Tuesday, July 7th, 2015

By David Arbit on Friday, June 26th, 2015

COMPARING SQUARE FOOTAGE TRENDS IN THE NEW CONSTRUCTION AND PREVIOUSLY OWNED SEGMENTS

New construction prices not only recovered far faster than previously owned prices, but they have also reached an all-time high (see chart). The median sales price for new construction was about $268,000 in 2009 but has since soared to new highs of just over $376,000. Previously owned prices, by contrast, reached $228,000 in 2006 but are now at $205,000. What’s driving this, you ask?

A multitude of factors have encouraged new home prices to stretch to new heights. Builders, contractors and suppliers will tell you that input costs have risen and that is true. Labor, copper, concrete, PVC, drywall and other related commodity prices have all risen lately. Steel prices, however—which make up a small share of overall construction costs—have fallen as China has flooded the global market with cheap steel. China now produces as much steel as the rest of the world combined. Lumber prices increased over the last few months, but have mostly declined since 2013. Lumber prices on the Chicago Mercantile Exchange are on-par with 2010. Let’s not digress too much.

Square-Footage-Trends-by-Segment-310x225

Something else noteworthy is happening, and this graph illustrates it pretty well. Though perhaps unsurprisingly, the total square footage of new construction is increasing at a far faster rate than the previously owned segment. Between May 2005 and May 2015, the median square footage of newly constructed homes rose 65.2 percent. During that same period, the median square footage of previously owned properties only increased 7.1 percent. For new construction, the typical home was built with 1,614 total finished square feet in 2005 but that figure grew to 2,667 total finished square feet by 2015. By contrast, the typical resale home had 1,700 square feet in 2005 but has only risen to 1,821 square feet as of May of this year. Interestingly, previously owned homes tended to be larger than new construction in 2005.

The nature of previously owned properties is that they don’t change that much. Those properties are already built. The 7.1 percent increase can be explained by two different dynamics. First, those who are selling and buying resale homes are tending to list and purchase slightly larger properties. Second, through remodeling projects such as a master bedroom addition or finishing off a basement or attic space, the existing housing stock can increase in finished square footage even though the foundation is already in the ground.

So what does this all mean? Well for one thing, those who have ruled out purchasing a newly built home because prices are at all-time highs might reconsider once they realize what’s causing that. Builders are constructing larger and larger homes, but not every newly built home is enormous and over $1 million. In fact, new construction can be fairly competitive with existing resale properties in certain areas and price points. Additionally, though the median sales price is at an all-time high, the price per square foot is not even back to bubble levels (see chart).

Another factor to keep in mind is that a lot of new construction in 2005 was condo-centric, particularly in and around both downtowns. As the condo bubble burst, development shifted toward single family products on larger suburban lots. Condos obviously tend to be smaller than single family homes, so that was certainly constraining square footages 10 years ago. In other words, a low baseline can impact this sort of analysis as much as if not more so than the current period. The large increase in new construction may be explained by a low 2005 figure as opposed to a high 2015 figure, though both dynamics

As we become ever more cognizant of energy efficiency, carbon footprints, insulation and everything that comes with it, there is some anecdotal evidence that smaller housing products are gaining popularity and it seems to be consumer-driven. There are even entire communities of “micro homes” (see article). So, despite the trend in new construction, perhaps bigger won’t always be better.

Posted in The Skinny |
Thursday, June 25th, 2015
By David Arbit on Thursday, June 18th, 2015

Assuming-5-pct-appreciation-310x225
After nearly 10 years, home prices are within 6.3 percent of their record high seen in June 2006. We have been here before, but we are in a different environment these days. The labor market has benefited from the longest stretch of private job growth on record, the stock market is at all-time highs, corporate balance sheets have seldom looked this good, we have a more regulated lending environment, consumers are deleveraged, our population has grown and consumers are more cautious this time around.

As we near (errr return to) “peak” pricing, there are several important items to bear in mind. First, this is not a brand new high in some foreign land, it is a return to where the market was 10 years ago but with better fundamentals (see above). Second—and as the chart suggests—if you assume that prices had followed their long term trend of increasing at 5.0 percent per year (nominal, not adjusted for inflation) as they have, we are still not back to where we would be assuming that rate of increase over the last 20 years. Third, this market is not fueled by irrational, unjustified speculation and exuberance—a leading cause of bubble-itus. Rather, it is fueled by low interest rates, rising rents, job growth, a diverse and robust local economy and slowly rising incomes.

Those who remember paying $0.05 for a cup of coffee or a candy bar like to remind us: prices will rise. It is inevitable. To expect home prices not to follow that trend is unrealistic. Once home prices began recovering, it was only a matter of time before they surpass their previous peak. Given all the improvements we have seen in the market and economy, it is no surprise we are back to where we were. But this time, under much better circumstances.
From The Skinny Blog.

Posted in The Skinny |
Monday, June 22nd, 2015

Where has the Twin Cities real estate market been and where is it heading? This monthly summary provides an overview of current trends and projections for future activity.

Posted in Monthly Skinny Video |
Monday, June 22nd, 2015

For Week Ending June 13, 2015

When Lewis and Clark looked over the horizon and saw the Pacific Ocean, they were charting the future while applying lessons learned on a long, historic journey. In the housing market, it is also important to look to the future with a nod to the past. The market has come a long way since the burst of 2008. May we always thank the past for teaching us how to pursue our futures. And may we always have a market interpreter as able and wise as Sacagawea.

In the Twin Cities region, for the week ending June 13:

  • New Listings decreased 0.8% to 2,058
  • Pending Sales increased 21.1% to 1,523
  • Inventory decreased 6.0% to 16,512

For the month of May:

  • Median Sales Price increased 6.7% to $224,000
  • Days on Market decreased 5.0% to 76
  • Percent of Original List Price Received increased 0.7% to 97.5%
  • Months Supply of Inventory decreased 9.8% to 3.7

All comparisons are to 2014

Click here for the full Weekly Market Activity Report. From The Skinny Blog.

Posted in Weekly Report |
Monday, June 15th, 2015

For Week Ending June 6, 2015

As we approach the halfway point of the year, we’ll begin to see some midterm report cards from anyone who wants to share an opinion or write a headline. If you have been reading these weekly excerpts, you already know that we are tracking along a predicted path. The residential real estate market was expected to be good at this point. Hiring is up, unemployment is low, sales are up, rates are low, prices are up and inventory is low. The gentle sway of up and low is making for an enjoyable ride, with no bubbles in sight.

In the Twin Cities region, for the week ending June 6:

  • New Listings increased 1.4% to 2,183
  • Pending Sales increased 10.9% to 1,413
  • Inventory decreased 5.2% to 16,253

For the month of May:

  • Median Sales Price increased 6.7% to $224,000
  • Days on Market decreased 5.0% to 76
  • Percent of Original List Price Received increased 0.7% to 97.5%
  • Months Supply of Inventory decreased 12.2% to 3.6

All comparisons are to 2014

Click here for the full Weekly Market Activity Report. From The Skinny Blog.

Posted in Weekly Report |

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