The latest report, just published today by the Shenehon Center for Real Estate is not a significant shocker. Current trends of single family housing supply shortages continue. Herb Tousley, Director of the University of St. Thomas’ Shenehon Center for Real Estate, gave interesting insights this month. Many people have attributed the shortages to simple reasons such as increased demand due to millennials and generation X’ers beginning to settle down which are true, but Mr. Tousley brings up a point seemingly looked over, the recent actions of investment vehicles.
According to Minnesota Compass, 48.4 percent of Minneapolis households are overburdened by housing costs. To explain, these households pay more than 30% of their gross income towards housing. Just for reference, a house in Minneapolis is averaging around $200,000 which for a first time home buyer with 10 percent down payment amounts to a monthly mortgage around $1,400 including an estimates for coverages and taxes.
There are many factors affecting this overburdened number. According to a Minneapolis City Council housing report, the city’s current population [approx. 412,000] has not been this high since the 1970’s which is still lower than the peak seen in 1950 [reported 521,718]. Further exacerbating the issue is the fact that there are about the same amount of units today as in 1950 in conjunction with a decrease in average household size. In 1950, it was roughly 3.3 persons per household compared to today’s 2.3 persons per household.
The most recent residential housing report from the University of St. Thomas and the 2017 Housing Market Comprehensive Analysis by HUD, give evidence that the cost burden is a result of the simple economic principle of supply and demand. The influx of demand for housing within Minneapolis has increased the risk of displacement. Housing prices are up year over year and there remains record low vacancy levels of 4 percent. Talks with a political liaison, Mark Stenglein, and local developer and founder Bob Lux of Atalus, LLC, reinforced the challenges to affordable housing
Affordable housing is and has been a buzzword in the real estate industry for years. It carries many misconceptions. Let’s clear up these misconceptions before going further.
- First, affordable housing is not typically affordable to everyone. It is affordable in that rent or sale value is reduced from market rates in order to allow individuals and families below the median income level to not be “overburdened” by rent or mortgage payments.
- Second, the majority of people assisted HAVE jobs and ARE productive members of their communities in which they reside. The idea that affordable housing induces crime and the lowering of community home values, to name a few, is false.
- Third, affordable housing is just like any other rental or purchase agreement with the addition of a historical income check. Owners and tenants undergo credit checks and asked of employment. Just in case you weren’t convinced when I stated earlier that a majority of affordable housing owners and tenants are employed.
So, why is this topic being brought up? Of almost 116 million households surveyed by the 2013 American Housing Survey, 36 percent are by definition overburdened by housing costs. To be overburdened by Federal government definition, a household must pay more than 30 percent of their yearly income. There are multiple perspectives to even this number, but before “Part 2” of this discussion, we ask the reader to do some research.
Do you think more affordable housing is needed? Is it a policy issue? Is it a supply and demand issue?
Our reason to talk about affordable housing is simple. With more than a third of the United States overburdened by housing costs and as a part of the University of St. Thomas, the Shenehon Center for Real Estate serves as a resource to the commercial, industrial, residential and corporate segments of real estate industry and the community to advance the public interest in real estate issues and to advance the common good.
St. Thomas’ fourth semiannual survey of 35 industry leaders measures sentiment and is designed to be a forecasting tool.
Leaders in the Twin Cities single-family home-construction industry are generally optimistic about market conditions for the coming year although they have concerns about increasing mortgage rates and higher costs of land and building materials. That’s according to a new survey conducted by the University of St. Thomas Shenehon Center for Real Estate in partnership with the Builders Association of the Twin Cities.
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 annually in June and again in December about their expectations for the upcoming year in six key areas of the housing 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 industry leaders we poll every six months are actively engaged in studying both the demand and supply side of the housing market,” said Herb Tousley, director of real estate programs at the university. “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 results align closely with what we are hearing from the market and our members.” Said David Siegel, Executive Director of the Builders Association of the Twin Cities. “While there is a great need for residential construction in the Twin Cities, there are still several factors holding it back including land prices, the regulatory burden and a shortage of labor.”
Here are the scores for each of the six questions that were asked in August 2017:
Housing Starts: 65
This score increased increased from 61 in December 2016 to 65, it indicates a high expectation that the number of single-family housing starts will show a marked increase in 2018. Last year was one of the best in recent years with about 5,300 permits issued.
Sale Price per S F: 74
This score is even more optimistic than last December’s score of 72. It reinforces the panel’s continued expectations that home prices will continue to increase. The net result is the belief that sale prices will increase at a rate that will more than offset the expected increases in project costs.
Land prices: 23
At 23 this index has decreased sharply from last December’s score of 31 moving even deeper into the pessimistic range. Indications are that the rate of increased land prices will accelerate in 2018. While there may be enough finished lots available, the higher land prices will squeeze profitability.
Availability of finished lots: 60
This index increased from 51 last December to 60 in June reflecting builders increased optimism that there will be an increase in the availability of finished lots in 2018. An adequate supply of well-located finished lots is crucial to the health of the home building industry.
Cost of building materials: 24
The outlook for the expected increases in the costs of building materials continues to persist. This index moved from 29 in December 2016 to an even more pessimistic score of 24 in June 2016. This score is an indication of increased concern by our panelists that much of the gain from increased sale prices and more building starts will be offset by higher costs. These expected increases in costs could depress profitability and could reduce the number of new homes built.
Mortgage rates: 28
This index remains unchanged at 28. It is an indication that the panel continues to expect mortgage rates to increase in the next 12 months. Although mortgage rates increased during the fourth quarter of 2016, most panelists are expecting an additional increase of ¼% to ½% half a percent within the next year. The affordability issues created by higher rates could put a damper on home-building activity.
Additional details can be found on the Shenehon Center’s website: http://www.stthomas.edu/business/centers/shenehon/research/default.html
Could You, Would You, Buy a House Sight Unseen?
First Half of 2017 – 3 Major Home Price Trends
The extreme shortage of homes available for sales is resulting in a new phenomenon of buyers who are purchasing homes sight unseen. Twenty years ago, virtual tours and 3D graphics were mainly science fiction in movies like The Fifth Element, and a “sight-unseen” purchase literally meant a buyer had no experience of the property other than static photographs. Buyers were in essence blindfolded. Today, 3D and virtual technologies have become a reality. They are able to bring a property experience to the “sight-unseen” purchase. A number of local real estate brokers have noted this ingress of technology into the real estate industry and how it has given them a new tool to present properties. One Minneapolis based broker who has personally sold 3 properties sight-unseen in the last year, said the Minneapolis market has recently seen buyers more willing to at least offer sight-unseen. All of our conversations with Minneapolis realtors shared the opinion that technology is impacting the industry. They stated that listing price and anticipated time on the market are main factors on whether a virtual tour is created. The description of the Minneapolis “sight-unseen” buyer was someone looking to relocate from out of state or internationally and has experience in home buying (i.e. not a first time home buyer). An interesting point, technology can actually be a drawback for certain listings. We were told technology removes the interactive sales process; buyers experiencing a virtual tour may never visit the property in isolation from the neighborhood experience.
Twin Cities Home Price Trends Through the First Half of 2017
Price Appreciation is Outstripping Income Growth
- Median sale prices continue to increase at record rates. Between May and June the median sale price increased 3.6%. For the first ½ of 2017 through June median sale prices increased at the red hot pace of 15.1%. The year over year increase for homes sold between June 2016 and June 2017 was 7.0%. These rates of increase are far exceeding wage and income growth and will begin to cause affordability issues for homebuyers if these trends continue
- Market Still Lacks Adequate Inventory
- While the availability of homes for sale has improved slightly the number of homes for sale has been consistently running 15% – 20% less than a year ago and 20% – 25% less than 2 years ago. While the construction of new homes has picked up notably this year we are still not building enough new homes to build our way out of the current short supply situation. It will take many more new listings to get the housing market more balanced in terms of supply and demand.
- Tight Inventory Also Impacting Rental Markets
- The lack of homes available to purchase is creating a situation where potential home buyers are unable to find a home to buy causing them to remain in rental housing for a longer period of time. Even though there were over 4,000 new apartment units delivered in 2016 and given that 2017 is expected to be another record year for new units delivered, the market is expected to absorb all of the new construction. Vacancy rates may increase slightly in the short run in some areas as new developments come on line, but overall occupancy will remain high through the end of this year. Minneapolis / St. Paul is one of the tightest rental markets in the country. Rent growth was 4.8% in 2016 and is expected to be at least that much in 2017. That rate of increase is higher than the expected wage and income growth of 2% – 3%. Continuation of this trend over time will continue to create an affordability gap resulting in renters having to pay an increasingly larger percentage of their income for housing.
Twenty years ago, virtual tours and 3D graphics were mainly science fiction in movies like The Fifth Element, and a “sight-unseen” purchase literally meant a buyer had no experience of the property other than static photographs. Buyers were in essence blindfolded. Today, 3D and virtual technologies have become a reality. They are able to bring a property experience to the “sight-unseen” purchase. Local Minneapolis real estate broker Aleksa Montpetit of Downtown Resource Group noted this ingress of technology into the real estate industry, and how it has given realtors a new tool to present properties. Montpetit, who has personally sold 3 properties sight-unseen in the last year, said the Minneapolis market has recently seen buyers more willing to at least offer sight-unseen.
An article posted in the Wall Street Journal by Katy McLaughlin cites increases in sight-unseen purchases are nationally becoming more common. The annual Redfin survey showed 33 percent of those surveyed said they had made at least an offer on a house “sight-unseen” in the last year. However, this survey did not include the Minneapolis market.
Last evening, I watched the Delano fireworks. The show was excellent and the lightning made it even more interesting. It got me thinking about the past, and how 10 years ago, my family would get there 5 or 6 hours early to get prime sitting/parking real estate to see fireworks up close. Whereas, now, as long as we can see the fireworks it is a good spot. To be honest, the effort to get a good spot doesn’t have the same value as before.
Although, my preferences have changed, finding a spot to park a car or a lawn chair seems like it is even harder to find than 10 years ago. Granted, Delano hosts one of the oldest annual 4th of July festivals in the state, the town has grown substantially, and they don’t seem to ever hold back on the fireworks. A couple years back at the 100th anniversary, the Delano fireworks show had a finale “end-of-show” firework which my friends and I felt from 10 miles away. I digress. Despite my own preferences, people want prime viewing real estate to watch the fireworks up close, but there isn’t enough. As the effort [price] to acquire the sitting space rises, people, like my family, have decided to locate farther away.
To the point, the fireworks show reminded me of the current housing market. Low housing inventories with high demand. From a simple economic standpoint, people should be entering the market as the price rises, but like the fireworks show there is an intangible element to housing. Individually, we all value these intangible attributes of living differently. For example, some people in a median priced house may value geography and education opportunities higher than the house alone, and they may not be able to find a home with similar geography and education. Therefore, they do not enter the market keeping inventory low.
FRED reports the average American family can afford a mortgage. So, why are we not seeing more sales? Can people not afford or not willing to pay current prices? Could it be trends changing social norms (Home ownership)? Whatever the reason, it will be interesting to see at what point housing inventories truly begin to climb.
Since the housing bubble burst in 2008, the market has seen an increase in demand for homes, but home inventories remain stagnant. Further, either from the bank restrictions or consumer caution new home growth has been at record lows for the last 10 years. Whether this is just a trend or due to socio-economic reasons can be debated, but statistics do show Millenials are living with their parents longer and seem to be putting off buying homes due to a different economic situation than previous generations at the same age (US Census).
Further a recent housing report by Joint Center for Housing Studies of Harvard University, posit similar statistics in the market strengthening the argument that Millenials and uncertainty are holding down the housing market.
1. For-sale inventories dropped even lower over the past year.
For the fourth year in a row, the inventory of homes for sale across the US not only failed to recover, but dropped yet again. At the end of 2016 there were an historically low 1.65 million homes for sale nationwide, which at the current sales rate was just 3.6 months of supply – almost half of the 6.0 months level that is considered a balanced market.
2. Fewer homes were built over the last 10 years than any 10-year period in recent history.
Even with the recent recovery in both single-family and multifamily construction, markets nationwide are still feeling the effects of the deep and extended decline in housing construction. Over the past 10 years, just 9 million new housing units were completed and added to the housing stock. This was the lowest 10-year period on records dating back to the 1970s, and far below the 14 and 15 million units averaged over the 1980s and 1990s.
Read more of the Full Article or go straight to the full Housing Report by Joint Center for Housing Studies of Harvard University
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**|
|Washington||6.6%||21.1%||St. Croix (WI)||7.9%||23.0%|
* 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|
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 email@example.com.
|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