Twin Cities Real Estate: Inventory Improves, and Why You Should Ignore Prices (sometimes)

by Alex Stenback on August 11, 2011

The most excellent data-miners over the the Minneapolis Area Association of Realtors have released their monthly housing report.  As always, packed with meaty information on the Twin Cities Housing Market.

Of particular note is an inventory situation that seems to be improving.  From the press release:

“The 24,328 active homes on the market represent 18.8 percent fewer than last July. That’s the largest year-over-year decline in inventory levels in the last seven years.

Similarly, absorption rates posted their first decrease in a year, improving to 7.6 months supply of inventory. That’s the lowest level in 15 months, indicative of a market moving from the buyers’ favor toward one of balance.”

If you are looking for one place to focus, by far the best indicator of the health of (and the prospects for a full recovery within) the real estate market will be absorption rates and supply. 

Why Supply Matters

When sellers outnumber buyers, it puts downward pressure on prices – sellers are all competing for a limited pool of buyers.  Eventually somebody blinks, and the other sellers then must follow suit.  Happens with flat screens, happens with concert tickets, happens with real estate.

A market where buyers and sellers are aligned  normally has stable prices and perhaps (dare I say it?) price appreciation.

Is The Market Recovered?

We obviously are not “there” yet.  About 5 months worth of supply is considered healthy – we are at just under 8 months throughout the Twin Cities.

Inventory, especially bank-owned (which still is almost 40% of all sales) may have been artificially restricted over the past 6 months as lenders worked to improve their foreclosure processes.  There seems to be a backlog of delinquent loans and properties “in foreclosure” that are not yet on the market. 

This bears watching and may well push inventory levels higher (and put more pressure on prices) in coming months.

What About Prices – Aren’t they down again?

Median sales price in the Twin Cities dropped 11%.  That is meaningful, but do yourself a favor and take any mention of increasing or decreasing ‘median’ or ‘average’ sales prices with a huge grain of salt.  Here’s why:

- Median sales prices are heavily influenced by the ‘mix’ of sales:  When a high percentage of sales are in a particular price bracket, Median prices loses much of it’s usefulness as a price barometer.  In a perfect world, the number of sales would be evenly spread across all price bands.  This is not the case today – the market is bottom heavy, with sales in the lower price brackets outnumbering higher priced sales, which may be skewing Median prices, and registering larger declines than an individual home seller might experience.

- There is no ‘Twin Cities’ real estate market.  These reports encourage you to think of the Twin Cities market as one big homogeneous blob, but that is not the case.  There are 100 or more unique sub-markets in the metro area, each with their own levels of supply, demand, and other characteristics.  The reality is, some markets are seeing prices rise (maybe) and some are seeing prices fall (probably.) Recent case in point here: Some Markets See Prices Rise.

Bottom Line: There are ‘green shoots’ appearing here and there as the market slowly corrects itself from the excesses of the real estate bubble.  Our local real estate market still has issues to work through, and further price declines are probably going to happen, but the major, heart-stopping price declines may be at an end.

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