Audio Twin Cities housing market cooling off, still warm to the touch (story audio) Photos Home-buying 101 Denise Gathman Measuring the market Resources Minneapolis Area Association of Realtors: latest statistics Your Voice Join the conversation with other MPR listeners in the News Forum.

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Twin Cities housing market cooling off, still warm to the touch
by Jeff Horwich, Minnesota Public Radio
November 25, 2003

Steve Olson, an appraiser for Edina-based CVS Appraisals, checks the dimensions of a home in Fridley. Thanks partly to improvements they made in recent years, the sellers realized a 150 percent gain. (MPR Photo/Jeff Horwich)

Even during the recent recession, real estate surged to new heights. Homeowners, especially in the Twin Cities, propped up the struggling state economy with a flurry of buying, selling and refinancing. Experts agree the frantic housing market of the past few years is ending. It's cooling off, but still warm to the touch.

Fridley, Minn. —

The Twin Cities housing market Median price of homes sold October 2003: $243,118 October 2002: $227,533 Number of closed sales October 2003: 5,405 October 2002: 4,764 Increase in home prices 2002: 8.9 percent Increase in wages 2002: 2.3 percent Average number of days on market, third quarter 2003 Ramsey County: 29 Hennepin County: 32 Washington County: 38 Sherburne County: 66

Home appraiser Steve Olson is walking the outside of a 1,000-square foot house in a suburb north of Minneapolis, checking the dimensions, the gutters, a few patches on the roof. It's his job to keep an eye on area housing prices. This one's a fairly typical entry-level house -- a starter home in Fridley that sold for for $176,000.

The previous owner paid $70,000 seven years ago, a gain of 150 percent. At the moment, most home sellers here in the hottest home-buying market in the state, the Twin Cities, can still expect a healthy return.

But this house was listed about 30 days before it sold, a good sign things are slowing down. We're in a different market than recent years, when Olson says this house might have been listed for just a week, or even a day.

With interest rates edging up again, experts expect demand will continue to drop. But how much, and how fast?

In an extreme scenario, demand might drop so abruptly home prices start to fall. Proponents of this view point to a growing and, they say, unsustainable gap between housing prices and income. That trend is real. Last year housing prices in the Twin Cities increased 9 percent, while over that same period, area wages went up about 2 percent.

	Home-buying 101

At a certain point, buyers like Archie Jackson might start to reject the prices they're confronting en masse, deciding it's better to stay in their current home or keep renting. Jackson would like to buy a townhome and start building some equity. But he says the prices he's seeing around the Twin Cities are "pretty nuts."

"They're pretty high," Jackson says. "Well, I thought they were high. Brooklyn Park, Plymouth areas, the nicer suburbs, seems like you get a lot less townhome for your money."

Historically, though, drops in home prices across an entire market are extremely rare. And though the Twin Cities show some signs of an overheated market, economist Karl Case of Wellesley University says the gap between incomes and home prices is not as bad as some places.

"The ratio of price to income and the rates of increase in Boston, New York, California, Hawaii have been much higher than yours," Case says. "Yours looks pretty stable."

Especially with the rest of the economy picking up, many regional experts expect a gradual slowdown in housing, with enough demand to keep most house prices headed in an upward direction. Glenn Dorfman, director of the Minnesota Association of Realtors, calls it "a correction."

	Denise Gathman

"Will it be a ferocious correction? No. We're going to have some people mad because their values were going up 10 percent a year, and now they're going to go up 3 or 4 or 5 percent a year," Dorfman says.

They might be more than mad -- they could be financially over-extended. Denise Gathman teaches homebuyer education courses in St. Paul. She says the housing boom may be ending, but it has left behind some dangerous misperceptions.

First, interest rates have been unusually low, and now the fear of them rising even a few percentage points can lead buyers to rush their decision. And Gathman worries about people buying beyond their means, based upon the kind of appreciation homeowners enjoyed during the boom.

"My fear is that people just have unrealistic expectations about how much appreciation they're going to be able to expect, and where rates are going to be," Gathman says. "If rates are "under 10 (percent), they're great. We're getting 5 percent appreciation a year? Awesome."

Those who watch the market say buyers' expectations are critical, both to individual homebuyers themselves and the housing market as a whole. If expectations do cool off along with the market, we might enjoy a smooth transition as we leave the housing boom behind.

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