Twin Cities home prices to stay strong as region inches closer to pre-recession prices

With 2015 in the rearview mirror and the first interest rate hike in nine years still fresh, Twin Cities real estate experts say the new year should be another strong one for the local housing market. Home prices are expected to keep rising following a year when the median sale price reached its highest level since before the recession. And a higher volume of sales in the Twin Cities are anticipated, though opinions differ on precise growth.

Such predictions leave sellers wondering whether the time has come to turn a profit on their home, while buyers discern if it will be the year to make an investment. For both, the overarching question is whether the market is nearing another peak.

Most market analysts don't believe the Twin Cities metro area is there yet. "We are kind of in between, in this twilight zone that is awkward," said David Arbit, director of research and economics for the Minneapolis Area Association of Realtors.

Before the recession, the median Twin Cities home price topped out in August 2006 at $231,500, Arbit said. In 2015, the median price was $218,000 for home sales, up 6.8 percent, according to a year-end review by the Shenehon Center for Real Estate and the Opus College of Business at the University of St. Thomas.

The university center expects similar price growth in 2016 while the Minneapolis Area Association of Realtors forecasts a 4 to 6 percent increase.

While the prices get closer to pre-recession levels, the 6 percent to 7 percent growth rate signals a "normal" period for the market.

Ryan O'Neill, whose RE/MAX Advantage Plus real estate team sold the most homes by dollar volume in the Twin Cities in 2015, said he believes the days of double-digit price growth are no more — and says that's good for consumers.

"I just think the market, since the crash, has been very slow to rise. It's just been much more healthy across the board," O'Neill said. "When I started in the early 2000s, it was rampant growth and people just expected their houses to be massive ATMs."

He says people need to allow themselves at least three years to be profitable in the resale of their home. Many of those who bought just before the crash in 2008 are still frustrated that, in nearly a decade of homeownership, prices have not rebounded to the level they paid for their property.

"Consumers are much more price conscious now," Arbit said. "The buyer who would've bought the $350,000 house in 2005 is buying the $190,000 house now."

A major influence on the Twin Cities market is a tight supply of houses. Inventory fell 17.3 percent in 2015, according to the St. Thomas study. New single-family home construction could turn that around, and so could the retirement of aging baby boomers, creating exodus of homeowners to warmer climates, Arbit suggests.

Another force at work is the soaring cost of renting in the Twin Cities. At some point, people will be pushed out of the rental market into homeownership, real estate experts said.

"People just have two main options, buy or rent, and eventually if it gets too much to rent, they start exploring the option of buying something," O'Neill said.

The average rent in the metro area was about $1,050 at year-end, wrote Herb Tousley, the director of real estate programs at St. Thomas. "After two very active years of apartment development in 2014 and 2015," Tousley wrote, "vacancy rates continue to remain relatively low and rents continue to increase."

Even with the addition of about 8,400 units in that period and a softening in some Twin Cities submarkets, the metro area's vacancy rate remains between 3 and 4 percent.

The impact of the Federal Reserve raising the key U.S. interest rate by 0.25 percentage point from its ultralow base will be negligible on mortgages and housing demand for the moment, Arbit said.

"We don't really see it harming consumer demand all that much mostly because of the choices around us. For the majority of folks, it is cheaper to own than it is to rent," he said. "The average mortgage payment might increase by $20 a month moving into next year, but a lot of renters are paying an extra $100 a month."

As for home sales, experts said certain patches of the metro region will do better than others.

"The market is made up of many niche markets," said John Wanninger, a Realtor from Lakes Sotheby's International Realty who specializes in luxury homes. "I would expect condos to see larger increases due to lack of inventory, and some markets, particularly some of the upper bracket, second-tier suburbs to lag because of oversupply."

Kristen Leigh Painter • 612-673-4767