The final numbers for 2007 are in: The median sale price declined 2.2%. This year might see another drop -- sobering news for anyone who bought at the peak of the market or has borrowed heavily against the value of their house.
Home sale prices dipped in 2007 for the first time in at least 20 years and are expected to remain flat or fall slightly in the coming year, officials from several Twin Cities-area real estate groups said Wednesday.
The decline is bad news for anyone trying to sell a house and also is an indication of downward pressure on housing prices across the metro area -- sobering news for anyone who bought at the peak of the market or has borrowed heavily against the value of their house.
"It's significant in that prices declined," said Mark Allen, CEO of the Minneapolis Area Association of Realtors. "But insignificant when you look at long-term price growth."
During 2007 the median sale price of single-family houses, condominiums and townhouses fell to $225,000, a 2.2 percent decline from 2006.
However, the median sale prices still are $10,000 higher than the $215,000 median price that prevailed when market activity reached its peak in 2004.
But the first price decline in two decades of record-keeping debunks the long-held notion that home prices in this market don't fall.
Whether this decline signals a long-term trend or is just a blip is anyone's guess, but the slowdown has already left plenty of victims:
• The number of foreclosures in Minnesota doubled in 2007.
• The nation's biggest banks have lost tens of billions of dollars investing in mortgages that couldn't be repaid, sparking a global credit crunch and threatening a recession in the United States.
• Some home builders have resorted to mass auctions to unload new but empty homes.
Closed sales during 2007 in the Twin Cities metro area fell 16.4 percent to 40,055, and pending sales fell 15.5 percent to 43,560. At the same time, the number of new listings that hit the market declined. During 2007 there were 105,044 new listings on the market, down 2.8 percent from last year, but well head of activity in previous years.
That's evidence that prices could stabilize late in 2008 as inventory levels moderate and buyers regain confidence, said housing-sales officials, which also included representatives from the Southern Twin Cities Association of Realtors, the North Metro Realtors Association and the St. Paul Area Association of Realtors.
Officials from the National Association of Realtors last year predicted that prices would rise 1 percent during 2007. Instead, dogged by the subprime mortgage meltdown, rampant foreclosures and a steep decline in sales of new houses, the market couldn't gain enough momentum to beat back falling prices.
Tom Musil, director for the Shenehon Center for Real Estate at the University of St. Thomas, said that given the rapid price increases of recent years, a decline was inevitable.
"I was happy in the sense that prices have not eroded as much as they have in other markets," he said. In Naples, Fla., the median sale price last year was down more than 7 percent, and in Detroit, prices were down even more.
Nonetheless, Musil said Twin Cities prices are likely to fall again slightly this year before showing signs of recovery in mid-2009. But that likely will be only after the mortgage markets work through the instability that's causing lenders to tighten access to credit and charge more for the additional risk of doing business in these uncertain times.
More the 2 million adjustable-rate mortgages are expected to reset in the next two years. Although the impact of those rising rates is unknown, they are likely to lead to more foreclosures. And foreclosures have put downward pressure on prices throughout the metro area.
Tony Pistilli, chief retail appraiser at U.S. Bank in Minneapolis, said that even though optimists already are talking about a recovery, 2007 marked just the beginning of the market correction.
That, combined with the fact that the market oversold itself in 2005 and 2006, doesn't bode well for price increases in 2008.
"I don't think people are comfortable buying into a declining market," Pistilli said. "Time will tell. There's still a huge inventory of properties that has to get sold before people get more comfortable."
Some markets are exceptions
With buyers more discerning -- and cautious -- than they've been in a decade, the market has grown ever more fragmented. For every story of a house that's been on the market for two years, there's one about that special house or condo that got multiple offers or sold in just a few days.
For example, several Multiple Listing Service districts posted an increase in the median sale price, including several first- and second-ring suburbs, including Chanhassen. Some Minneapolis neighborhoods, such as southwest Minneapolis, also saw increases. And sales data suggests that while the upper-bracket market has the deepest inventory, 2007 sales in that price category kept pace with 2006.
Cynthia Froid of Keller Williams Integrity Realty in Minneapolis has had several upper-bracket listings in downtown Minneapolis that sold before hitting the market, and some of them had multiple offers from buyers who weren't concerned about selling their existing house to buy a new one. That includes a recent $2.75 million sale on a riverfront condo that closed last week for what she says is a record $854 per square foot.
"Those folks are just so insulated from what's going on in the mortgage markets," Froid said. "So all of this threat of recession impacts them, but not as dramatically."
At the same time, condo sales in downtown Minneapolis and St. Paul haven't kept pace with development plans, forcing developers to scrap several high-profile projects. Last year developers scrapped the Revue across the street from the Guthrie Theater on the river, the high-profile 222 Condos above the planned Whole Foods on Washington Avenue, and the Portland.
The story was similar in the suburbs, where new projects came to a virtual halt while builders and developers focused on reducing inventories of unsold homes.
Todd Bjerstedt, vice president of MarketGraphics, a data research company in Hudson, Wis., said there still is a glut of unsold new houses on the market, but that inventory levels have come down slightly.
As of December there were 3,548 houses that were finished but not sold, he said, down from a peak of 4,552 in April. And the number of ready-to-be-built lots peaked at 42,524 in August, but dropped slightly to 42,287 in December.
"Until this inventory is drawn down, we can't really expect normal construction activity," he said.
Ultimately, it's the decline in sale prices that could help drive the recovery as first-timers and investors take advantage of lower prices and the trail of bargains left behind in the wake of the foreclosure crisis.
With mortgage interest rates still near record lows and prices falling, the affordability index has risen from 131 in January 2006 to 141 this month. That means that a family with the local median income has 141 percent of the income needed to buy a median-priced house.
"Sellers are being much more flexible," said Karen Rue, a sales agent for Edina Realty's Crocus Hill office in St. Paul. "I just think there are fair prices for the buyer."
Rue, who used to be a labor-and-delivery nurse and now specializes in selling architecturally distinct and unique houses, compared buying and selling in today's market to a "difficult delivery."
After working with a buyer for several months, for example, she helped him buy an unusual upper-bracket house in St. Paul that had been on the market for many months. With so much doubt and consternation in the market, it's a process, she says, that takes patience, trust and determination.
"And I trust the process," she said. "But you have to keep working through the ups and downs."
Jim Buchta • 612-673-7376