Saturday, January 08, 2005

After a rousing 2004, housing markets may cool

Jim Buchta
Star Tribune

2004 was a year of extremes for the housing market, and a year of contradictions too.

With mortgage rates near historic lows and the highest numbers of houses for sale and apartments for rent since 2000, renters and home buyers found themselves spoiled with choices.

For many sellers and landlords, however, it was a year of growing frustration as market times for rentals and for-sale housing stretched to weeks, sometimes months, and one-day market times faded to a sweet memory.

Nonetheless, when all the numbers are in the Minneapolis Area Association of Realtors expects 2004 to be another record year, and the Builders Association of the Twin Cities says 2004 will run a close second to its best year on record: 2003. Mortgage interest rates too will end the year at the lowest level in nearly 30 years.

Nationwide, new and existing home sales are expected to fall 5 percent as mortgage rates rise to 6.25 percent, according to Doug Duncan, chief economist with the Mortgage Bankers Association in Washington, D.C.

In the Twin Cities area, 2005 should usher in a relatively calm, slightly slower year for buyers and sellers, according to George Karvel, professor of real estate at the University of St. Thomas, who said people's fears of plummeting prices are unwarranted.

"There would be no expectation of any collapse in housing prices," Karvel said. "There is no bubble."

Existing home sales

During 2004 the market for existing homes went from great to good as the number of houses for sale peaked late in the year while the number of buyers remained fairly static. That caused market times to rise as buyers took advantage of the growing choices.

Even so, pending sales, closed sales and new listings all are expected to break records once the final numbers are tallied in early January, said Mark Allen, chief executive officer of the Minneapolis Area Association of Realtors.

According to preliminary data, there were 58,000 closed sales this year, up about 2.6 percent from 2003 -- the previous record-setting year, Allen said.

So if you were a buyer, you probably found yourself in the driver's seat. The number of houses for sale rose to the highest level in more than five years, giving buyers more options than they've had in years. That also gave many sellers a headache. After four years of market times in the single digits, that has increased to several weeks or more in some areas. Mid- to upper-bracket houses in the suburbs are among those taking the longest to sell.

What can buyers and sellers expect in the coming year? That largely depends on what happens to the economy and to mortgage interest rates. Current projections and a promising jobs outlook indicate that the market will remain healthy, but might not break records, Allen said.

Continued economic growth is expected to drive home sales through the coming year. But at the same time, a stronger economy is likely to cause mortgage rates to rise, softening the increased demand that could come with a better economy.

"The good combined with the bad should result in a year that's very similar to this year," Allen said.

Annual sale price increases over the past year are expected to finish above 7 percent during 2004, but drop into the 4 to 6 percent range this year, he said. Historically speaking, that's still not bad. During a normal market the median sale price increase is more likely to be in the 3 to 4 percent range.

"All signs are that growth of appreciation should moderate a little bit, which is ultimately healthy in the long run," Allen said.

Rental market

In many ways the rental market mirrored many of the dynamics of the for-sale housing market, but for different reasons.

There still were plenty of renters out there shopping for an apartment, but with a rising supply of new apartments hitting the market, landlords had to scramble to get renters to sign leases. For most of the year vacancy rates dipped slightly from the 7 percent range to the mid-6 percent range, but not enough to justify significant rent increases. That left rent prices stagnant. As of the end of the third quarter, the last period for which data is available, the average rent price was $851 -- just $6 higher than last year at this time.

"We saw some progress, but I don't think the progress met the expectations of many people in this market," said Brent Wittenberg, vice president of GVA Marquette Advisors. "We saw some job growth, but that didn't translate into apartment demand."

Wittenberg estimates that the vacancy rate in 2004 will be between 7 and 7.3 percent, down from 7.6 percent a year ago, but up considerably from 6.7 percent during the third quarter.

The rental market suffered at the hands of the housing market, which continued to steal renters who took advantage of historically low interest rates to become homeowners. However, when it came to low-income housing, demand still exceeded supply.

The market is considered to be at equilibrium when the vacancy rate hits 5 percent, Wittenberg said, and historically, a 7 percent vacancy rate isn't bad. But many landlords were spoiled by vacancy rates that dropped to the rock-bottom lows of 1 to 2 percent in the days before mortgage rates dropped to historic lows and the housing market went bonkers.

That's why property managers are digging deep to snag renters. Many are offering concessions of 1 to 2 months free rent, no application fee and other perks, particularly in communities where there's been significant construction.

In Plymouth, for example, competition increased when several new luxury projects hit the market. Some property managers are now reporting vacancy rates in the 10 percent range. In some areas the market got tighter because of the apartment-to- condominium conversion trend. In downtown Minneapolis, for example, where Riverwest Apartments is converting, the third-quarter vacancy rate fell to 5.1 percent.

During the coming year renters can expect a favorable market as long as mortgage rates remain fairly low. If rates spike, that could end the exodus from the rental market and increase the competition for apartments as potential home buyers fall out of the market. Wittenberg expects vacancy rates to remain in the 7 percent range with rent prices remaining steady.

"Hopefully we'll see a more robust job market resulting in more demand as interest rates rise," Wittenberg said.

New construction

Low mortgage rates have been a boon to home builders, too, and over the past couple years builders have been working year-round at break-neck pace trying to keep pace with demand.

Rick Kot, 2004 president of the Builders Association of the Twin Cities and president of R.A. Kot Homes Inc., said 2004 will go down as the second-most-active year in recent memory. From January through November, the number of permits issued in the Twin Cities is 3 percent behind last year.

Business is good largely because of strong demand for new townhouses and condominiums from baby boomers and empty nesters seeking liberation from snow shovels and rakes. Throughout the year attached housing has consistently comprised about half of all new units built in the metro area.

As of November, home builders were issued 10,073 permits for 17,010 planned units at a value of $3,038,984,769 in the metro area, according to the Keystone Report, which is commissioned monthly by the Builders Association. That report does not include downtown Minneapolis or St. Paul and a small number of suburbs.

During the coming months home builders could find themselves with a little more time on their work-weary hands as the market moderates. During the last months of 2004 the number of permits pulled -- new home sales are not tracked locally -- dropped precipitously compared with 2003. In November, for example, builders pulled 20 percent fewer permits with plans to build 11 percent fewer units.

During the coming year builders expect demand for new housing to slow slightly. That might translate into more incentives, including financing deals, option upgrades and closing cost assistance as they compete for business.

"Our builder members are relatively optimistic about 2005," Kot said. "All forecasts suggest the Twin Cities will continue to need new housing production."