Real Estate Matters

March 2013   The Market is Building – New Home Construction Picks Up

 Prices are up and the Inventory of Homes for Sale Remains Low

Housing data in March continues to show improvement compared to the same period last year. The median price of a traditional (non-distressed) home sale was $209,900, an increase of 2.4% over the $205,000 reported in February and a 6.04% increase over the March 2012 median price of $197,950. The median price of $209,900 is the highest median price seen since last summer. The volume of closed sales in March 2013 was 3,732, up considerably from the 2,839 recorded in February 2013 and close to the same as the 3,692 recorded in March 2012.  The number of existing homes available for sale remains at historically low levels. In March of 2013 there were 12,941 homes available for sale. This compares to 18,291 in March 2012 and 23,467 in March 2011. See the table below for previous year’s March inventory levels. In March of 2013 there were only 3.47 homes for sale for every closed sale. Since the beginning of 2012 the inventory level of homes for sale has been consistently running 25% – 30% below the previous year’s level.

 New Construction Continues to Surge

While the number of new housing starts is a long way from the levels seen in the mid-2000’s, activity in the first quarter of 2013 is substantially improved. The low number of homes for sale along with a continued improvement in general economic conditions are creating opportunities for new home builders as they are able to add to the supply of homes available to potential buyers. The data shows that the construction and sale of new homes continues to play a larger role in the Minneapolis / St. Paul housing market. Year to date through April 11 of 2013 there were 1,177 building permits issued for single family home construction. This is a 54% increase compared to the 763 permits issued during the same period in 2012. The closed sales data in March shows a similar trend. The sale of newly constructed homes in March is up 12.2% compared to March of 2012.

 Employment plays a major role in household formation.  As employment increases more people will be moving into places of their own. The unemployment rate in Minnesota is well below the national average at 5.5%. The state added 50,800 new jobs in the last 6 months. These positive employment indicators will increase the rate of household formation, requiring additional housing units. Since the inventory of existing homes for sale is expected to remain at historically low levels in the near term future, look for continued growth in the number of new homes built in 2013.  The increase in the construction of new homes is beginning to create a shortage of finished lots. The number of vacant developed lots in Minneapolis / St. Paul has been decreasing over the last several years. At the end of the first quarter of 2012 there were 24,559 vacant developed lots in the Twin Cities metro area (a 101 month supply). That number had decreased to 24,559 (a 58 month supply) by the end of the first quarter of 2013. As the shortage continues home builders are finding they have to pay premium prices for desirable lots.

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Researchers say the inventory of available homes is the lowest in more than eight years. They examine why that is, and why it could lead to some changes in the Twin Cities real estate market 

Minneapolis, Minn.  –   An unusual imbalance between the supply and demand of homes for sale in the Twin Cities likely will lead to higher home prices some months from now, according to the Residential Real Estate Price Report Index, a monthly analysis of the 13-county metro area prepared by the Shenehon Center for Real Estate at the University of St. Thomas’ Opus College of Business.

 “The lack of availability of homes for sale is likely to persist through the winter and into the spring of 2013,” said Herb Tousley, director of real estate programs at the university. “The imbalance between supply and demand … combined with historically low interest rates and an improving economy … will continue to put upward pressure on median sale prices.  “And as median sales prices continue to rise, more homes will be put up for sale as increasing values improve homeowners’ equity positions,” he predicted.

 Here are some metro-area statistics that illustrate what is happening to the supply of homes:

•  The number of homes for sale is the lowest in more than 8 years.  The number declined from 16,629 in September to 15,190 in October, and that compares to 21,348 homes listed in October 2011.
•  The ratio of “homes for sale” compared to “closed sales” declined to 3.49 in October. That means for every home sold, there were 3.49 homes on the market. In October 2011 that ratio was 5.76 and in October 2010 it was 11.14.
•  In October there was a 3.7-month supply of homes (and a 2.7-month supply for homes selling for less than $140,000). The normal supply is six to seven months.
• The shortage of homes is creating opportunities for new home builders. According to figures released by the Builders Association of the Twin Cities, permits for single-family construction in October have increased 46 percent over October 2011.

 Tousley suggests a couple of reasons for the low supply of homes. Many homeowners are still underwater, meaning they owe more than their homes are worth. For some, rising prices could help fix that problem. There also are homeowners who would like to sell but they don’t have to sell right away; this group is sitting on the sidelines and waiting for prices to increase.

 Meanwhile, here are signs of a continuing rebound on the “demand” side of the equation:

•  The median price of a metro-area traditional-type sale (not a foreclosure or a short sale when a home is sold for a price less than the outstanding mortgage balance) increased 2.35 percent from September to October, from $207,875 to $212,750. It also is up 9.7 percent from October 2011.
•  The number of closed sales increased from 4,054 in September to 4,355 in October, a gain of 7.4 percent.
•  Both median prices and the number of closed sales are well above October 2011 levels.
•  The number of pending sales in October was higher than September and October 2011.
•  In addition to low interest rates, there are signs of an improving economy and higher levels of consumer confidence.

 In addition to the sale price of homes throughout the Twin Cities, St. Thomas has developed a composite index that uses eight additional data elements to track the health of the traditional, foreclosure and short-sale markets.

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David Juran and Jonathan Banyard of Dougherty Mortgage LLC offer insights on current trends in investment banking and financing for commercial real estate. The full service real estate investment banking firm Dougherty & Company and its affiliated companies, Dougherty Funding and Dougherty Mortgage, provide a wide array of investment products and debt financing alternatives to commercial real estate clients across the country.

Jonathan Banyard and David Juran of Dougherty Mortgage, LLC

David Juran joined Dougherty & Company the first quarter 2002 and serves as the executive vice president for Dougherty & Company LLC and as the president of Dougherty Funding LLC and Dougherty Mortgage LLC.

Jonathan Banyard is senior vice president, chief credit officer and Fannie Mae chief underwriter at Dougherty Mortgage LLC. Banyard joined Dougherty Mortgage in September 2007 with approximately 21 years of experience in commercial and real estate mortgage banking.

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