It seems everywhere we turn we are hearing news about the real estate market slowing down. What are the facts, what is opinion, and what’s relevant?
It’s important to consider the source and the statistics cited. Much of the media coverage is national statistics. Like the weather forecast real estate is most relevant at the local level. When I get dressed in the morning I’m concerned with the temperature in Minneapolis rather than a national average. The same local focus is most relevant with real estate markets.
We experience extreme seasonal fluctuations in Minnesota yet it seems we get contacted every year by the media asking us why the market is slowing down. And each year we have to remind them that it’s October.
It’s the longer term cycles that we need to focus on and each of us active in the Twin Cities market knows where we’ve been the last several years: low supply relative to demand with upward price pressure. With prices at all time highs it’s easy to expect the cycle to change soon.
The number of homes for sale and the more relevant “months supply” metric have been in decline for most of the last ten years. And for the last six years they’ve been low enough to apply the upward price pressure that we’ve been experiencing. Eventually higher prices should cause buyers to drop out of the market, encourage sellers to jump in and lead to a cycle change.
There are signs that this may be in sight. New listings have been up while sales have been down slightly over the last six months. The inventory of homes for sale is still dropping but at a slower pace and months supply appears to have bottomed out.
We’ve only tracked these metrics since 2003 but our new listing and closed sales data goes back to 1960. We can measure the tightness of a sellers market by a ratio of sales to new listings – the higher the ratio, the tighter the market. This ratio has only exceeded 80% three times: 1999, 2000 and 2017. It was 78% in 2016 and may end up around there this year. It’s still a strong sellers market but probably past it’s peak strength.
Considering these developments in recent months, it is reasonable to expect the number homes for sale to stop it’s long term decline and start a gradual incline sometime in the next few months. Yet even as it starts to rise it will still be low for a while and upward price pressure will still persist, although not as strong.
I don’t expect the coming cycle change to be as extreme as the last time. Lenders and buyers are making much wiser decisions this time and there should be only a fraction of the amount of foreclosures that brought the market down ten years ago.
In conclusion, the market slow down is mostly seasonal but a longer term cycle change is imminent. It’s no longer beyond the horizon. We can see it coming.