Price cuts are becoming more common on homes for sale in the metro area, a sign that higher interest rates are cooling one of the hottest parts of the Twin Cities economy.
In June, about 14% of active sellers reduced the price of their home at least once, according to Zillow.com. That’s still below the national average, but it’s up from 10% in May and 7.6% in April.
Since the mid-2010s, residential real estate in Twin Cities has been a seller’s market, and it has become more skewed in favor of sellers during the pandemic.
But with the mortgage rate spike that began earlier this year, buyers, sellers and agents have been waiting for the market to start turning back in favor of buyers. Data for May and June sales activity suggests that is the case, but only slightly.
“Of course things are rebalancing in a way that hopefully eases the landscape for buyers, but we’re still pretty far from becoming a buyer’s market,” said David Arbit, research director for Minneapolis area real estate agents.
While more and more sellers are offering discounts, few are cutting prices. The median price drop on the subway in June was just 3%. Meanwhile, buyers are also dealing with diminishing purchasing power caused by rising mortgage rates. And the number of homes for sale remains close to historic lows.
“For what we wanted, I felt like there was little choice,” said Denver’s Jenna Gerlach, who is watching the market closely. She and her husband Mike want to move to the Twin Cities this fall.
“It feels like there’s less inventory and we don’t know what’s going on with [mortgage] rate,” Gerlach said.
Rates have been volatile, putting potential buyers on edge. Although the Federal Reserve raised its key rate again on Wednesday, mortgage rates fell slightly last week.
A weekly survey released on Thursday indicates that the 30-year fixed rate mortgage is averaging 5.30% with an average of 0.8 points. That’s down from the previous week, when it averaged 5.54%. A year ago at the same date, the 30-year average was 2.80%.
Rising rates mean fewer people are able or willing to buy a home in the Twin Cities. During the month of June, nearly 20% fewer buyers signed purchase contracts compared to last year. In the first three weeks of July, the decline seems even more pronounced.
On average, people who put their homes up for sale in June received an offer in just 21 days. It was a day faster than the previous year and the fastest pace in nearly a year, according to MAR.
“The pace remains historically fast and still represents half of the market time of 2018, 2019 and 2020,” Arbit said.
Indeed, although buyers had more choice at the end of June than last year, there is still a dramatic shortage of listings. At the current rate of sales, there were only enough homes on the market in June to last 1.6 months. Although this figure is up from 1.3 months this time last year, it is still well below the five- to six-month supply seen as balanced between buyers and sellers.
This imbalance is why the market is still relatively competitive and many sellers still get more than their asking price. On average, sellers in June received 103.3% of their list price. Although this figure is down from 104.1% a year earlier, it is still the second strongest June in 20 years.
“That still leaves us in a strong seller’s market, but not as strong as it was last June,” Arbit said.
At the national level, a deceleration of the real estate market is clearer. Mortgage applications fell last week for the fourth consecutive week, the Mortgage Bankers Association reported. And a pending home sales index fell nearly 9% in June, the National Association of Realtors said last week.
Kath Hammerseng, a Twin Cities area sales agent and former president of MAR, said buyers have become more hesitant. Some are assessing the interest rate situation and the impact of rising property prices. Last month, the median price of all closures rose nearly 9% to a record high of $380,000.
She said the housing market was similar to 2018 and 2019, when buyers had a bit more time to make decisions and sellers had to work harder to prepare their homes for sale.
“More than ever, homes that aren’t turnkey or competitively priced…persist,” she said. “Sellers who are overconfident don’t see the results they thought they were seeing. On pretty ones, buyers are always competing and it’s the same multiple offer situation.”
Arbit said while the market adjusts, it is unlikely to pivot quickly to a more buyer-friendly market.
“It doesn’t happen overnight or even in a matter of months,” he said. “We’ve been underbuilt and undersupplied for so long that it will take time to tip the scales back to a balanced market, let alone a buyers’ market.”
The Gerlachs were unwilling to wait. They planned a buying trip to the Twin Cities area in September, but like many first-time buyers, the threat of rising rates made them a bit more eager to buy sooner rather than later. And friends who had shopped in the neighborhood warned them that the best homes always sold quickly, and sometimes for more than the asking price.
Plus, they were somewhat surprised when one of the first homes they visited remotely checked almost every item on their wishlist.
So almost immediately after taking several virtual tours this month, the Gerlachs offered sellers of a house in Maple Grove slightly above the asking price, even though there were no other offers. The couple knew homes in the neighborhood were selling quickly and wanted to avoid a competing offer.
“We didn’t feel like we were in the driver’s seat. It really felt like it was a seller’s market,” Jenna Gerlach said. “I just didn’t want to be in a position where we had to make an offer and settle for a house we didn’t want.”
At the top of his wish list was a fireplace and a large yard for their boxer. Within a day of listing the house, their seller quickly accepted their offer. The Gerlachs prepare to move.