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Low Twin City inventory causes biggest home price gain since 2004

The shifting forces of supply and demand are driving home prices across the nation to heights not attained in years.

In Minneapolis-St. Paul, a housing inventory that sits at a nearly nine-year low and a changing sales mix away from foreclosures caused prices to rise for five straight months.

The number of homes for sale in the Twin City’s 13-county metro area has dropped for 18 consecutive months, down 30.9% from July 2011 to 16,806 active listings — marking the lowest inventory reading for any month in the area since December 2003, according to the Minneapolis Area Association of Realtors. Months’ supply of inventory dropped 43.9% to 4.3 months — the lowest reading for any month since December 2005.

“We continue to see strong demand with a current inventory tracking about 30% less than last year,” Brad Fisher, a Minneapolis-based broker, said.

Fisher said the trend is resulting in multiple offers on many properties with low inventory positions. Traditional sales are up because of a lack of inventory in distressed properties, resulting in an increase in the median sales price of 14.3% in July to $179,950, the strongest gain since January 2004 and the fifth consecutive month of annual gains.

July home prices in the Twin Cities reached their highest level since October 2008, excluding June 2010 when homebuyer tax credits were at their peak.

Other markets also are experiencing a turnaround. After battling an onslaught of foreclosures, Phoenix is now a shining example of a turnaround market, Move Inc., the operator of Realtor.com, claims. Phoenix’s median list price up nearly 30% from last year.

Scenes such as these are why Joseph LaVorgna, housing analyst at Deutsche Bank (DB), says housing is converting into a tailwind for the broader economy.

He also points to construction activity. The reduction in nondistressed inventory is helping to support prices and create opportunities for new construction. Housing starts elevated to 760,000 in June, reaching their highest level since October 2008.

“This (overall) resumption in residential activity cannot be understated as the long awaited housing recovery should help buoy consumer confidence and provide a mild lift to second half economic output after what was likely a disappointing first half of the year,” LaVorgna says in a recent research report.

Mortgage data and technology services firm CoreLogic (CLGX) exported home prices, including distressed sales, appreciated annually by 2.5% in the month of June. The company believes the good news may be an emerging trend through the end of the year.

The inventory of new homes totaled just 1.74 million units in May, up only a smidgeon from April’s all-time record low of 1.73 million units. The same pattern exists for existing homes, where inventories have fallen since July 2007 when they stood at a record high of 4 million units.

And a smaller supply of REOs is buoying home prices. Freddie Mac‘s home price index rose 4.8% from March to June, the largest quarterly increase in eight years. The national index also posted a year-over-year gain of 1%. 

LaVorgna’s comments echo those made last week by Bank of America Merrill Lynch (BAC) housing analyst Michelle Meyer, who said a better alignment of housing supply and demand is adding to the continued recovery in the housing market, despite sluggish growth in the overall economy. 

Several years of extraordinarily slow construction, slow processing of foreclosures and reduced housing turnover is significantly reducing the inventory of homes for sale, Meyer said.

“Laying claim to a recovering housing market does not ring of hyperbole, because it has been this way for several months,” MAAR President Cari Linn said. “We’re especially pleased to see seller confidence rise and the role of distressed properties fall.”

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