Why meager price gains might be good for Twin Cities homebuyers

House prices in the Twin Cities are rising far less than in the rest of the country, sobering news for equity-driven sellers, but a relief for deal-seeking shoppers.

As of July, prices in the metro posted only a 2% annual gain, according to the latest Case-Shiller Home Price Index, a closely watched report that tracks repeat sales of the same single-family houses. That's far below the national average, much lower than historical averages and somewhat bittersweet news for those like Nate Lefebvre, who experienced both perspectives on price when selling his starter house and purchasing a larger one.

With mortgage rates now at more normal levels but still double what buyers enjoyed two years ago, gone are the days of jaw-dropping offers that triggered double-digit price gains. Instead, house prices are rising in line with normal inflation rates, said Andrew Babula, director of the real estate program and the Shenehon Center for Real Estate at St Thomas.

"It's not surprising," Babula said, noting in the long run, more moderate increases are much healthier than the kinds of frothy jumps still happening in some parts of the country.

This might make homeowners fret, but there's a silver lining for homebuyers: More muted price gains are less likely to offset recent declines in mortgage rates, boosting the power of shoppers in virtually every price range.

"Lagging performance does create a value effect," said Brian Luke, head of commodities, real and digital assets at S&P Dow Jones Indices. "[That] could create more value in the longer term."

Luke said while price growth in the Twin Cities has been relatively healthy and steady through the years, the area has lagged the national average by about 10% since at least 2020.

Babula noted the Twin Cities — and Midwest markets in general — tend to be more stable than the coasts, resulting in less-dramatic fluctuations in either direction. Minnesota's population growth, which drives demand for housing, has increased at a slow and steady pace but is below the levels seen in many other markets, he said.

"The Twin Cities is also not as land [supply]-constrained as many of the coastal markets, so it is easier to keep pace with increased demand," he said. "We saw large price gains early in the pandemic fueled by demand for single-family homes and low interest rates. However, as interest rates climbed over the past two years, demand slowed, so there was less upward pressure on prices."

Babula said the recent declines in price gains are in no way a sign of an impending housing crash akin to the one that triggered the Great Recession in 2008.

"People remember how much things dropped in '07 and '08 and are concerned, but that was a unique situation driven by a lot of factors that we're not experiencing today," Babula said. "I don't expect to see any kind of substantial crash."

"We don't get those high highs and those low lows," he said. "Even if a big countrywide crash [happens], we don't see prices come down as dramatically as they have in the past. We saw prices come down but not nearly as substantially."

Even when adjusted for inflation, home values in the Twin Cities have kept pace with inflation, according to the Case-Shiller methodology. On average, home prices in the Twin Cities have appreciated nearly 35% in the past five years, with the biggest gains happening among the least-expensive houses. Case-Shiller breaks the metro-level data into three price tiers, representing the least expensive houses, those in the middle and those in the the top third.

By a large margin, the lowest price tier increased the most, rising 42% in the past five years and outpacing the top tier by nearly 10%.

A lack of house listings affordable to first-time buyers and those wanting to downsize are partly driving price gains among the least-expensive houses. Already, softer gains and slight declines in mortgage rates in the past few weeks have made homebuying in the Twin Cities more accessible.

Housing affordability in the Twin Cities has increased for the past two months, rising nearly 8% in September, according to a Minneapolis Area Realtors analysis that tracks how much income a buyer would need to purchase a median-priced house.

The Case-Shiller index, often considered the most accurate way to track changes in prices, has closely mirrored monthly price data from the Minneapolis Area Realtors, which tracks the median price of all sales, including condos and townhouses not part of the Case-Shiller equation.

On Tuesday, the group said the median price of all sales during September was $380,000, a 2.4%-increase from the same time last year. That gain came as new listings increased 4.2% while pending sales were up only 1.5%.

While David Arbit, director of research for the state and local Realtors groups, said the Case-Shiller report might not be a true picture of everything that's selling, it's a good measure of how the Twin Cities stacks up against other parts of the country.

"Buyers will benefit as price gains slow because incomes are rising faster than prices," he said. "But sellers are always excited about strong appreciation. It may be a wash if the next home they buy has also appreciated just as much as theirs."

Lefebvre understands that conundrum. He and his wife have spent the past several months planning the sale of their starter house and the purchase of a larger one.

A little more than a decade ago, they paid $230,000 for their four-bedroom home in Bloomington, in top-notch condition on a half-acre lot.

Listed for $385,000, the house drew 14 showings within three days, plus eight open house visits. Those about two dozen prospective buyers led to three offers, but just one merited serious consideration.

"I thought that with that many showings, we would have been in more of a bidding war," he said. "The feedback we were getting is that it was priced right and accordingly, but it didn't turn into a bidding war like I've heard other people have had."

One buyer was willing to pay a bit more than the asking price but could only come up with a 5% down payment. Another was an investor who wanted to pay less than asking and turn the house into a rental, but Lefebvre "didn't want to sell to a company" and "do that to [the] neighborhood."

Ultimately, the couple sold it to a buyer who was able to offer a larger down payment and was willing to pay a little more than the list price. Still, given the high interest in the house and the fact there are so few houses in that price range for sale, Lefebvre was frustrated it didn't didn't sell for more.

"Could we have waited it out? Sure," he said. "But that's the cost of trying to offload it."

At the same time, how much he had to pay for a bigger house was a bit flummoxing. Though the Lefebvres thought they could land a larger home than the one they had for $500,000 to $600,000, they found few acceptable options.

They ended up spending more than that after visiting an eager local builder, but they received more incentives as well: a credit to help buy down their mortgage rate or assist with closing costs and a free gas fireplace in their fully furnished lower level.

"It felt like we did have more leverage," Lefebvre said of being a buyer. "Maybe it was just this builder, but they were very attentive. Their heart was in the right place."