| 02 February 2010
By most measures, 2009 was a year of healing and balancing for the local real estate market, posting the most sales since 2005. Transactions in November were 34% higher than the previous year, almost entirely attributable to the first iteration of the federal government's $8,000 tax credit for first-time homebuyers, which expired on November 30th. The current inventory of homes is down 28% from mid 2007 highs. An extended and expanded tax credit program is likely to stimulate strong activity this Spring, but how will the patient do after life support is removed mid-year?
I offer a shorter and a longer-term forecast. Short-term, the preponderance of fundamentals favors buying and investing. Historically low interest rates and discounted prices have converged to push the housing affordability index to 208. The index is the relationship between the median family income and the cost of the median priced home at today's interest rates, assuming a 20% down payment. The Twin Cities' December affordability index indicates that the median income is 208% of what is required to afford the median priced home, up from a low of 120% in mid 2006. In January, Forbes magazine listed Minneapolis/St Paul number 6 on a list of the top 10 metro areas in which to buy now.
But there are headwinds to contend with. Unemployment uncertainties and concerns about market stability create the hangover effects of a classic over-correction, pinching household and bank balance sheets alike. Mortgage lending standards have lurched from absurd permissiveness a few years ago to paranoid reluctance today. Some further price declines may lie ahead as shadow inventories of foreclosed property come to market.
Long-term, demand for many Springs to come will be driven by significant demographic shifts, already underway. The market will experience an infusion of Echo Boomers, young people entering the 25-44 age group, peak household-formation, home buying years. This cohort is five million larger than the legendary Baby Boomers (their parents), whose activity determined market conditions for two decades. For these Echo Boomers (or Gen Y'ers), the inspiration of the American Dream blossoms, perennial as Spring, even absent the now discredited motive of getting rich simply from buying a home.
More buyers will also be entering the market through immigration. Near term economic conditions in the job and mortgage markets will affect both the number of immigrants and the buying power of Echo Boomers. A future gap in housing demand may appear in the relatively small number of Gen X'ers available to absorb the growing inventory of final stage family homes no longer needed or wanted by Baby Boomers. The federal government's $6,500 tax credit for qualified move-up buyers who purchase by April 30, and a softer move-up market, offer encouragement to those Gen X'ers who want to set their foot on the next rung of the property ladder.
In this real estate environment, sellers should be serious and competitive, buyers bold and brave. As the Baby Boomers contemplates retirement housing, the seasons of Life and the market cycle on.
Jim Tice is General Manager of CENTURY 21 Luger Realty in Edina. He has been a real estate consultant for 33 years- This e-mail address is being protected from spambots. You need JavaScript enabled to view it (952)925-3901.