The Twin Cities housing market is inching toward recovery, experts say, but potential obstacles remain.
Shelly and John Nikolou decided that the time was right to take advantage of low interest rates and a home-buyers' market.
They lined up five houses to look at in one evening in St. Paul and its inner-ring suburbs. By the time they did, three had been sold. Another in Falcon Heights had been on the market for a week when they and four other potential buyers submitted offers. The Nikolous lost out to a couple who offered an all-cash bid above the asking price of $349,000.
What sounds like a story from the housing market peak in 2005 took place last month and serves as another indication that the worst of the great housing market depression may be over. In the Twin Cites area, pending sales of homes have risen for 14 consecutive months. Nationally, sales of new homes have risen for four months in a row.
Experts agree that the Twin Cities market is taking baby steps toward recovery.
"Sales for new and existing homes have hit bottom. We've seen consecutive increases in sales month-over-month and year-over-year," said Scott Anderson, a senior economist with Wells Fargo & Co. in Minneapolis.
"These are all very good signs that demand is picking up."
But Anderson and other experts are quick to say that the recovery is still precarious at best, and it could be years yet before homeowners recover the equity wiped out after values plummeted as much as 30 percent.
Median prices, though up since January, remain lower than they were a year ago, locally and nationally. July sales of new homes were the third lowest sales for July since the Census Bureau started tracking sales in 1963. A weak economy, continued job losses and higher interest rates could trigger another wave of foreclosures, and the federal first-time home buyers tax credit expires at the end of November.
"There's a lot of stimulus in play, which drives demand, which drives up prices. It will be interesting to see what happens after the stimulus is gone," said Toby Madden, a regional economist with the Federal Reserve Bank of Minneapolis.
Foreclosures: More coming?
The first wave of foreclosures that hit the housing market was caused by the subprime crisis. Then came a second one, when people who had prime mortgages couldn't pay them because they had lost their jobs.
No one wants to hear about a third wave.
But Rick Sharga, a vice president at RealtyTrac, a California company that monitors foreclosures nationwide, predicts the second wave will go well into 2010, as unemployment continues to go up. That will be followed by the third wave, he said, triggered by option adjustable-rate mortgages (ARMs) that will start resetting to higher interest rates next year.
"The option ARMs that have started to reset early have been defaulting at rates that are even higher than the subprimes," Sharga said. "The good news is that there weren't quite as many of them. The bad news is that they tend to be in more expensive properties."
In Minnesota, the number of foreclosures more than quadrupled since 2005, to just more than 26,200 last year, according to HousingLink, a nonprofit research agency. For the first half of this year, 11,089 were reported -- although a foreclosure moratorium by many large lenders this spring could be holding that number down.
In addition, "heroic work" by the Minnesota Home Ownership Center's counseling network is helping keep the numbers down, said HousingLink research manager Dan Hylton. That said, he added, there is no easy end in sight to the wave of foreclosures, which could even get worse.
"The general sense is that we're in a small lull between waves -- and that the next wave is going to be worse, simply because it is based on the economy, rather than subprime loans/questionable choices/questionable business practices," he said.
The very foreclosures that are dragging down prices are helping bolster the market on the lower end by making homes more affordable.
"The prices are low compared to a few years ago -- very low -- and it's become increasingly more affordable to buy a home," said Gregg Stratton, an economist with the National Association of Realtors.
"But," he cautioned, "there's the overhang of concern. Am I going to be employed in six months? Or am I going to be furloughed? Those kind of stability concerns are weighing on people's minds."
Forsythe Appraisals, a national appraisal firm based in St. Paul, tracks values of homes and neighborhoods nationwide. Its senior vice president and chief appraiser, Alan Hummel, said the company has noticed that properties in areas priced for first-time home buyers are rebounding more quickly than other areas. "That's where the demand is right now," he said.
Property value declines have slowed in some areas of the Twin Cities, he said. "In 2008, where [property values] were going down 1.5 percent a month, now maybe they're going down three-fourths [of a percent] a month. We're seeing that in a lot of areas and we're seeing stabilization in others." And some areas are even appreciating, pushing up the median home price in the Twin Cities to $175,000 in August.
Hummel noted that some of the stabilization is taking place in areas where foreclosure inventories have been reduced. "So whenever you have less supply, you are going to have some stabilization."
Recent economic news doesn't bode well for a quicker recovery for the housing market. Nationally, the unemployment rate jumped almost half a percentage point, to 9.7 percent in August, the highest since 1983. Many private economists and the Federal Reserve expect the rate to top 10 percent by the end of the year. Minnesota's jobless rate is 8.1 percent, with new numbers due out this week.
And if consumers are holding the purse strings tight, so are the banks.
Consumers' "ability to spend is still very constrained, given the tight credit and the fact that households have lost so much wealth," Wells Fargo's Anderson said.
He said that the signs of stability and recovery are there, but cautioned against reading too much into it.
"There been a tremendous amount of damage done to home values and home equity," he said. "It's not going to be easy to bounce back from that, especially in a tight credit environment."
Advice from the front lines
Two weeks ago, the Nikolous saw a house they liked in Falcon Heights that had been on the market for two days at $309,000. They put in an offer right away for the full asking price and got it.
Shelly Nikolou's advice to anyone looking for a house? "If you have that feeling that this is the house for you, I would react on it. Seeing that one house slip between our fingers because we didn't react aggressively enough was disappointing. I would definitely jump on it."
Suzanne Ziegler • 612-673-1707