Decline in Buyer Activity a Matter of Affordability

With the local real estate market officially a Buyer’s Market, many are wondering why. Some point to the excessive amount of homes and condos on the market. While this is a very important cause, it is not the underlying reason. Experienced agents realize that when listing and selling a home, the most basic reason a home sells over a neighbors home is the list price. If the price is too high, then buyers will look elsewhere.

As everyone has heard in the last week, the Twin Cities Real Estate Market is considered “overvalued”. I particularly do not like the term “overvalued” because during the last few years of market activity, buyers were willing to pay the price for the home they wanted. Homes were priced accordingly to buyer demand. Now that things have slowed, sellers are beginning to realize that 2006-2007 prices are going to have to be a lot lower than 2004-2005 list prices. The best way to define the new market is to say it is in a “state of correction”. Now that homes are not being snatched up in record numbers, it doesn’t mean that homes are going to decline in value to prices pre-2004.

While home appreciation values will hold some of their value, the real problem facing the current Minneapolis real estate market is its affordability. Price growth has been outpacing income growth for the last decade. Statistics from the Minneapolis Association of Realtors show that in 1992, the median home price in our region was $87,700. It has now risen to $228,900 – a 161% increase in 14 years. During the same period, the median household income for a family of four has grown from $51,000 to $77,500 – an increase of only 51%.

Many think that the saving grace for home buyers would be the record low interest rates of the past few years, compared to the 8-10% interest rates of the 1990’s. This was true in 2000, but now home values have reached a point beyond what declining interests can mitigate. Until household incomes catch up, the Twin Cities real estate market is going to be in a state of flux, including a slow down of home appreciation.

It is important to understand that the current slowdown due to housing affordability and record supply is normal and natural. There is just no way the market could continue on as it has and remain stable. The ups and downs in real estate are expected and make for a healthy, long term market. If you have any questions on what your specific area is doing in regards to pricing, please feel free to contact me!

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One Comment

  1. Stop Home Foreclosure October 27, 2008 at 12:33 pm - Reply

    This post was definitely a sign of the times to come! Values have hit a rock bottom (hopefully) across the US in 2008. Great foresight in this post.

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