Is the Housing Market Shifting?

Minneapolis-St. Paul Residential Real Estate Index

By HERB TOUSLEY

Director of Real Estate Programs at University of St. Thomas

Since the June and July housing numbers have been published there seems to be much more uncertainty about the current state of the housing market. People are beginning to ask questions about the market. Is the decrease in sales volume a warning sign? Are we in a bubble? Will there be another housing market correction? One or two months’ data by themselves doesn’t signal a major change in the direction of the housing market. We will need to look at several more months’ data to understand more about where the market is headed.

The number of closed sales were down 12.5 percent between June and July of this year. However, number of home sales in the Twin Cities was essentially unchanged in July 2018 compared to July 2017. When looking at the overall seasonal pattern for the number of homes sold, it is following a very similar pattern compared to previous years. When looking at the charts below for the median sale price, the number of closed sales, and the number of homes available for sale, the pattern for 2018 is very similar to 2016 and 2017. People have expressed concern that the number of sales is declining. When looking at 2018 year-to-date sales there have been just over 1,000 fewer homes sold this year compared to last year. About half of this amount occurred in May. A few more months of data is needed to understand if this is a long-term change in the market. At this point, much of the decrease in the number of homes sold seems to be a result of the continued decrease in the number of homes available for sale. The number of homes available for sale was 12.3 percent less than last July. Median sale prices continue to increase, up 6.6 percent year over year compared to July 2017.

What really drives the need for housing?

Many people correctly point to increasing population and job growth as the primary reason. Job growth doesn’t drive housing demand, housing demand responds to job growth. Few people are against job growth, it is considered by many as sign of progress. There are many local economic development groups trying to attract new jobs by offering incentives for potential employers.

Almost all communities are in favor of job growth but what about the housing needs that are created by this job growth? In many of the communities where people want to live creating more housing translates to more density. The truth be told, many people are in favor of more housing and more affordable housing as long as it not near them.

According to recent DEED statistics, employment in the Twin Cities metro area in the last 12 months has increased by 30,800 jobs. We have not been creating enough new housing units to keep up with that growth rate. As a result, we have a chronic shortage of homes available for sale, median sale prices are increasing faster than wage growth, a very low vacancy rate for rental housing, and rents that continue rise faster than the cost of living.

It’s becoming increasingly difficult and expensive to develop and create any type of for sale or rental housing. If we are going to continue to have strong economic growth, then we are going to have to figure out a way to create enough new housing units at all price levels to keep up with the increasing employment growth.

What about new housing? Why does it take so long? Why is it so expensive?

• Lack of entitled land

• Difficulty and length of the entitlement process

• Excessive impact and local Zoning and bias against density

• Inclusionary zoning

• Rapidly increasing construction costs

• Rapidly increasing land costs

As long as our local economy continues to grow and is creating more jobs these are some of the issues that need to be addressed if we are going to come up with meaningful solutions to our housing market issues.

Tousley Charts.JPG