development and investment business for over 30 years. His company’s mission is to provide innovative solutions and high quality projects by wisely using his team’s talents and strengths to achieve the client’s vision and form a better community.   Lux will discuss the challenges, opportunities and trends in developing residential and commercial real estate in the Twin Cities. Lux will also share his views on the condo market and as the largest private owner of parking facilities in Minnesota Bob will outline his expectations for future parking and infrastructure needs in the downtown area.

Agenda 5:30-6 p.m. Networking 6-7 p.m. Presentation by Bob Lux

Register Today
 
Economics, Home Prices, Housing, Housing Trends, Minneapolis / St. Paul Housing, Real Estate Trends, Residential Real Estate, Residential Real Estate Index, Twin Cities Real Estate

St. Thomas Real Estate Analysis: More Twin Cities Homes for Rent Means Fewer are Available to Purchase

The growing number of single-family rentals is contributing to a chronic shortage of moderately priced homes on the market.

More and more single-family rental homes — a trend that has been developing locally and nationally since the start of the Great Recession in 2008 – means there are fewer and fewer single-family homes available for purchase. According to the most recent market analysis by the Shenehon Center for Real Estate at the University of St. Thomas’ Opus College of Business, this increased percentage of rental homes is yet another factor contributing to a historically low supply of homes for sale in the 13-county Twin Cities region. In earlier reports, the center examined other causes that contribute to the shortage: low or negative equity during the recession, concerns about job or financial situations, and a trend of keeping homes longer than in the past. Earlier this year, the center predicted that the persistent low availability of homes for sale, coupled with strong demand, will result in a 5 percent increase in the median sale price of Twin Cities homes this year.

“On a national and local basis we have seen the formation of companies and funds such as Blackstone’s Invitation Partners and American Homes 4 Rent that are buying large numbers of single-family homes for investment purposes,” said Herb Tousley, director of real estate programs at the university. “Blackstone is the largest of single-family investors; they currently own about 50,000 homes across the country,” he said. “Their strategy was to purchase single-family homes at deeply discounted prices during the recession, rehab the property, and then hold the property longterm as a rental property. Even though home values have increased since the end of the recession, many of these companies are still actively buying. “Institutional investors have largely figured out how to maintain and efficiently operate ‘scattered-site single family rentals’ on a professional basis. Most of these homes are in established neighborhoods. Renovation and a regular maintenance schedule preserves the housing stock and maintains the quality of the surrounding neighborhood,” Tousley said.

This is a trend that is not only occurring in the core cities of Minneapolis and St. Paul, it is happening all across the Twin Cities metro area. The total number of single-family homes being rented in suburban neighborhoods has increased from 12,000 in 2000 to over 28,000 in recent years, according to data compiled by the Metropolitan Council. Of the 93 cities that were tracked, all but 32 saw their single-family rentals grow by at least 100 percent between 2000 and 2013.

Where are the Single Family Rentals in the Twin Cities?         Top 5 Cities by %

City Single Family Homes as Rentals in 2000 % of Rentals in 2000 Single Family Homes as Rentals in 2013 % of Rentals in 2013
Minneapolis 5864 8% 10278 14%
St Paul 3976 7% 7416 13%
Brooklyn Center 193 3% 867 12%
Columbia Heights 153 3% 610 12%
Anoka 177 5% 449 11%

Meanwhile, the number of homes available for sale that are priced between $150,000 and $350,000 has been steadily declining since 2008. Tousley said that homes in this price range are very attractive to the large institutional investors because they make good rental properties that provide a good return to their investors. However, homes in that same price range also are the most attractive to first-time homebuyers and first-move-up buyers. “The homes that are purchased by the institutional investors are going to be held longterm as rental properties so they in effect would be ‘off the market’ and will not be available for sale for a long period of time. The institutional ownership of large numbers of homes as single-family rentals is a relatively new development in the housing market and it is one more factor that is contributing to the chronically low number of homes available for sale,” he said.

February Market Summary

The housing market in the Twin Cities continued on its normal seasonal pattern in February. As expected the overall median sale price was essentially the same as January at $223,000. The traditional, non-distressed median sale price was $230,000, a 4.2 percent increase compared to February 2016.

The number of homes sold in February was 2,696 compared to 2,814 in January and 2,716 in February 2016. The percentage of distressed sales (foreclosures and short sales) ticked up slightly in February at 9.2 percent, however that percentage should continue to decline to pre-recession levels as we move into the spring selling season.

As noted earlier, the continued shortage of homes available for sale continues to be an issue. As buyers become more active in the spring-summer selling season, the shortage will create additional upward pressure on sale prices.

“The concern is that if this continues over a long period of time … where median sale prices are increasing faster than wages and income … it will begin to create affordability issues especially if interest rates begin to rise,” Tousley said.

The St. Thomas indexes.

Here are the Shenehon Center’s monthly composite index scores for February 2017. The index, which tracks nine data elements for the three types of sales (traditional, short sales and foreclosures), started in January 2005. For that month, the center gave each of the three indexes a value of 1,000.

 

  • The February 2017 index score for traditional sales was 1,114, down 0.4 percent from January 2017 and up 4.1 percent from February 2016.

 

  • The February 2017 index score for short sales was 993, down 2.5 percent from January 2017 and up .1 percent from February 2016.

 

  • The February 2017 index score for foreclosures was 842, up .2 percent from January 2017 and up 7.5 percent from February 2016.

 

More information online

The Shenehon Center’s complete online report for February can be found at: http://www.stthomas.edu/business/centers/shenehon/research/default.html.

The report is available via email from Tousley at hwtousley1@stthomas.edu.

Commercial Real Estate, Commercial Real Estate Index, Economics, Industry News, Office Real Estate, Real Estate Trends, Retail Real Estate, Twin Cities Real Estate

Minnesota Commercial Real Estate Outlook Showing Few Changes Following Election, says University of St Thomas Minnesota Commercial Real Estate Survey

The December 2016 University of St. Thomas/Minnesota Commercial Real Estate Survey, taken entirely after the November 8th election, shows few changes in commercial real estate leaders outlook. The biannual survey projects a two-year-ahead outlook for Minnesota’s commercial real estate industry and forecasts potential opportunities and challenges affecting all commercial real estate sectors.

In all 12 surveys the same group of 50 industry leaders have been polled on their expectations for future commercial real estate activity in six categories: rents, occupancy levels, land prices, cost of building materials, rate of return, and equity requirements. Their responses are used to create index scores that can be compared over time. Scores higher than 50 represent a more optimistic view of the market over the next two years; scores less than 50 represent a more pessimistic view.

The panel is expecting to see a continuation of the favorable market conditions for commercial real estate that we have been experiencing for the last two to three years. The results of the November 8th presidential election does not appear to have significantly changed their outlook for the next two years

Observations from 2016 have recorded few major changes in expectations from before the election compared to after the election. “The natural cycle in commercial real estate appears to be running its course somewhat independent of the presidential contest” says Herb Tousley, Director of the Real Estate Programs at the University of St Thomas. “While the forecast for 2017 still looks good, the increase in online shopping, higher interest rates, and the continued redefinition of the office environment will remain major factors in the performance of commercial real estate in 2017.”

Here is a look at the panel’s responses for each of the questions.

Rent Expectations

An outlook that rents will continue to increase at current rates. The index for rental rates has increased from a highly optimistic 60 to a slightly more optimistic 61. This is an indication of an expectation of continued rent growth over the next two years and that the economy will continue to grow and that business conditions will continue improve.

Occupancy Expectations

A moderately positive outlook on expected occupancy levels. The index for occupancy levels increased moderately from 52 to 54. This indicates the panelists continue in their belief that occupancy levels will increase slightly over the next two years. This is a continuation of a trend that began 1 ½ years ago that reflects their expectation that business will continue to expand and will need more space.

Land Price Expectations

Increases in land prices are expected to moderate. The panel’s outlook for land prices reveals an expectation that land prices will increase at a slower rate between now and fall 2018. The land price index has increased (become less pessimistic) for the fourth consecutive survey moving from 40 last spring to 46 this fall.

Building Material Price Expectations

Increases in the price of building materials are expected accelerate.  The index for the price of building supplies took a sharp turn downward, moving from a strongly negative 32 to an even more negative 29. This reflects the panel’s strong belief that rate of increase in building material prices will accelerate over the next two years.

Return on Investment Expectations

Investors return expectations are expected to increase slightly over the next two years. The index for investor’s return expectations has decreased slightly moving from 48 to 46. This slight decline indicates that investors will be looking for higher returns. The consensus among survey respondents indicates that investors will be seeking higher returns due to their expectation of increasing interest rates over the next two years.

Lending Expectations

More equity is expected to be required.  The index for the amount of equity required by lenders decreased significantly, falling from 42 in to 36. This indicates the panel’s strong belief that credit will be available for good projects but lenders will be more risk adverse by increasing their equity requirements in the coming two years.

 More Information

Additional details can be found on the Shenehon Center’s website: http://www.stthomas.edu/business/centers/shenehon/research/default.html.

Affordable Housing, Economics, Home Prices, Housing, Housing Trends, Minneapolis / St. Paul Housing, Multifamily, Twin Cities Real Estate

St. Thomas real estate analysis for July: Tight market is the result of several long-term trends that won’t change soon

Current trends, including the low number of moderately priced homes, are expected to continue through the end of 2017.mortgages

Current real estate trends in the 13-county Twin Cities region, including the historically low number of moderately priced homes available to purchase, are the result of several long-term trends that are expected to change slowly over time. That’s the conclusion reached by the Shenehon Center for Real Estate at the University of St. Thomas’ Opus College of Business. The center examined the Twin Cities’ long-term trends, expected to continue through the end of 2017, in its monthly analysis of metro area real estate data. “The historically low-supply-of-homes-for-sale situation has been with us for the last several years although it has been most acute since mid-2015,” said Herb Tousley, director of real estate programs at the university.

He cited five statistics that illustrate the housing supply-and-demand situation in the Twin Cities:

  • Days on Market:       It was 53 days in July. That’s 15 percent less than a year ago and the fastest turnover since 2007.
  • Month’s Supply: It was 2.9 months in July. That’s 24 percent less than a year ago and the lowest 12-month average since 2005.
  • New Listings: It was 7,522 in July. Down 14 percent from June and 6 percent from a year ago.
  • Closed Sales: It was 6,030 in July. The annualized number of homes sold has increased 59 percent since early 2011.
  • Homes for Sale: It was 14,457 in July. The annualized number of homes for sale has decreased 48 percent since early 2011.

The shortage of homes is most pronounced for homes selling for less than $200,000 and for those selling between $200,000 and $399,000.

For example, in July there was only a two-month supply of homes selling for less than $200,000 and a 2.6-month supply for homes selling between $200,000 and $399,000. However, there was 5.2-month supply of homes selling between $400,000 and $599,000 and a 10.5-month supply of homes selling for more than $600,000.

Also in July, 56.3 percent of homes available for purchase were under $400,000 while 81.7 percent of homes sold were under $400,000.

The median price for homes sold in the Twin Cities in July was $239,000. That’s down $6,000 from the all-time high median sale price of $245,900 that was set in June. However, it still is in record territory; the previous high was $238,000 set in June 2006.

Supply Side Trends

The Shenehon report cited these long-term underlying trends on the supply side of the Twin Cities market.

  • Americans are keep their homes longer. CoreLogic reported recently that the number of years homeowners owned their homes increased by three years between 2007 and 2013 and it has increased an additional year since then.
  • The homeownership in the Twin Cities, as reported by the U.S. Census Bureau, was 68.6 percent in the second quarter of 2016. That’s the highest rate of any major metro area in the nation. Nationally, the rate is 62.9 percent.

“Since we have a very high ownership rate and homeowners are keeping their homes longer, the result is fewer existing homes being listed and a shortage of homes available for sale,” Tousley said.

Demand Side Trends

According to this month’s Shenehon report, “On the demand side the simple answer is that people want to live here.”

  • The Twin Cities population has been increasing and is expected to increase for at least the next 10 to 15 years. This is mainly due to migration from rural areas and other parts of the country, and immigration.
  • Housing is affordable. According to a recent Bloomberg News report, the Twin Cities area ranks fourth in the top-10 list of most affordable places for people between the ages of 24 and 44 to purchase a home.

“These people are going to need a place to live here,” Tousley said. “Our diverse economy, strong job growth and high median income attracts people to the area.

“Favorable economic conditions coupled with historically low interest rates and an increasing number of potential home buyers will continue to create strong demand for single-family homes.”

How long will the shortage last?

According to the Metropolitan Council, the Twin Cities region had 1,176,600 owned or rented households in 2015, up almost 59,000 since 2010. During that time, however, only 43,000 housing units were added. The remaining 16,000 new households moved into existing housing, and that in turn reduced the vacancy rate. “This growth pattern is expected to continue for at least the next five years,” Tousley said. “It is unlikely that we will be able to build our way out of this situation in the near term. “Single family home builders have not yet returned to pre-recession production levels. Over the last several years there has been a great deal of multi-family construction but much of this new product has been high-end luxury units, beyond the financial reach of many households. “For the housing market to become more balanced between buyers and sellers we are going to have to add a significant number of affordably priced rental and for-sale housing units. “These units need to be affordable to households who earn the area median income in order to keep up with the expected population growth in the Twin Cities market area. As this happens the market should begin to slowly come back into balance. “However, this is a process that is going to take a number of years and until then we should expect similar market conditions to what we have experienced over the last couple of years. “In the meantime, expect to see solid annual price appreciation for existing homeowners. As you can see from the table below in the past year the supply of homes for sale has become even tighter, especially for homes are priced at less than $400,000

The St. Thomas indexes.

Here are the Shenehon Center’s monthly composite index scores for July 2016. The index, which tracks nine data elements for the three types of sales (traditional, short sales and foreclosures), started in January 2005. For that month, the center gave each of the three indexes a value of 1,000.

  • The July 2016 index score for traditional sales was 1,192, up .3 percent from June 2016 and up 5.7 percent from July 2015.

 

  • The July 2016 index score for short sales was 1,031, up 2.1 percent from June 2016 and up 5.9 percent from July 2015.

 

  • The July 2016 index score for foreclosures was 875, which is unchanged from June 2016 and up 7.1% from July 2015.

For the third consecutive month, the score for traditional sales set new record highs. “Although the increase was small in July, it is the result of a continuing tight supply of homes for sale couple with very low interest rates,” Tousley said in Shenehon Center’s July report.

 More information online

The Shenehon Center’s complete online report for July can be found at: http://www.stthomas.edu/business/centers/shenehon/research/default.html.

The report is available free via email from Tousley at hwtousley1@stthomas.edu.

 

 

 

Economics, Home Prices, Housing, Housing Trends, Minneapolis / St. Paul Housing, Real Estate Trends, Residential Real Estate, Residential Real Estate Index, Twin Cities Real Estate

Twin Cities Sets Records for Median Sale Price and Number of Homes Sold

Are we seeing another bubble in the Twin Cities housingMarket Report

market? Not this time, says St. Thomas’ monthly analysis  

With median sale prices hitting a record high in June, is the Twin Cities housing market experiencing the kind of bubble we saw back in June 2006? According to a monthly analysis conducted by the Shenehon Center for Real Estate at the University of St. Thomas’ Opus College of Business, the short answer is no. The median sale price of homes sold in the 13-county Twin Cities region reached $242,000 in June. That tops the previous high-water mark of $238,000 set in June 2006. On top of that, the 7,110 homes sold in June was another record high.

Each month the St. Thomas center tracks the median price for three types of sales: nondistressed or traditional; foreclosures; and short sales (when a home is sold for less than the outstanding mortgage balance). In addition, it looks for trends in the market and creates a monthly composite index score by tracking nine data elements for those three types of sales.

Herb Tousley, director of real estate programs at the university, said the reasons for the current run up in housing prices are much different than the conditions that led to the run up in values in the mid-2000s followed by the subsequent crash. “Before 2008, lending standards were very lax,” he said. “Little to no down payments were required since everyone believed that home prices would always keep going up. There were many low-documentation or ‘no-doc’ loans that were made to people who were not qualified, resulting in high numbers of foreclosures and short sales. “Additionally, overbuilding, speculation, and excessive flipping of homes were major contributors to the housing market crises of 2008. “Today, mortgages are only being made to qualified buyers, home flipping has returned to normal levels, and overbuilding is not a problem. The current run up in home prices can be attributed to market fundamentals. There is a shortage of homes for sale and a historically high level of demand fueled by low interest rates and an improving economy. “One concern is the affordability issue; that occurs when home prices rise faster than family income. When this occurs over an extended period of time it becomes more difficult for families to afford to purchase a home due to higher required down payments and higher monthly payments,” Tousley said.

It has taken 10 years for the median sale price of a Twin Cities home to recover to its previous peak level. Where do we go from here?

Number of sales: In 2015 there were just over 56,000 homes sold in the Twin Cities. Tousley predicts that the second half of 2016 should continue to see a high sales volume. Look for a total of about 58,000 homes sold in 2016.

 Median sale price: In most years, the peak median sale price occurs in June. Maybe not this year. With the low number of homes for sale and continued low interest rates, Tousley feels that median sales prices should be at or above record levels in July and possibly August before tapering off in September. At the end of the year, look for an annual increase in the median sale price of 5 percent to 6 percent, with the median sale price settling in the low $230,000 range.

One reason for the higher median selling price recently is because the percentage of distressed sales – foreclosures and short sales – has finally returned to pre-crash levels. In June, only 5 percent of home sales were distressed. Before 2007, the level of distressed sales was in the 3 percent to five percent range. But during the recession, and especially from 2008 to 2013, the level of distressed sales was in the 40 percent to 60 percent range. Since the median price of distressed homes is considerably lower than nondistressed homes, when there are fewer distressed homes sold the overall median selling price goes up.

In addition to robust home sales, the Twin Cities is seeing more remodeling and more new homes being built. In 2015, the Twin Cities saw the construction of 4,680 new single-family homes. So far this year single-family “starts” are up about 15 percent. “Look for a 2016 year-end total of 5,300 to 5,500,” Tousley said. That would make 2016 the best year for new-home construction since before the recession.

Meanwhile, the Leading Indicator of Remodeling Activity, calculated by the Harvard Joint Center for Housing Studies, estimates that this year the growth in home improvement and repair spending will reach 8 percent, well above the average of 4.9 percent. Tousley said there are two main reasons for the increase.

First, because of the shortage of homes for sale, many potential homeowners are opting to stay where they are and enlarge or remodel their existing homes.

Second, rising home prices and the current “seller’s market” is encouraging some homeowners to upgrade or remodel their home in anticipation of listing it for sale.

“In either case,” Tousley said, “it is good news for remodeling contractors in our area. Many are booked ahead with work well into the fall.”

The St. Thomas indexes.

Here are the Shenehon Center’s monthly composite index scores for June 2016. The index, which tracks nine data elements for the three types of sales (traditional, short sales and foreclosures), started in January 2005. For that month, the center gave each of the three indexes a value of 1,000.

The June 2016 index score for traditional sales was 1,188, up 2.1 percent from May 2016 and up 6.3 percent from June 2015.

The June 2016 index score for short sales was 1,010, up 2.8 percent from May 2016 and up 4.2 percent from June 2015.

The June 2016 index score for foreclosures was 875, up 1.86 from May 2016 and up 7.86 from June 2015.

The score for traditional sales hit record highs in May and June. “It is a result of a continuing tight supply situation and high sales activity indicating the ongoing health a resurgence of the Twin Cities housing market,” Tousley said in Shenehon Center’s June report.

Index Chart June 2016

Development, Economics, Home Prices, Housing, Housing Trends, Minneapolis / St. Paul Housing, Real Estate Trends, Residential Real Estate, Twin Cities Real Estate

Survey of Twin Cities’ home builders finds them in a slightly more optimistic mood than six months ago

The composite score of this new forecasting tool increased slightly, but there were more significant changes found in the six individual questions that St. Thomas asked industry leaders.

Leaders in the Twin Cities single-family-home-construction industry were “slightly less pessimistic” about market conditions in June than they were last December. That’s according to a survey conducted by the University of St. Thomas Shenehon Center for Real Estate in partnership with the Builders Association of the Twin Cities (BATC). Last December’s survey produced a composite index of 45. The second survey, conducted in June 2016, produced a slightly more optimistic 46. The Twin Cities Home Builders Survey is patterned after St. Thomas’ Minnesota Commercial Real Estate Survey that began in 2010. The home builders survey polls the same panel of 35 industry leaders every six months about their expectations in six key areas of the housing market one year in the future.  The first survey was conducted in December 2015.

“The participants were strongly optimistic in their expectation of increasing sale prices per square foot and the number of single-family housing starts, and they were moderately optimistic about an increase in availability of finished lots in the coming year,” said Herb Tousley, director of Real Estate Programs at the University of St. Thomas. “However, the expectation of increasing land prices and a belief that the cost of building materials will increase over the next year was a cause for concern that tempered the composite index,” according to David Siegel, executive director of the Builders Association of the Twin Cities.  “Increasing prices of land and building materials increase total building costs which in turn creates a drag on single-family housing construction and is reflected in the survey as a pessimistic score. There is also an expectation that mortgage rates are going to increase moderately over the next year. This is also reflected pessimistically in the survey as it adds to the total cost of purchasing a home,” said Siegel.

Tousley noted that these first two surveys are providing a baseline to compare with future surveys. “As we accumulate more survey results over the next few years, the results will begin to reveal market trends that will be useful as a forecasting tool,” he said. “The industry leaders we poll are actively engaged in studying both the demand and supply side of the housing market,” said Tousley. “Since they are involved in creating new housing units and adjusting supply-to-demand conditions, these individuals are close to the actual changes taking place in the market.” These experts are asked to assign a number of zero to 100 for each of the six questions. A midpoint score of 50 is neutral; scores higher than 50 indicate a more favorable outlook and scores lower than 50 indicate a more pessimistic outlook. The survey also provides a composite score, or overall average, for the six questions.

Here are the scores for each of the six questions:

Housing Starts: 63 (up 3 from December)

This score indicates an increasingly optimistic expectation by the panel that the number of new single-family housing starts will increase in the coming year.

Square-foot sale price: 69 (same as December)

This reflects the panel’s strong belief that sale prices will be significantly higher a year from now. The net result is the expectation that when compared to previous years, 2016 will be a much better year for single-family home builders.

Land prices: 31 (up 1 from December)

This pessimistic score changed little from the first survey in December. The score reflects a belief that the rate of increase for land prices is going to be greater than the rate of increase for home prices in general.

Availability of finished lots: 56 (up 6 from December)

This indicates an increasing optimism that there will be more finished lots available over the next 12 months. That’s a good thing for the market since it helps moderate land prices and encourages more construction.

Cost of building materials: 36 (up 2 from December)

Like land prices, this score is just slightly less pessimistic and continues to reflect a concern that some of the gains from increased sale prices and more building starts could be offset by the higher costs of building materials.

 Mortgage rates: 32 (up 2 from December)

This reflects the panel’s expectation that mortgage rates are going to increase moderately over the next year. Most panelists are expecting an increase of .5% to 1%.

June 2016 Homebuilders Image

More Information

Additional details can be found on the Shenehon Center’s website: http://www.stthomas.edu/centers/shenehon/wp-content/uploads/sites/7/2014/07/Twin-Cities-Home-Builders-Survey-June-2016.pdf.

 

Commercial Real Estate, Commercial Real Estate Index, Development, Economics, Industrial Real Estate, Industry News, Investment Real Estate, Office Real Estate, Real Estate Trends, Retail Real Estate, Twin Cities Real Estate

Semiannual Survey of the Twin Cities Commercial Real Estate Experts Predicts Continued Favorable Market Conditions

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Leaders in the field of Minnesota commercial real estate expect to see a continuation of the favorable market conditions for commercial real estate that we have been experiencing for the past two to three years.

May 2016 Results

The semi-annual Minnesota Commercial Real Estate Survey conducted in May 2016 has produced some interesting results. Overall, the survey continues to indicate a slightly less than neutral expectation looking ahead two years to spring 2018 for commercial real estate. The composite index was recorded at 46. This is the sixth consecutive survey where the composite index has been in the 46 – 48 range. Index values greater than 50 represent a more optimistic view of the market over the next two years, with values of less than 50 indicating a more pessimistic view. Although the composite index level is similar to previous surveys the pattern of the individual indexes in the current survey is very different.

As was done with all ten of the previous surveys, the same group of 50 commercial real estate industry leaders involved in development, finance, and investment were polled regarding their expectations of near-term, future commercial real estate activity. One thing we have observed in the current survey is there is less variation in the responses and that has caused a more uniform response rate reflecting the panel’s increased certainty in their views. The individual indexes are detailed below:

Rent Expectations

Less optimistic outlook that rents will continue to increase at current rates. Market conditions expected in spring 2018 are best described by the price for space (rental rates) and the supply of space (occupancy levels). The index for rental rates has declined from a highly optimistic 66 to a somewhat less optimistic 60. This is an indication of an expectation of a moderation of rent growth over the next two years. Higher rents help to offset the increased costs of new construction. A slowdown in rent growth puts pressure on expected returns that will be achieved by developers and owners.

Occupancy Expectations

A continued neutral outlook on expected occupancy levels. The index for occupancy levels increased slightly from 50 to 52. Despite the increase, the panelists continue in their expectation that occupancy levels will remain steady at current levels. As new buildings have been completed it takes some time for the market to absorb the new space. Over the last 2 years the occupancy index has been drifting downward towards a neutral expectation concerning the demand for space.

Land Price Expectations

Increases in land prices are expected to moderate. The panel’s outlook for land prices reveals an expectation that land prices will increase at a slower rate between now and spring 2018. The land price index has increased (become less pessimistic) for the third consecutive survey moving from 37 last fall to 40 this fall this spring. The low point for the index was recorded at 31 in the fall 2013 survey. This sentiment while still in pessimistic territory indicates an expectation that land prices will moderate their rate of increase during the next two years. Increasing land prices increase total project costs and are a hindrance to new development, making it more difficult to obtain financing and adequate returns for investors.

Building Material Price Expectations

Increases in the price of building materials are also expected moderate.  The spring 2016 survey reveals that for the fourth consecutive survey our panel continues to become less pessimistic about the rate of increase in price of building materials. The building material index moved from a strongly negative 32 to a somewhat less negative 37, reflecting the panel’s opinion that building material price increases are expected to moderate. Since building materials are a major cost component of any development project any improvement in prices will be favorable for future development.

Return on Investment Expectations

Investors return expectations remain unchanged over the next two years. The index for investor’s return expectations has increased slightly for the third consecutive survey at 48. Although this index value is slightly pessimistic, it is essentially neutral.  The consensus among survey respondents continues to indicate that investors expected returns will not change significantly in the next two years. Investors will continue to seek out quality investments but they are being much more diligent about how they price risk and evaluate return when considering their investment options.

Lending Expectations

More equity is expected to be required.  The index for the amount of equity required by lenders decreased significantly, falling from 51 in to 42. This indicates the panel’s strong belief that credit will be available for good projects but lenders will increase their equity requirements in the coming two years. The good news is that more equity should result in better rates and terms; however, the bad news is that in many cases equity is harder to find and more expensive than debt.

 Summary

To summarize the panel is expecting to see a continuation of the favorable market conditions for commercial real estate that we have been experiencing for the last 2 to 3 years, however there will be some differences as to why this will happen. The panel has moved from a positive to a neutral position on occupancy. With all of the new product coming on line it is expected that given a little time the market will be able to absorb all of the new space but while this happens occupancy rates will be depressed in the short run. Additionally, the panel expects to see continued rent growth, however, that growth will be at a slower rate as new product comes on line and is absorbed. Development efforts will be helped by an expected moderation in the rate of increase in land prices and building materials. The panel is also expecting to see lenders tighten their lending standards somewhat. That results in lower loan amounts and higher equity requirements on development projects. Higher equity requirements makes development more difficult since equity dollars are more expensive and using less debt financing tends to reduce the rate of return on a project. Overall, our panelists see continuing activity at or near present levels in most categories of commercial real estate during the next two years.

May 2016 Commercial Survey

Economics, Home Prices, Housing, Housing Trends, Industry News, Minneapolis / St. Paul Housing, Real Estate Trends, Residential Real Estate, Residential Real Estate Index, Twin Cities Real Estate

Economy is Good, Interest Rates are Low, but Where are the Homes to Buy?

St. Thomas real estate analysisHomes for Sale Inventory

There are about half as many homes available to buy in the Twin Cities compared to pre-crash days. Things should improve, but slowly.

The chronic shortage of homes available to buy in the 13-county Twin Cities region — especially moderately priced homes — is expected to improve but not overnight, according to a monthly analysis conducted by the Shenehon Center for Real Estate at the University of St. Thomas’ Opus College of Business.

How bad is the home shortage?

According to Herb Tousley, director of real estate programs at the university, there were 12,179 homes on the market in March. That compares to 14,983 homes in March of 2015, and compares to the 25,000 to 30,000 homes that typically were on the market back in the pre-crash years of 2005 to 2007. Tousley’s report for March lists three reasons for the current home drought:

 

  • Homeowner’s equity still has not completely recovered from the Great Recession and crash in housing values. Despite three years of steady price increases, some homeowners still owe more than their house is worth.
  • A somewhat greater number of homeowners, meanwhile, have “near negative equity,” which means that while they are not technically underwater, if they sold their home they would not have enough equity to move up to their next home.
  • And then there are some homeowners who know they could easily sell their current home, but are concerned about finding their next home under current market conditions.

The shortage is most acute for lower- to moderately priced homes. In a normally balanced market there typically is a six-month supply of homes. Right now there is less than a two-month supply of homes being sold for less than $200,000 and between $200,000 and $300,000.

Home Shortage

Will this change, and when?

“As median sale prices continue to increase, the equity position for all homeowners will improve,” Tousley said. “That should encourage more homeowners to list their homes for sale, improving the supply situation. “The short-supply situation will take time to correct itself and our expectation is that it will slowly improve through the end of 2016. In the meantime, continued low interest rates and improving economic conditions will keep buyers active in the market,” he said. The Shenehon Center updated its graph that illustrates the historical relationship in the Twin Cities between the number of homes for sale, the number of homes sold and the median sale prices. The chart shows that when the market gets tighter – or in other words when buyers increasingly outnumber sellers – the median sale price of homes increases.

To see the chart, visit the Shenehon Center’s online report for March at: http://www.stthomas.edu/business/centers/shenehon/research/default.html. The entire monthly report also is available free via email from Tousley at hwtousley1@stthomas.edu.

The St. Thomas indexes.

Here are the Shenehon Center’s monthly composite index scores for March 2016. The index, which tracks nine data elements for the three types of sales (traditional, short sales and foreclosures), started in January 2005. For that month, the center gave each of the three indexes a value of 1,000.

The March 2016 index score for traditional sales was 1,091, up 1.9 percent from February 2016 and up 4.6 percent from March 2015.

The March 2016 index score for short sales was 973, down 2 percent from February 2016 but up 10 percent from March 2015.

The March 2016 index score for foreclosures was 808, up 2.9 percent from February 2016 and up 5.8 percent from March 2015.

There are far fewer distressed sales now than there were during the height of the Great Recession. In March, the 96 short sales represented 2.5 percent of total sales and the 427 foreclosure sales represented 10.9 percent of total sales.

Read the Entire Report at: http://www.stthomas.edu/business/centers/shenehon/research/default.html.

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