Is it a bear market for housing?

Nationally, home prices are down. The slowdown isn't hitting as hard in the Twin Cities, where the median sale price last month remained flat at $229,900. Either way, the industry is hurting.


Jim Buchta, Star Tribune

Published October 26, 2006 in the Star Tribune

Last update: October 26, 2006 – 9:12 AM

Single-family home prices nationwide fell 2.5 percent in September, their biggest year-over-year decline since 1969 and the second month of decline, according to data released Wednesday by the National Association of Realtors.

Nationwide, that median sale price was $219,800. The median price for all housing types fell 2.2 percent, to $220,000, from $225,000 a year earlier.

The slowdown isn't hitting as hard in the Twin Cities metro area, where the median sale price for all housing types last month remained flat at $229,900 and sales activity is on pace to be the third-best year ever.

What happens next is anyone's guess, but already, everyone from agents to builders to appraisers is starting to feel the pain.

The slowing market is forcing some real estate agents and builders to embrace unusual sales tactics.

For Sheri Fine, an agent with Edina Realty, that means paying a neighbor kid $50 to stand along a Minnetonka street in a bear costume and direct traffic to one of her listings.

"Did that get attention? Yes it did. Did it bring a buyer? No," Fine said.

Home builders are among those most affected. In September, Twin Cities builders posted one of their worst months in a decade. Last month, the number of planned units to be built in the Twin Cities metro area was down 48 percent, and total permit activity was down 23 percent from January through September, according to the Builders Association of the Twin Cities.

For example, Hanson Builders of Andover, like others, has turned up the volume on its efforts to sell its inventory. On fliers and its website, the company is touting year-end close-out sales with offers of thousands of dollars in price reductions.

David Seiders, chief economist for the National Association of Home Builders, expects an 11.5 percent decrease in housing starts this year, followed by another 11.7 percent drop next year.

Builders blame the declines on fickle buyers, who are delaying new-home purchases in fear they'll have trouble selling the homes they already own.

Even the state's beleaguered manufacturing industry is feeling the heat, as materials suppliers are reducing production of everything from air conditioners to wallboard.

On Tuesday, Pentair Inc. of Golden Valley, which makes pumps and filters for swimming pools and spas, blamed the slowing housing market for a 22 percent drop in the company's third-quarter earnings.

And real estate agents are feeling the pinch as they compete for a smaller supply of buyers. Earlier this month, the Minnesota Association of Realtors posted a brief note suggesting that agents who handle only a few transactions every year consider a new career to help improve service and protect the current commission structure.

Aberration or trend?

Twin Cities-area home-sale prices held steadier than those in the Midwest in general. Sales results were better than in certain parts of California, where sales are down 31 percent, and in Boston, which recently posted its steepest price decline in almost 15 years.

And Minnesota's economy is resilient enough to withstand a slowdown, according to Gary Stern, president of the Federal Reserve Bank of Minneapolis. During a broad discussion earlier this month about the health of the region's economy, he cited two variables that are in this market's favor: Mortgage interest rates and high employment. At this point there's no bad news on either front, he said.

In its most recent economic outlook, Freddie Mac expects mortgage interest rates to average 6.4 percent during the fourth quarter of 2006. That's well below the 7 percent figure forecast earlier this year, corresponding to the Federal Reserve Bank's restraint in raising short-term rates.

On Tuesday, the Fed announced plans to leave its benchmark rate unchanged for the third consecutive time. And the most recent unemployment figures, a key indicator of the health of the local market, were below the national average.

Are the latest sales numbers an aberration or a trend?

Chris Galler, senior vice president of the Minnesota Association of Realtors, is among the optimists who believe that the Twin Cities area will continue to fare better than most of the rest of the nation, but he cautions anyone who expects the market to snap back to the record activity levels of the past couple years.

"Coming out of this isn't going to be as fast as some people believe," Galler said.

To illustrate the problem, he compared the real estate industry to the auto industry. When consumer loan rates dipped a couple of years ago and dealers offered irresistible incentives, people who weren't even in the market to buy a car decided that there never would be a better time.

The same is true for the real estate industry. "They've sold forward," he said. "People made a move sooner than they would have naturally if conditions had been different."

He expects the slowdown to continue into 2007 as unsold homes find buyers or are taken off the market, and as demand ramps up again.

"People do not sell very frequently; they generally make three moves in a lifetime," he said. "And so you're extending the length of time people need to get back into the marketplace."

Jim Buchta • 612-673-7376 • jbuchta@startribune.com



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