Rising mortgage interest rates and home prices, along with a shortage of housing throughout the market has some fretting about a real estate crash on the horizon. However, local real estate professionals and lenders are cautiously optimistic about the coming year.
Doug Kman, president elect of Lake Superior Association of Realtors, and a licensed realtor in Minnesota and Wisconsin, said the current competitive market is still tipped in the favor of sellers, with a dearth of inventory helping to push up prices.
Nonetheless, while there has been a drop off of buyer optimism in recent months, Kman said he believes a more balanced attitude is in the offing this coming summer.
“I think we are going to see a better balance of available houses to buyers and therefore we will see prices drop a bit with a drop in buyers writing competitive offers,” he said.
During the last two years Kman noted prices had been driven up by buyer competition, where in the recent past sellers would quickly get several offers over the list price creating a wave pushing up comparable sales.
A question that Kman said is lurking in many minds is whether another housing collapse is on the horizon, however, he doesn’t believe that’s the case.
“A lot of people are wondering if we’re going to see another bubble because of the rising home prices, but I don’t have that concern because the charts are not the same, foreclosure rates are very low, the feds have raised interest rates to avoid an economic issue and everybody’s on the lookout for it,” he said.
Another factor Kman pointed to that he believes will avert a replay of 2008’s bursting real estate bubble is the character of the millennial generation.
“Millennials are the largest home buying source in the market, and because they saw the effects of the housing collapse they are living more modestly and being more responsible in this market,” Kman said.
Research from the National Association of Realtors shows millennials are putting up to 10 percent of a home purchase down, staying in their first homes an average of two years longer, and appear to be borrowing less.
With the merger of the Realtors Association in the last year, previously split between Duluth and Superior, Kman said Northwest Wisconsin sales are no longer trailing Northeast Minnesota.
“Previously a realtor licensed in Minnesota wouldn’t know about homes in Wisconsin and now they are much more aware going both ways and listings on either side of the bridge are getting shown,” he said.
While property taxes are higher in Douglas County, home values are much lower, and Kaman said that has led to a leveling of the playing field for buyers.
Housing shortages are definitely a factor for rising home values, something that Kman called a housing crisis in the region. What it would take to change the dynamic, in Kman’s opinion, would be a radical shift in education in the trades.
“Builders are lacking skilled labor to hire, and LSAR has been talking to legislators about ways they can help get more workers into that career path,” said Kman, “If builders build houses that fall into the affordable housing market those are going to fly off the shelves.”
According to Kman, the hidden cost of construction can be found in city-associated costs.
In a study Lake Superior Area Realtors (LSAR) took part in last year Kman said costs like utility hook-up and permitting pushed Duluth to the top of the list for most expensive new housing construction over Superior or Fargo-Moorhead.
At Superior Choice Credit Union, with offices in Duluth, Superior, Hermantown, and seven other locations in Northwest Wisconsin, Linnae Currie, assistant vice president of mortgage services noted first-time homebuyers made up the majority of their mortgage loans this year.
Several robust down payment assistance programs in Minnesota and Wisconsin have done much to keep business going for Superior Choice, with first-time home buyers closing on mortgages there at a rate of between 10 to 20 homes a month.
However, Currie said there is a disparity between available homes at the lower end of the market and demand.
“What we are seeing is lower and medium priced houses turning over fast making it hard to find a home for those in that market and a lot of investors are trying to pick those houses up for rentals, so buyers have to be quick,” Currie said.
On the flip side, Currie said more mature borrowers are driving a rise in the credit union’s construction loans, where individuals are able to borrow to build if they prove they have the skills. She noted most banks will only allow construction loans for contractors.
“With too few existing houses out there for second or third time homebuyers self-builders are building their own homes and we have done more construction loans in the last year than we have ever done,” she said.
Joe Johnson, senior vice president and manager of the mortgage department at North Shore Bank in Duluth, said despite slight interest rate increases his 40-year perspective in the lending business sees rates still at historic lows at under 5 percent.
With a significant number of loan applications from pre-qualified buyers who have not found houses, Johnson said a more conscientious buyer has emerged.
“In the past buyers would look around at homes and then apply for a loan, now they come in and see what they can afford ahead of time and get prequalified before they start to look,” Johnson said.
First-time homebuyers are leading the ranks at North Shore Bank as well, but Johnson said that while the number of closed loans remains fairly constant this year, the dollar amount of loan applications are being pushed higher by demand outstripping inventory.
He also noted a bottleneck being created by limited housing stock for people who are ready to upgrade to their next home, with construction lending down at North Shore where building loans are limited to individuals working with contractors.
“Everybody’s looking for ways to meet the need for more housing units, but the difficulty is the high cost of materials and construction holding that back,” Johnson said.
Commercial real estate, while low on inventory in some areas, is still moving nicely according to Tom Acton, RE/MAX realtor and LSAR board member.
“Things are much better in the last couple years than five years ago, and generally more commercial property is moving and that translates into how we realtors feel about it, and then to buyers feeling more optimistic,” Acton said.
The phenomenon of diminishing retail brick-and-mortar presence is being felt in Northeast Minnesota and Northwest Wisconsin, but Acton said creative solutions are taking up the slack.
“It’s not a good seller’s market for certain properties, just like we are seeing everywhere with retail mall space, but main street stores are getting snapped up and mixed use is growing with shops in a lower level and converting to living space upstairs and that tells me that there is money to invest out there,” he said.