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Catching the Real Estate Wave
By Mark Zdechlik
March 11, 1998
Click for audio RealAudio 2.0 14.4

This Spring's warm weather coupled with low interest rates and a booming economy have jump-started home sales around Minnesota, especially in the Twin Cities. From existing homes to new construction, home buyers are finding they can get significantly more for their money than just a couple of years ago.

DAVE AND DEBORAH Christianson and young sons Daniel and Jacob have decided it's time for a bigger and better home. They're selling their townhouse and working on a design plan for the new home they'll soon have built in Woodbury.

Voices: Want to look at the house? YEAH!
It's a muddy walk up a wet path to survey the floor plan of an almost completed model home in a new development.

The Christiansons want a four-bedroom house with a two-car garage. It has to have a nice kitchen, a large family room, lots of closet space, and a whirlpool tub in the master bath. The Christiansons plan to spend as much as $200,000 on their new house. They say favorable interest rates are allowing them to include many more amenities than they thought they could afford.

Christianson: Interest rates are part of it. I mean, if they're down, you might as well get a better house and more upgrades, more room, especially if you are going to raise a family. Might as well start now before they go up.
The Christiansons recently moved to Minnesota from California's sky-rocketing housing costs. Dave Christianson says it is a blessing that he's able to move his family from a townhouse to a single-family home in the suburbs with a back yard.
Christianson: Where we are living right now they are selling our neighbors' homes within two weeks. It's unbelievable. It's really nice right now the way the market is.
People like the Christiansons are spending a lot of money on housing, but George Karvel, holder of the University of St. Thomas's Graduate School Real Estate Chair, says the real cost of mortgages today is significantly less than it was just a couple of years ago.
Karvel: The drop in interest rates over the last several years from, say, a nine percent mortgage interest rate to a seven percent mortgage rate has significantly increased the buying power of the average consumer. Someone today that earns roughly the median income for a family of four - which would be about $41,000 a year - they can go out and qualify and buy a $150,000 home with a $20,000 down payment and $865 a month would be the principle and interest payment. That would be a seven percent mortgage.

At nine percent the same family - according to Karvel - could handle only a $107,000 mortgage. That's $23,000 of additional buying power for someone who earns about $41,000 a year. And that boost is making for a busy spring real estate market.

Karvel: We are at levels of record affordability at this time. There may have been some point in 1952 when housing was more affordable or maybe in 1965, but let's put it this way: basically, housing has not been ever significantly more affordable than it is today.
And that boost is making for a busy real estate market. The president of the Minnesota Association of Realtors, Todd Grill, says in such a busy market consumers need to take measures to ensure they receive quality service.
Grill: Most of us were caught unaware of how good this marketplace was going to be this quickly, and because of the labor shortage, the unemployment rate being so low in the metropolitan area, a lot of mortgage companies, title companies real estate companies were all caught a little short-handed, and now they are trying to play catch-up and trying to find other people, processors, people to do the paper shuffling, and this is not always an easy thing to do.
Grill says the stock of available housing is generally good in the Twin Cities. However, he says homes in the $100,000 -$150,000 range are selling very quickly and often for more than the asking price. He says there is generally a shortage of available quality housing in rural Minnesota. He says the lake-cabin market is busier than any other.

If you're house shopping, regardless of what you're looking for, Grill recommends getting pre-approved by a bank for a mortgage, so when you find a home you want you can immediately offer to buy it. Another tip Grill offers is to house hunt during the middle of the week instead of on weekends when the majority of homes are sold. In the real estate frenzy, mortgage consultant Roger Harrington says it's important to keep in mind today's boom-time market will invariably weaken.

Harrington: It's largely roses, there's no doubt about it, but you have to temper the roses with a little bit of common sense.
For example, Harrington says first-time buyers may well benefit from starting smaller, paying off their first home early, and using the proceeds from appreciation down the road to move into a larger home. On the other hand, Harrington says those planning to stay for a long time in whatever house they buy now could benefit from stretching their resources to take the most advantage of today's favorable interest rates.
Harrington: The most certain thing that happens to a consumer or to anyone is change. I have helped people buy four different homes when they planned to stay in each home forever. I've talked to people who have had deaths in the family, marriages, divorces, changes in living and employment, all of these things changing what home they are going to be in. So you need to be able to live with whatever is thrown at you.
Harrington says a good common-sense guide for buyers is to calculate their gross monthly income and determine what 28 percent of that income will buy in a mortgage that includes principle, interest, insurance, and property tax payments.