Herb Tousley – Real Estate Matters - Page 2
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Herb Tousley

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

Low Home Inventory Beginning to Affect Sales Volume: First Time Home Buyers Fueling Growth

MINNEAPOLIS, (June 21, 2017)— According to the First-Time Homebuyer Market Report recently released by Genworth Mortgage Insurance this segment of the market is having a big influence on the national housing market. The report found that this demographic accounted for 424,000 single-family home sales, or 38 percent of the total homes sold in Q1 of 2017. This amount is an 11 percent increase from Q1 2016, and the most since 2005. Their source data dates back to 1994 and analyzes over 20 million records. The survey tracks home sales for first-time homebuyers on a monthly basis, publishes quarterly, and compares the data against national housing market indicators.

“The first time home buyer segment is poised for additional growth in the Twin Cities. In fact, historically low interest rates and a strong local economy are all feeding demand in this market segment.” said Herb Tousley, director of real estate programs at the University of St. Thomas.

There are some head winds that are creating a drag on the willingness and ability of first time buyers to jump into home ownership. Student loan debt is a major factor making it very difficult to save for a down payment, qualify for a mortgage, and afford a mortgage payment. Additionally, the extreme shortage of moderately priced homes is making it difficult for first time buyers to find affordable homes in good locations.

The limited availability of homes to buy is creating upward pressure on sale prices. Home prices have been rising faster than wages for the last several years. This situation is starting to create affordability issues for first time buyers who typically do not have large down payments. The idea of home ownership is still very much alive among younger potential home buyers. However, due to the aforementioned factors many are needing to delay their first home purchase by several years.

 Setting New Records

The Twin Cities housing market continues to set new records in May. Record high median sales prices and historically low supply continue to dominate the market. The overall median sale price jumped from $245,500 in April to $250,000 in May.

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Affordable Housing, 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

St. Thomas Real Estate Analysis: Super-tight Housing Market Drives Metro Area Median Sale Price to Near Record Levels

High demand and low supply helped drive the median price of a Twin Cities home in

May 2016 to within $1,000 of the record set back in the bubble days of June 2006.

mortgagesIt has taken a full decade, but the median sale price of a home in the Twin Cities in May 2016 almost reached the all-time record high set back in the housing-bubble days of 2006, according to a monthly analysis conducted by the Shenehon Center for Real Estate at the University of St. Thomas’ Opus College of Business. Fueled by low supply and brisk demand, the median sale price of a home in the 13-county Twin Cities region reached $237,000 in May. That’s just shy of the highest median price on record, which was $238,000 back in June 2006. While the selling prices are similar, there are many differences in the 2016 market when compared to 2006. Each month the St. Thomas center tracks the median price for three types of sales: non-distressed 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, observed that the supply of homes on the market dropped to its current low level in early 2013 and has remained historically low since then. He said possible reasons include difficulty in finding and purchasing a replacement home at a reasonable price; higher standards to qualify for a new mortgage; lackluster wage growth over the last several years; and homebuilders not building as many single-family homes as they used to. Meanwhile, on the demand side, Tousley said low interest rates, an improving economy, and a tight rental market are key reasons why the number of sales has steadily been increasing to near pre-recession levels.

“In spite of all of the new apartments that have been built over the last few years we remain in a very tight rental market,” he said. “The area has been absorbing all of the new units and vacancies continue to remain historically very low. The result of a low vacancy and a tight rental market is high rent growth. In 2015 the average rent in the Twin Cities increased by 5 percent. Repeated large rent increases over the last several years have many renters considering the idea of homeownership as an alternative, creating additional potential homebuyers.”

Comparing 2016 to 2006

The Shenehon Center for Real Estate compared May 2016 housing-market statistics with those of 2006. While the selling prices are very similar, some characteristics are quite different. A few examples: in May 2006 there were 5,079 closed sales and in May 2016 there were 6,234; in May 2006 there was a 6.7-month supply of homes for sale and in May 2016 there was a 2.8-month supply; in May 2006 there were 11,458 new listings and in May 2016 there were 8,676; and in May 2006 there were 30,235 homes for sale and in May 2016 there were 13,501.

10 yrs after- then & now

Another way of looking at the impact of low inventory on sale prices is to create a ratio for the number of homes available for sale divided by the number of homes sold that month. For example, if the ratio was 5, it means there were 5 homes available on the market for each buyer. A lower number indicates a tighter market. There were months back in 2007 to 2010 when the ratio was 10 to 14; it has dropped significantly. Tousley said that for most of the previous 14 months the ratio in the Twin Cities market has been less than 4, and in May 2016 the ratio hit an all-time low of 2.17. “When the ratio gets lower and the market gets tighter, the median sale price increases,” he said.

 

Sales Pressure - May 16

The St. Thomas indexes.

Here are the Shenehon Center’s monthly composite index scores for May 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 May 2016 index score for traditional sales was 1,163, up 3.7 percent from April 2016 and up 8.6 percent from May 2015.

The May 2016 index score for short sales was 980, up 1.6 percent from April 2016 and up 7.7 percent from May 2015.

The May 2016 index score for foreclosures was 859, up 3.2 percent from April 2016 and up 9.4 percent from May 2015.

The May 2016 score was the highest ever for the traditional sale index. “It is the result of a very tight supply situation and continuing high sales activity, indicating the continued health and resurgence of the Twin Cities housing market,” Tousley said. There are far fewer distressed sales now than there were during the height of the Great Recession. In May, the 79 short sales represented 1.3 percent of total sales and the 341 foreclosure sales represented 5.5 percent of total sales. “As the number of distressed sales continue to return to pre-crash levels, the foreclosure index will continue to diminish in importance,” Tousley said.

Index Chart June 2016

Data - May 2016

 

 

 

 

 

 

 

 

The Shenehon Center’s complete online report for May 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.

 

 

Affordable Housing, Housing, Housing Trends, Minneapolis / St. Paul Housing, Real Estate Trends, Residential Real Estate, Twin Cities Real Estate

Minneapolis / St. Paul is One of only 3 U S Major Metros Where Owning is Cheaper than Renting

As you can see from the headline below from John Burns Consulting in most U S cities homeownership is more expensive than renting. If you look at the image below you will see that Minneapolis / St. Paul is one of three major metro areas where homeownership is less expensive than renting.

 Owning Costs More than Renting

by Erik Franks, Manager John Burns Consulting

In most areas of the country, homeownership costs more than renting. Many economists with calculators claim the opposite, but the calculations and conclusions are often highly misleading. As is often the case, the devil is in the details.

We recently reviewed one highly publicized calculation that owning was cheaper than renting in almost all markets. That calculation had a number of outdated assumptions, including:

  • Outdated assumption #1: Buyers put down 20%.
    • In reality, own versus rent is a first-time buyer decision, and the vast majority of first-time buyers today make down payments of 10% or less.
  • Outdated assumption #2: Buyers are in a 25% tax bracket and thus save 25% of their interest payment in taxes.
    • Today, half of all home buyers obtain a mortgage less than the median resale price of $236K, and 100% of the annual interest on that mortgage is less than the standard itemized deduction of $12K per couple, so many entry-level buyers actually save ZERO dollars in taxes. Those that itemize likely only save a small percentage of the interest payment in taxes.
  • Outdated assumption #3: Future home price appreciation should be included in the own-versus-rent decision.
    • Most indices show that home prices have historically appreciated 1%–2% faster than incomes, but over a 30-year period of falling mortgage rates. Assuming you believe rates will rise or at least stay flat, price appreciation might be an aggressive assumption.

Don’t get me wrong. We believe homeownership is a great long-term investment for those with stable employment. It is just not less expensive than renting.

Not All Markets Are the Same

The premium homeowners pay to own versus rent varies across all cities. While the average US homeownership premium over renting is $146 per month, the premium varies widely:

  • In San Francisco, housing payments are over $2,500 more per month to own an entry-level home than to rent an apartment, which is also expensive. In San Jose, the gap is almost $1,800 per month!
  • In some markets in the Midwest and the Southeast, the monthly payments (excluding maintenance) are currently cheaper to own than rent. These areas are still extremely affordable, thanks to ultra-low mortgage rates and home prices that have increased over the past few years but not enough to return to their long-term average.

Below is a chart of major US markets and the premium it costs to own versus rent as seen through the eyes of most first-time buyers. We assume that the decision is between renting an apartment in a large apartment complex and buying a home valued at 80% of the median home price (a reasonable assumption for first-time buyers) with a 95% LTV loan.

Homeownership vs Renting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conclusion

Potential entry-level home buyers focus on saving a small down payment and affording the homeownership costs. They compare the monthly cost of renting to the monthly cost of owning, realizing that the owned home is usually much nicer than the rental and is thus more expensive. If owning were truly cheaper than renting, far more renters would be buying homes. Never forget that headlines can be misleading.

 

Housing Trends, Minneapolis / St. Paul Housing

St. Thomas Real Estate Analysis: Home Prices Take A Small Seasonal Dip In July

There just aren’t enough low- to moderately priced homes for sale

A scarcity of lower-priced homes for sale in the Twin Cities is putting upward pressure
on asking prices; that’s good news for sellers, bad news for buyers looking for a deal.

Minneapolis, Minn. – For the third year in a row, the median sale price for a Twin Cities home took a seasonal dip in July after peaking in June. That … and a pronounced lack of homes available in the sub-$200,000 range … were among the findings in the monthly housing-market analysis of the 13-county Twin Cities region conducted by the Shenehon Center for Real Estate at the University of St. Thomas’ Opus College of Business. Each month the center tracks the median price for three types of sales: non-distressed or traditional; foreclosures; and short sales (when a home is sold for less than the outstanding mortgage balance). Here’s what the center found:

Key numbers for July.

The median sale price of a traditional home in July 2015 was $231,000. That is down 1.91 percent from $235,500 in June 2015 but up 2.67 percent from $225,000 in July 2014.

“So far in 2015, the traditional median sale price has been running a relatively stable 2.5 percent to 3.5 percent increase over 2014 levels,” said Herb Tousley, director of real estate programs at the university. “We continue to expect a 4 percent to 6 percent overall median sale price increase for 2015. However, our outlook could change to the extent that interest rates increase this fall.”

In the two distressed categories: the median price for short sales dropped 10.2 percent, from $171,500 in June 2015 to $154,000 in July 2015; the median price for foreclosure sales increased 1.75 percent, from $137,591 in June 2015 to $140,00 in July 2015. The distressed-type sales are comprising a progressively smaller portion of all sales as the housing market returns to pre-crash health. The short sales in July represented just 2 percent of all home sales in the Twin Cities and foreclosures were 5.4 percent.

Traditional Home - Median Price

Low inventory.

The Twin Cities housing market saw 6,301 closed sales in July 2015. That’s down slightly from June 2015 but up 19.2 percent from July 2014. In addition, there were 5,736 pending sales at the end of July 2015; that’s up 12.5 percent over July 2014. The 16,998 homes on the market at the end of July 2015 remains historically low. “Before the market crash of 2005 to 2007, there were many more new listings coming into the market than there were closed sales leaving the market,” Tousley said. “In 2015 the number of closed sales is rebounding to pre-crash levels, yet the number of new listings has not recovered.” He said that for inventory levels to return to more normal levels, the number of new listings will need to increase to at least 10,000 per month in the peak selling months.

“Until that happens the low levels of homes available for sale will persist. In the meantime, the low number of homes for sale and the high volume of closed sales are being reflected in the higher number of multiple offers and sale prices at more than the original asking price.

“Good news for sellers; bad news for buyers looking for a deal,” he said.

Supply and demand of modest homes.

The Shenehon Center examined the median sale price of the homes that actually sold in July (the demand) and compared that with the prices of homes that were for sale in July (the supply).

“We found that in July 40 percent of the homes that were sold were less than $200,000. Yet only 27 percent of the homes available for sale fell into that range,” Tousley said. “That means that in comparison, as a percentage, there were more buyers wanting to purchase a home under $200,000 than there were homes available for sale in that price range.”

For more expensive homes, those selling for $400,000 or more, there were many more homes available for prospective buyers to choose from.

“The conclusion is that there are more buyers chasing a relatively smaller percentage of low- to moderately priced homes available for sale and that is another reason why we are seeing a very active market for moderately priced homes in the Twin Cities market.”

July 2015 - Price of Homes Sold vs. Price of Homes Available For Sale

The St. Thomas indexes.

As part of its monthly analysis, the Shenehon Center creates a monthly composite index score by tracking nine data elements for those three types of sales (traditional, short sales and foreclosures). The data categories include things like the number of closed sales, how many days that homes are on the market, and what percent of the asking price sellers receive. The center started the index at January 2005 and for that month gave each of the three indexes a value of 1,000.

July’s composite score for traditional sales was 1,128, which is the highest since the index began in 2005.

“We expect increases in the index to moderate as summer moves into fall,” Tousley said. “However, the continued increase of the traditional-sale index is an indicator of expected ongoing improvement in the health and resurgence of the Twin Cities housing market.”

The short-sale index was up a few points, from 971 in June to 974 in July. The foreclosure index was up a couple, from 817 in June to 819 in July.

More information online

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

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

Commercial Real Estate

Despite some headwinds, Minnesota commercial real estate survey finds general optimism

Minneapolis, Minn.  —   Leaders in the field of Minnesota commercial real estate are generally optimistic about their industry and economic conditions in general. However, they also have identified some headwinds related to land prices and the cost of building materials.

That is the theme of the ninth Minnesota Commercial Real Estate Survey that was conducted in May. The semiannual poll of 50 Minnesota commercial real estate leaders from the fields of development, finance and investment is conducted by the Shenehon Center for Real Estate at the University of St. Thomas’ Opus College of Business.

In all nine surveys the same group of 50 industry leaders have been polled on their expectations of future commercial real estate activity. 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 composite score for the May survey stands at 46 and continues a “slightly less-than-neutral” trend for the fifth-consecutive survey.

Untitled

“This survey’s composite results reflect a mixed bag of optimism in some areas and pessimism in others” said Herb Tousley, director of real estate programs at the university. “This is similar to the pattern that was observed in our previous survey. However, the degree of optimism and pessimism has become slightly more moderate.”

Price for Space

The index score for rental rates remains positive at 66, which Tousley said is “an indication that our panel is still expecting strong rent growth for the next two years.”

The index for occupancy levels moved from 62 to 56. “Despite the decrease, the panelists remain optimistic that rents and occupancy levels will continue to improve,” he said.

This marks the ninth-consecutive survey with positive index scores in these two areas. That indicates, he said, “continued optimism that the economy is going to continue to improve and there will be a continued demand for additional space.”

Land Prices

The panel’s outlook for land prices reveals a strong expectation that land prices will continue to increase. The land-price index increased slightly, moving from 31 in the previous survey to 35 in the May survey.

“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,” he said.

Building Materials

The building-material index moved from a negative 24 to a somewhat less pessimistic 29.

“That reflects the panel’s opinion that building-material price increases are expected to moderate sightly,” Tousley said. “A moderation in price increases will be favorable for future development.”

Return for Investors

The index for investors’ returns decreased from an essentially neutral 48 to a more pessimistic 41.

“The consensus of the panel indicates that investors will expect higher returns in two years, leaving less profit for the developers,” he said. “There was a concern that interest rates that have been at record-low levels for the past seven years will be higher two years from now, requiring higher rates of return on future investments.

“Higher interest rates will add to total project costs and higher project costs will squeeze project return on investment. 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.”

Required Equity

The index for the amount of equity required by lenders dropped from 57 to 53.

“This indicates the panel’s belief that credit will be available for good projects but lenders will increase their equity requirements in the coming two years,” he said.

“This indicates the panel’s belief that credit will still be available for good projects but that 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,” Tousley said.

Accuracy

With nine surveys completed since the Minnesota Commercial Real Estate Survey began in 2010, the researchers compared the panel’s past predictions with how things actually turned out.

It turns out that market conditions in May 2015 are very close to what the panel predicted in May 2013. Some examples:

  • In 2013 the panel predicted higher rents in 2015. The average net rents for all types of industrial properties in the Twin Cities went from $5.70 per square foot in 2013 to $6.15 per square foot in 2015.
  • In 2013 the panel predicted higher occupancy in 2015. The average direct vacancy for industrial properties in the Twin Cities went from 8.1 percent in 2013 to 7 in 2015.
  • In 2013 the panel predicted higher costs for building materials in 2015. Although the price for lumber decreased, the Mortenson Construction Cost Index for the Twin Cities increased from 104 in 2013 to 114 in 2015.

Summary

“It appears that our panel’s expectations of higher land costs and the higher cost of building materials are the primary culprits driving the composite index to its slightly below neutral level,” Tousley said.

“Despite the headwinds created by higher project and acquisition costs, the panel has strong expectations that general economic conditions in our area will continue to improve and there will be an increasing demand for space. The demand for more space will put upward pressure on rents. Higher revenues in the form of higher rent will offset most of the much of the expected increase in the price of land and building materials, allowing owners and investors to achieve their required returns and development to move forward.

“Conditions for development and acquisitions have definitely improved since the last survey. Based on the survey results our panel expects that even if interest rates increase modestly, development and acquisition activity will continue at near present levels for the next two years.”

Housing, Housing Trends, Minneapolis / St. Paul Housing

St. Thomas real estate analysis: Strong May and June helps return Twin Cities market to pre-crash levels

Minneapolis, Minn. – A strong first half of 2015 — and an especially robust second quarter — has for the most part returned the Twin Cities housing market to a level of health not seen here since the pre-crash years of 2005 and 2006.

Each month the Shenehon Center for Real Estate at the University of St. Thomas’ Opus College of Business looks for real estate trends in the 13-county Twin Cities region and 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).

Additionally, as part of its analysis, the center creates a monthly index score by tracking nine data elements for those three types of sales, including categories like the number of closed sales, how many days homes are on the market, and what percent of the asking price sellers receive. The researchers started the index at January 2005 and for that month gave each of the three indexes a value of 1,000.

For several years running, the Shenehon Center had to report some dismal news in its monthly analyses. Although there were both ups and downs along the way, the index for traditional homes (not short sales or foreclosures) dropped into the 900s in early 2007 and eventually bottomed out at 889 in February 2012.

The traditional home index has since rebounded and reached an all-time high in June 2015. “At a level of 1,120 the June index is the highest that has been observed since it was created in 2005,” said Herb Tousley, director of real estate programs at the university. The June 2015 index is up 4.2 percent from the same month a year ago, and is up 2.8 percent from May 2015.

“This monthly increase is the continued result of both a relatively low number of homes available for sale and a significant increase in the number of buyers in the market,” Tousley said.

The St. Thomas researchers found six categories that had especially healthy numbers in June and contributed to that record-high composite index score:

  • Median price of all homes: The median price of the three types of sales (traditional, foreclosures and short sales) in June was $229,900, a level not seen since August 2007.
  • Median price of traditional-sale homes: The median price for a traditional-type sale (not a foreclosure or short sale) in June was $235,500, also the highest since August 2007.
  • Percent of distressed sales: The percent of distressed sales in June (foreclosures and short sales) was 7.7 percent of all sales. The percent has not been that low since mid-2007.
  • Number of closed sales: The 6,980 closed sales in June was the highest number since the St. Thomas index was created in January 2005.
  • Number of pending sales: The number of pending sales for the last 90 days was more than 6,200, the highest since spring 2005. This high number of pending sales indicates that the number of closed sales should remain strong for the rest of the summer.
  • Sale price as percentage of asking price: In June the sale price as a percentage of the original asking price increased to 98.6 percent, a level not seen since spring 2005. The inventory of homes for sale at 16,718 in June remains historically low, and is one reason for a higher number of multiple offers and, in some cases, homes that are sold for more than the asking price.

Construction of new homes

With such a shortage of homes on the market, the Shenehon Center checked on the number of new homes being built to meet the demand. It found that while there has been some improvement over the past three years, the number of single-family-home permits has been flat over the past year.

So far this year 2,224 permits were issued, compared to 2,270 for the first half of 2014. The dollar value of the permits, however, has increased from $319,254 per home last year to $335,295 this year.

Twin Cities Chart Residential Building Permits (Year to Date Through June 30th)

“There are several factors that explain this increase,” Tousley said. “There has been a marked increase in the price of building materials such as concrete and drywall. Secondly, due to a shortage of quality buildable lots, land prices have also increased considerably.”

He said the average sale price of a used home is $121 per square foot while the average sale price of a new home is $162 per square foot. That’s a 34 percent premium for a brand-new home.

“While many homebuilders have focused on building higher-priced homes because the profit margins are higher, the low supply of existing homes available for sale is creating a pent-up demand for construction of lower-priced homes,” Tousley said. “There are a number of homebuilders who are starting programs to profitably build entry-level homes that provide a bit more than the basics to entice first-time and entry-level buyers. An example of this is D.R. Horton’s Express Homes program. The company has been aggressively rolling out this program on a national basis as a way to add to the supply of moderately priced homes available for sale.”

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

St. Thomas real estate analysis: Low inventory of homes for sale in the Twin Cities is creating a seller’s market

University researchers look at reasons why potential sellers are sitting on the sidelines.

Minneapolis, Minn. — An analysis of Twin Cities real estate data for the month of May found that while the housing market is continuing its recovery from the great recession, it remains plagued by a low inventory of homes for sale.

Each month the Shenehon Center for Real Estate at the University of St. Thomas’ Opus College of Business looks for real estate trends in the 13-county Twin Cities region and 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).

“The main story found in data for May is a significant increase in the number of traditional-type home sales and a continuation of the historically low number of homes available for sale,” said Herb Tousley, director of real estate programs at the university.

The number of homes for sale in the Twin Cities in May was 16,282. Normally there are between 20,000 and 25,000 homes on the market. On top of that, the 5,264 nondistressed homes sold in May 2015 was 25 percent more than in May 2014.

Price Distribution of Homes Sold in the Twin Cities

This combination of more sales and fewer homes “has created a seller’s market with instances of multiple offers and homes selling for more than the asking price becoming more common,” Tousley said.

Why are there fewer homes on the market?

“There are many homeowners who are considering selling now that values have recovered over the last three years. The question then is, what they do after they have sold their home. They have now turned from sellers into buyers in a market that offers them limited choices for their replacement home and the fact that obtaining a new mortgage is still relatively difficult,” Tousley said.

“The other reason is that although the number of homeowners who are underwater has decreased significantly there are still a considerable number of homeowners who are near negative equity. That means that even though they are not underwater they have very little equity and when they sell their home they do not have enough equity to buy a new home.

“These factors along with more restrictive credit standards and little-to-no wage growth in the last several years are keeping many potential sellers on the sidelines.”

The median sale price for a traditional or “nondistressed” home in May was $229,900, up 2.18 percent from April’s $225,000.

“Originally, we had been expecting an annual median sale price increase in 2015 of 4 percent to 6 percent. However, if the current trend of strong sales numbers and a persistently low inventory of homes for sale continues through the summer and into the early fall, we expect to see higher-than-expected increases in median sale prices,” Tousley said.

Traditional Home - Median

Overall, how is the market doing?

To answer that question, the Shenehon Center tracks nine data elements each month, including the median price for three types of sales (traditional, foreclosure and short sales) and creates an index for each. The St. Thomas Traditional Sale Composite Index hit 1109 in May, which is the highest level seen since the index was created in 2005. The index increased 2.8 percent from April 2015 to May 2015, and it increased 5.6 percent from May 2014 to May 2015.

“The continued increase in the Traditional Sale Composite Index is an indicator of the ongoing improvement in the health and resurgence of the Twin Cities housing market,” Tousley said.

Things also are continuing to look better for the two “distressed sales” indexes. In May, the short-sale index increased 5.1 percent from a year ago, and the foreclosure index moved up 5.6 percent. Several years ago these two indexes represented a significant portion of the all home sales in the Twin Cities. In May, short sales were just 3.1 percent of the total while foreclosures were 8.6 percent.

St. Thomas researchers did find some interesting results when looking at changes in the number of homes sold at different price levels. For example, three years ago, in May 2012, 40 percent of homes sold for less than $150,000. But in May 2015, less than 15 percent of the homes sold for less than $150,000. Meanwhile, the number of homes that sold for more than $450,000 in May 2015 is nearly double what it was back in May 2012.

“This shift is a reflection of the high number of foreclosures three years ago as well as the general decline in the value of all homes during the crash. Moving to 2015, as we are recovering from the recession, the economy is beginning to improve and home values are increasing,” Tousley said.

He added that this trend is expected to continue, but the differences will not be as stark as the market continues to stabilize over time.

Development, Industrial Real Estate, Industry News, Investment Real Estate, Minneapolis / St. Paul Housing, Office Real Estate, Property Management, Real Estate Trends, Residential Real Estate, Retail Real Estate, Twin Cities Real Estate, UST Program News

2014 Real Estate Outlook

Last week, Twin Cities real estate professionals gathered at the University of St. Thomas for the third annual Real Estate Outlook event. The program included a series of panels featuring leading experts in local real estate market segments, each offering their views on the current state of the market and their expectations for the coming year. The event was co-sponsored by Shenehon Center for Real Estate at the University of St. Thomas Opus College of Business and Integra Realty Resources. Here is a recap of some of the major themes presented:

Economic Forecast

The keynote presentation was made by State Economist Laura Kalambokidis, who discussed the current state of the economy locally and nationally. Minnesota has generally fared better than the nation in recovering from the economic downturn. Employment in the state has now climbed back to pre-recession levels. Unemployment in Minnesota is at 4.6%, well below the national rate of 7%. Employment growth has been strongest in the health services, business services, retail, and hospitality industries, all of which have grown between 2.5 and 4% year over year. Government and manufacturing were the worst performing job sectors over the previous year, each declining by about 2%. Despite a slight drag on the economy from policy uncertainty related to the federal budgetary process, continued modest growth is expected locally and nationally over the next two years.

Laura Kalambokidis, State Economist

Office Market Update

Mike Salmen of Transwetern started off the office panel with a report on 2013, which was a decent year for Twin Cities office real estate. Absorption was modest at approximately 200,000 sf. Vacancy has slowly been decreasing thanks to the job growth and low unemployment noted by Ms. Kalambokidis. While Class A Space is performing well, Class B and C space and certain sub-markets are still seeing high vacancy.

Steve Chirhart of TaTonka Real Estate Advisors agreed, noting that the St. Paul and East suburban sub-markets were the weakest office markets in the region, although vacancy has declined from a peak of over 25%. Mark Kolsrud of Colliers stated that the St. Paul CBD had the least amount of investor interest of the regional submarkets, and that this was due to a lack of interest from lenders.

On the other side of the metro, the 394, Southwestern, and Minneapolis CBD submarkets are all performing very well. Mr. Salmen believes the I-394 corridor is currently the hottest office market in the Twin Citeis, with rates pushing into the mid-teens and low vacancy. Vacancies are also low in the Southwest submarket, despite the addition of 3 million sf of space since 2007. An anomaly in the West Metro is the Northwest submarket, which has among the highest vacancies at 24%. Mr. Kolsrud pointed out a 150 basis point swing in cap rates from the 394 area to Northwest submarkets. Like St. Paul and Eastern suburban, Northwest is unlikely to attract interest from institutional investors, although the panelists believed a local developer could find a way to make a deal work.

Lastly, the Minneapolis CBD remains the largest submarket and currently has vacancy at 15%. A big concern for office real estate downtown is the impact of the Wells Fargo build-to-suit deal with Ryan Cos. for new office space in Downtown East; the panelists speculated that this move could pull 1 million space of occupancy out of the downtown core as Wells Fargo consolidates employess in the new buildings. Another concern is the increasing obsolescence of older buildings, where mechanical systems and floorplans don’t support the employee density and layouts now desired by office tenants. But despite these concerns, downtown continues to see strong investor interest, as institutional investors from the coasts seek out the comparatively higher cap rates available in Class A properties in Minneapolis. Additionally, institutional investors are increasingly interested in “non-traditional” investemnets, such as office conversions in historic warehouse buildings in the North Loop area.

Office Panel

The office market panelists ended with a discussion of a macro trend that will have a large impact the office market going forward, which is coporate users taking less space per employee. The average space used per employee is expected to decline from over 220 sf to 150 sf by 2015. Among ten large renewals over the last 18 months, almost all took less space than they had before. Thus despite employment growth, the outlook for office absorpbtion is flat.

Retail Market Update

The retail market panel featured a lively discussion with Jim McComb, John Johannson of Colliers, and Skip Melin of Cushman Wakefield. In the Twin Cities, 2013 saw declines in vacancy and somewhat flat absorption of roughly 900,000 sf. However, Mr. Johannson noted that good space is mostly full, and gave the example of 16 formerly vacant spaces over 12,000 sf in the Southdale area, of which 13 have leased in the last 16 months. Mr. McComb noted that there isn’t much vacancy in smaller neighborhood spaces either. He pointed out that changes in the economy and demographcis are creating opportunities in retail markets.

One of the most significant retail developments currently underway is an outlet center in Eagan. Mr. Melin noted that the center will have 400,000 sf of space for 19 tenants, anchored by Saks Off 5th. Mr. Johannson then described another large 450,000 sf outlet development currently in the planning stages, this one also in Eagan. These two projects are all the more interesting because they are just about the only large multi-tenant retail developments currently in the works in the Twin Cities. Each are banking partly on capturing tourist trade from the nearby Mall of America but also taking advantage of a submarket in Eagan that is currently under-retailed.

The panelists noted that grocery-anchored retail centers continue to Continue Reading