Metro market awash in homes for sale

Sellers continued to swamp the Twin Cities-area housing market in May, leaving a huge pool of inventory for increasingly choosy home buyers.

New listings of 11,419 homes in the 13-county metro area were a record high for the 10th consecutive month. Closed sales fell to 5,039, more than 9 percent below the 5,553 sales in May 2005. Pending sales -- deals not yet closed -- were down 14.5 percent to 5,749.

At month's end, 30,179 homes were for sale in the 13-county metro area -- up 43 percent from May 2005, according to statistics from the Regional Multiple Listing Service of Minnesota Inc. That amounted to 5.4 homes on the market for every expected sale in June, compared with 3.14 homes per expected sale a year earlier.

The median sale price in May was $230,000, up 1.1 percent from May 2005. Last year, the median sale price -- the point where half are more, half are less -- rose 7.7 percent.

For all of 2006, appreciation is expected to be about 4 percent, said Todd Shipman, president of the Minneapolis Area Association of Realtors.

While the market conditions are tough on sellers, buyers are in the driver's seat, and they're taking their sweet time about jumping into deals.

"There's a combination of factors going on -- rising mortgage rates, especially for adjustable-rate mortgages ... and the level of home prices is so high that's it's starting to affect affordability," said Scott Anderson, senior economist for Wells Fargo & Co. "There's also a sense that buyers are holding off, waiting to see if a bottom forms, or if there's continued weakness in the market."

Shipman said: "Rates are reasonably low, there's a big selection and some motivated sellers. But buyers aren't pulling the trigger."

One reason for the slower sales may be overly optimistic sellers, observers said.

"Sellers are having a hard time" adjusting to lower appreciation rates, said June Wiener, president of the St. Paul Area Association of Realtors. "They're perhaps not being realistic about prices. ... We've seen so many years of high appreciation that this is kind of a sudden change."

The return of contingencies also is contributing to the buyer-seller imbalance, said Shipman, a real estate agent with Great Minneapolis Real Estate Co. The hot market of past years meant that few buyers made a purchase contingent on selling their own home for fear of losing out to a noncontingent buyer. But that's changed.

"It's the chicken and egg," he said. "If the buyers' house hasn't sold, they're reluctant to buy because of the uncertain market." In addition, he said, "investors have pulled out of the market" because the slowing home appreciation rate means they can't earn a big enough return to make a real estate investment worth their while.

Psychological reinforcement

Economist Anderson said there's a psychological factor at work, too. "When you start to see prices decline, they become reinforcing," he said. "Buyers hold off, expecting cheaper prices in the future. It's almost the opposite of rising prices," when people rush to buy because they think they'll have to pay even more if they wait.

"I think the real question is, will the market bottom out, or is this the beginning of a down trend that could be more severe?" he said.

The answer, Anderson said, will depend largely on baby boomers, who are approaching retirement:

• "Will they panic, and all put their houses on the market at once," hoping to lock in the hefty appreciation gains many have been counting on to help finance a comfortable retirement?

• "Or will they hold back, as [sellers] traditionally do when the market weakens," hoping that prices eventually will improve?

"We're in uncharted territory because of the baby boomers and the run-up in housing prices over the past five years," Anderson said.

"We're not 100 percent sure how home sellers are going to react."

Susan E. Peterson • 612-673-4506