Twin Cities Real Estate Update-August 2013 Interest rates hit their lows early this summer and have inched up to a still-low 4.5%. The combination of low interest rates, low prices and rising rent costs have continued to drive sales with pending sales up 13.6% over the past 3 months from a year ago and the resultant inventory decline of 14.3% over the same period.

What does the future hold? There are several issues that could impact the real estate industry.
(1) The federal government is proposing reducing their bond purchases. Just the threat of this has caused 10 year bond yields to go up which tends to drive up mortgage rates.
(2) The federal government is also contemplating what to do with Fannie Mae and Freddy Mac, the government-sponsored entity (GSE) mortgage guarantors that the government had to bail out to keep solvent. These GSE's could be privatized with banks and other mortgage originators taking more of a risk in mortgage losses. This would likely further drive up the costs of obtaining a mortgage.
(3) Past home-owners who lost their homes to foreclosure or short sale are beginning to re-enter the market as potential home-buyers, this will drive up demand and further drive down supply.
(4) Home investment companies have blossomed over the past year. Most homes for sale are seeing at least one, if not several offers to purchase from out-of-state corporations that are buying thousands of homes to build their rental portfolios. This will also potentially drive down supply.

Summary
As the economy rights itself and employment continues to improve, people will return to home-ownership as a historic cornerstone of personal stability and wealth-building. Price appreciation is expected to be around 4-6% over the next 12 months due to the resulting increasing sales. This appreciation will bring homeowners that are currently unable to sell their homes back above water which will allow inventory to increase and the real estate market to continue its recovery. All this could be impacted by the feds moves which drive up interest rates but as long as interest rates remain below approximately 6%, the housing market should remain healthy and stable.

Special thank-you to the Minneapolis Area Association of Realtors:
Data and graphics are courtesy of the Minneapolis Area Association of Realtors

Real Estate Update

Summary: Inventory is down, Rates are going up, and Prices are inching up

Mortgage Rates
At the past couple federal reserve meetings, the chairman has announced that with unemployment improving, he will soon phase out "quantitative easing" or the bond purchasing programs. This has driven down the price of 10 year notes (if you pay a lower price, that means your yield goes up on a specific face value bond). 30 year mortgage rates follow 10 year bond rates so mortgage rates have also increased. Mortgage rates have risen from 3.5% to 4.25% over the past 30 days.
Inventory
With the number of homeowners who have lost their homes to foreclosure, there is an ever-increasing number of people renting. This has led to a very low 2.8% vacancy rate (Marquette Advisors, May 2013). Low vacancy rates has led to increases in rent amounts, driving home buyers and in particular, 1st time home buyers into the market place and driving inventories of homes for sale to 10 year lows. Again, as with rent amounts, supply and demand is driving up the prices of homes with the median price of a home in the Twin Cities up 14.9% from this time in 2012.

Is There a 3.8% Health Care Sales Tax on Real Estate?

The 3.8% real estate sales tax rumor is mostly false.
There's a popular rumor being circulated that starting January 1, 2013, the health care reform bill will add a sales tax to all home sales. NOT TRUE.
Now, before I go into details, a caveat -- I am NOT a tax expert! Consult your tax professional for the details on how your taxes could be affected.
Who/what will be taxed:
Adjusted Gross Income (AGI)

• above $250,000 AGI married filing jointly
• above $200,000 AGI for single filers

Taxed Amount (principal residence home sales)

• gains above $500,000 if married filing jointly
• gains above $250,000 for single filers

For more details on the tax, including examples for various scenarios, a brochure is available from the National Association of Realtors.

Home Inventory at Low Levels

Home sales in the Twin Cities are up 29.4% year-to-date while the number of homes for sale has dropped 31%.

With just a 4.6 month supply of homes for sale, the inventory of homes for sale is below the 5 month supply that is considered a "balanced market" meaning the market is considered tilted in favor of sellers, a welcome change to many home-owners. This has led to a rise in the percent sale price compared to list price with sellers receiving on average 94.6% of their list price compared to 91.1% a year ago.

Driving this decline in inventory is a drop in bank-owned and lender-mediated short sale homes listed which are down 19.9% and 25.7% respectively while "traditional" owners selling their homes are up 4.1%.

With rents up, exceeding the cost of home ownership in many cases and interest rates at all time lows, the rate of home sales is not expected to decline, at least through the typically robust summer home-buying season.

Rentals Heat Up

Economic uncertainty and the high numbers of foreclosures are causing rental properties to become a hot commodity.

Minneapolis vacancy rates were at an incredibly low 2.5% in Minneapolis in Q4 of 2011 while nationwide rents went up 0.4% in Q4 and have gone up around 2% for all 2011.

Investors including some that normally finance and build other types of buildings have jumped into the apartment building fray leading to some speculation of a pending oversupply.

Add to this the federal government with a glut of Fannie Mae and Freddie Mac foreclosures. Some are calling for the federal government to rent these homes rather than continue to sell them which is driving down prices.

Refinance Tips

Interest rates are at all time lows so it's a great time to think about refinancing.
I use a thumb-rule of 1% to determine if it makes sense to refi. If you can lower your interest rate by 1% or more, just do it providing you have at least 7 years remaining on your mortgage. It will typically cost around 3% of your new mortgage amount in closing costs to refinance so the pay-back period for a 1% reduction in interest is roughly 3 years.

How do you choose a mortgage product? (ARM, fixed rate, 10 yrs, 15 yrs, 30 yrs, ...) Talk with your loan officer - they're the experts, and you should also decide what your personal goals are.
Get out of debt quickly? A 15 year mortgage with slightly higher monthly payments but lower interest rate may be best.
Planning to remain in your home for under 10 years? An Adjustable Rate Mortgage (ARM) which remains fixed at an attractive interest rate for the 1st 3-7 years may be best or an FHA loan which is an assumable giving you a marketing edge over the competition when you sell may be best.

What if you owe more than the home is worth?
The federal goverment, as part of a legal settlement with the big five lenders: Ally Financial, Bank of America (Countrywide), Citigroup, Wells Fargo and JP Morgan Chase, has made re-financing available if your loan was originated prior to January 1, 2009 and is serviced by one of those lenders. There is also HARP2, a federal program available only if your loan is backed by Fannie Mae or Freddie Mac. To find out, you can call your lender or use the websites:
http://fanniemae.com/loanlookup/
www3.freddiemac.com/corporate/,

Before you refinance, it's a good idea to review your credit report - you can do this free of charge once each year by requesting a copy of your credit report from each of the big three credit agencies: Equifax, Transunion and Experian or you can request the report through AnnualCreditReport.com or by calling 877-322-8228.

Market Update

Interest rates remain at AMAZING levels (around 3.75% for a fixed 30 year FHA) and prices seem to have stabilized with inventory driving this bus. New listings are down 15% week over week from a year ago. This combined with sales being up 21% has led to a decrease in inventory of 28% so quite a bit fewer homes to choose from which we were starting to feel this winter. Shadow inventory and the economy are the unknown players here. If the economy and job market begin to soften, that could put a damper on sales and even out the supply-demand curve. Likewise, with new lending regulations causing speedier foreclosure to market times, we could see a slight but noticeable increase in the numbers of foreclosed properties coming for sale which could raise the supply, again evening out the supply-demand curve. Time will tell but regardless, the combination of amazing interest rates and low prices have created home affordability not seen in quite a few years.

Banks Agree to Settle for Unsound Foreclosure Practices
The big four (Bank of America, Citibank, JPMorgan Chase, and Wells Fargo) have agreed to a $394M penalty paid to the Federal Government in response to their unsound practices ("robo-signing") that were identified in early 2011 and resulted in a temporary moratorium on foreclosures.

For more on the action, you can read more at the Federal Government website: http://www.occ.gov/topics/consumer-protection/foreclosure-prevention/correcting-foreclosure-practices.html
Additionally, there will be funds paid to people that were negatively affected by these practices. To help determine if you are eligible for a settlement, you can go to http://www.independentforeclosurereview.com/.