Spring to bring real test for Minnesota housing market

  • Article by: ERIC ROPER , Star Tribune
  • Updated: February 16, 2010 - 11:53 PM

A program that kept interest rates low also will end, potentially dealing the market a double whammy.

WASHINGTON - John Addler and his fiancée moved in together a little earlier than planned last month. In this economy, it was a sound financial decision.

The 26-year-old Best Buy employee, who had planned to buy a home after his wedding this spring, got a jump-start and purchased a three-bedroom house in Shakopee, spurred by an $8,000 federal tax credit for first-time home buyers that will expire in April.

A separate federal program that has been keeping mortgage rates artificially low ends next month. Addler, still paying rent on his Bloomington apartment, said he couldn't imagine buying a house without the extra boost.

"When we were writing out that down payment check, it's not too hard to write it out knowing that you're getting it all back," he said of the tax credit.

It's stories like Addler's that have market analysts predicting that when those programs end, so, too, may the temporary boomlet Minnesota's housing market has enjoyed during the past several months. After a year on crutches, it may have to stand alone. Many wonder if it's ready.

"I think we'll be bumping along the bottom," predicts Minneapolis-based Wells Fargo economist Scott Anderson. Anderson said expiration of the programs could slow sales activity, drive down home values and push mortgage rates up.

"The headwinds that are working against the housing market will certainly intensify at the end of March," Anderson said.

All of that could erase some of the market's strides this past year.

Despite the recession, numbers compiled by the St. Paul Area Association of Realtors show a more than 16 percent rise in home sales in the 13 counties surrounding the Twin Cities between 2008 and 2009 -- growth sparked at least partly by unprecedented tax credits and low mortgage rates.

The programs have been unable to stem falling home values, which slid 15 percent in 2009.

The National Association of Home Builders (NAHB), a Washington, D.C.-based trade association, predicts that weaning the market off those programs could cause single-family home sales to drop 12 percent nationally this summer -- the largest quarterly dip since the programs began.

"The end of the tax-credit program will have a significant impact for home buyers that are interested in both obtaining low mortgage interest rates as well as that kind of tax benefit," NAHB economist Robert Dietz said. "They probably need to be doing their homework now."

Time to pare back

Though economists are generally pessimistic, area real estate agents are less gloom and doom. Several agents said that while they would love to see the programs extended, they appreciate the need to see the actual state of the market.

"The hard part is you don't want to set a precedent in the marketplace that something like this is always going to be there," said Tony Maurer, president of the St. Paul Area Association of Realtors. "At some point, we all need to kind of stand on our own and recognize what's going on."

The tax credit, born of the Obama administration's stimulus package, nearly landed on the congressional chopping block last fall but was extended by nervous lawmakers fretting about a premature cutoff. In another signal that the time has come, the new deadline has prompted far fewer calls for another extension.

U.S. Rep. Keith Ellison, D-Minnesota, argues it's still too soon to take off the training wheels, given more than 7 percent unemployment in Minnesota and the effectiveness of the federal programs.

"I'm not sure that the market is really on its own two feet yet," Ellison said. "If people aren't making money, then people aren't buying as much, and if people aren't buying, then they're not buying houses, either."

Ellison said he is talking to colleagues on the Hill about the merits of extending both programs.

The homebuyer tax credits -- $8,000 for first-time buyers and $6,500 for some repeat buyers -- have gotten much of the attention, even being showcased with TV ads. But the far-lower-profile federal program to keep mortgage rates low has also played a role in kick-starting the market.

The Federal Reserve has quietly spent more than $1 trillion buying bundled mortgage debt from banks across the country -- a move made necessary, in part, because many investors stopped buying mortgage debt in the wake of the economic collapse.

That steady flow of money allowed banks to keep mortgage rates artificially low.

"The reality is that, on a historical perspective over a 12-month period, I doubt [rates] have ever been lower," said Tim Swierczek, president of the Minnesota Mortgage Association. He predicts an inevitable rise this spring.

Looking ahead

With the two key federal programs set to dry up, area real estate professionals and economists are keeping a sharp eye on April and the months following. The first concrete data will probably emerge in May, with Minnesota's first real spring weather.

What happens then could be a bellwether for the general state of the economy, said George Karvel, a real estate professor at the University of St. Thomas.

"You will not have an economic recovery in this country until you see some form of recovery in the housing markets," Karvel said.

Eric Roper • 202-408-2723

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