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Even with temperatures cooling, the Twin Cities housing market remained in its summer swelter of a holding pattern for the week ending August 28. Signed purchase agreements topped off at 636, continuing a sub-700 trend that has gone on for 15 weeks in a row. Prior to that, we had 15 weeks in a row of 700 or more pending sales per week.

Think about that for a minute. There were more pending sales in the metro during the first full week of February than in the last full week of August. And last year at this time, we were consistently hitting 1,000 or more pendings throughout the summer.

All of this adjustment firmly points to the federal tax credit for first-time home buyers that was in full swing both at this time last year and during the winter and spring months of this year. We have returned to a world void of juicy government incentives.

The number of homes for sale has grown to 27,271, up 8.6 percent from the prior year. Increased supply plus declining demand has caused the Supply-Demand Ratio to grow 56 percent in one year's time. This boils down to greater opportunity for buyers and increased challenges for sellers. You're probably used to hearing that by now. We're certainly used to saying it.

Click Here to View Full Weekly Activity Report

Welcome to the new abnormal. Interest rates are hammocked at 55-year lows. Buyer activity is squatting like it’s 1993. There are plenty of available homes in the new abnormal, yet even this favorable buyer’s market hasn’t caught the buyer’s favor. In the new abnormal, the economy is currently driving the housing market, not vice versa.

So where exactly does the market stand in this strange land? Short answer? The aforementioned 1993 in terms of buyer activity and 2001 by way of home prices. The market stands where it is right now due in large part to the second iteration of the first-time homebuyer tax credit. The price free-falls of 2009 could very well have continued, but the credit propped up prices by incentivizing additional demand. And as Sir Isaac Newton put it so eloquently over three centuries ago, every action has an equal and opposite reaction. This absolutely applies to commodity market intervention such as homeownership incentives.

There is nowhere this is more evident than in the accompanying chart. Pending home sales peaked at the end of April 2010 when the second tax credit ended. But, much like the entire market in 3rd quarter 2006, that bubble burst. The tax credit stimulated record-breaking home sales in March and April at the cost of May, June, July, August and possibly through part of 2011. The market is suffering from a textbook case of displaced demand—unfortunately one of the uglier negative externalities of artificial “market” incentives.

But this can’t come as a surprise since home buyers are (generally) rational in their purchase decisions and responded favorably to free money—who wouldn’t? What’s unclear is the amount of new business the credit stimulated compared to the amount of purchase activity that was simply shifted forward in time. We believe more in the latter.

The keen observer will note that 2010 home sales are hanging significantly lower than last year’s levels since the credit ended compared to how far above last year’s levels they were before the credit ended. In other words, the bad is now worse than the good was good.

Equally astounding is the fact that this plunge occurred during the usual peak home sales months. It’s likely the result of equal and opposite market overcorrection. Think of a pendulum whose power supply was shut down—it overswings gravitational equilibrium in both directions several times before it settles into an even balance. It’s either that or there just aren’t any more buyers out there until the next iteration of home consumers enters the market.

So does sharp growth followed by sharp decline outweigh the stability and steady growth that may have at least kept pace with last year’s levels? Well, though median sales prices have posted welcomed gains by year-over-year comparisons for seven consecutive months, economic theory suggests that this cannot continue in the face of suppressed demand. It’s not that we don’t appreciate the upward price mobility; it’s just that we’re suspicious of the peculiar combination of market activity and acknowledge the possibility of further lurking price dips if demand isn’t restored.

Upwardly inching inventory figures will try to exert additional downward pressure on prices, just as they do in any commodity market. The question is whether demand can absorb the current supply before prices respond negatively to the expanding inventory. Before that can happen, the economy needs to improve in order to repair consumer confidence and restore buyer activity.

Oddly enough, the housing market seems to be waiting on a green light from the economy. Housing starts and home purchases typically fuel economic growth by stimulating demand in the manufacturing, lumber and skilled labor sectors of the economy. These secondary and tertiary economic benefits have historically reverberated throughout the economy and have been known to jump-start it during down cycles. And that’s just not happening.

The flip side of all this is examining the opportunity costs of such an investment at this scale. Are there alternative means by which our public officials could have strategically targeted these dollars that would have sped up a broader recovery?

Speaking of which, the sequence of recovery events should look something like this: widespread private-sector hiring resumes, national unemployment drops below 6%, mortgage delinquency rates begin a measurable decline, housing demand makes an epic comeback, and prices continue to stabilize.

Welcome back to the old normal. The year is 2000. Please be careful as some items may have shifted. Let’s try that last decade one more time.

David Arbit is a Market Analyst with the Minneapolis Area Association of REALTORS® in their 10K Research and Marketing division and holds a Bachelor’s in Urban Geography and a Master’s in Urban and Regional Planning with a focus on Housing and Economic Development. He has worked extensively in the public, private, university, and non-profit settings on housing issues, housing finance, foreclosure prevention, economic and workforce development, econometric modeling, spatial data analysis and a variety of neighborhood-level initiatives. He may be contacted at davida@mplsrealtor.com.

Note: Both the numbers and insights derived from the numbers reflect regional trends in the 13-county Twin Cities housing market. All data comes from Northstar MLS.

Welcome to the new abnormal. Interest rates are hammocked at 55-year lows. Buyer activity is squatting like it’s 1993. There are plenty of available homes in the new abnormal, yet even this favorable buyer’s market hasn’t caught the buyer’s favor. In the new abnormal, the economy is currently driving the housing market, not vice versa.

So where exactly does the market stand in this strange land? Short answer? The aforementioned 1993 in terms of buyer activity and 2001 by way of home prices. The market stands where it is right now due in large part to the second iteration of the first-time homebuyer tax credit. The price free-falls of 2009 could very well have continued, but the credit propped up prices by incentivizing additional demand. And as Sir Isaac Newton put it so eloquently over three centuries ago, every action has an equal and opposite reaction. This absolutely applies to commodity market intervention such as homeownership incentives.

There is nowhere this is more evident than in the accompanying chart. Pending home sales peaked at the end of April 2010 when the second tax credit ended. But, much like the entire market in 3rd quarter 2006, that bubble burst. The tax credit stimulated record-breaking home sales in March and April at the cost of May, June, July, August and possibly through part of 2011. The market is suffering from a textbook case of displaced demand—unfortunately one of the uglier negative externalities of artificial “market” incentives.

But this can’t come as a surprise since home buyers are (generally) rational in their purchase decisions and responded favorably to free money—who wouldn’t? What’s unclear is the amount of new business the credit stimulated compared to the amount of purchase activity that was simply shifted forward in time. We believe more in the latter.

The keen observer will note that 2010 home sales are hanging significantly lower than last year’s levels since the credit ended compared to how far above last year’s levels they were before the credit ended. In other words, the bad is now worse than the good was good.

Equally astounding is the fact that this plunge occurred during the usual peak home sales months. It’s likely the result of equal and opposite market overcorrection. Think of a pendulum whose power supply was shut down—it overswings gravitational equilibrium in both directions several times before it settles into an even balance. It’s either that or there just aren’t any more buyers out there until the next iteration of home consumers enters the market.

So does sharp growth followed by sharp decline outweigh the stability and steady growth that may have at least kept pace with last year’s levels? Well, though median sales prices have posted welcomed gains by year-over-year comparisons for seven consecutive months, economic theory suggests that this cannot continue in the face of suppressed demand. It’s not that we don’t appreciate the upward price mobility; it’s just that we’re suspicious of the peculiar combination of market activity and acknowledge the possibility of further lurking price dips if demand isn’t restored.

Upwardly inching inventory figures will try to exert additional downward pressure on prices, just as they do in any commodity market. The question is whether demand can absorb the current supply before prices respond negatively to the expanding inventory. Before that can happen, the economy needs to improve in order to repair consumer confidence and restore buyer activity.

Oddly enough, the housing market seems to be waiting on a green light from the economy. Housing starts and home purchases typically fuel economic growth by stimulating demand in the manufacturing, lumber and skilled labor sectors of the economy. These secondary and tertiary economic benefits have historically reverberated throughout the economy and have been known to jump-start it during down cycles. And that’s just not happening.

The flip side of all this is examining the opportunity costs of such an investment at this scale. Are there alternative means by which our public officials could have strategically targeted these dollars that would have sped up a broader recovery?

Speaking of which, the sequence of recovery events should look something like this: widespread private-sector hiring resumes, national unemployment drops below 6%, mortgage delinquency rates begin a measurable decline, housing demand makes an epic comeback, and prices continue to stabilize.

Welcome back to the old normal. The year is 2000. Please be careful as some items may have shifted. Let’s try that last decade one more time.

David Arbit is a Market Analyst with the Minneapolis Area Association of REALTORS® in their 10K Research and Marketing division and holds a Bachelor’s in Urban Geography and a Master’s in Urban and Regional Planning with a focus on Housing and Economic Development. He has worked extensively in the public, private, university, and non-profit settings on housing issues, housing finance, foreclosure prevention, economic and workforce development, econometric modeling, spatial data analysis and a variety of neighborhood-level initiatives. He may be contacted at davida@mplsrealtor.com.

Note: Both the numbers and insights derived from the numbers reflect regional trends in the 13-county Twin Cities housing market. All data comes from Northstar MLS.

For 12 consecutive weeks now, the number of homes for sale in the Twin Cities housing market has been higher than it was a year ago, and the gap between this year's inventory and last year's inventory at the same time has been steadily growing. There are currently 27,784 homes for sale, up 8.1 percent from this time in 2009. Inventory is not growing due to an influx of new sellers putting their homes on the market. Rather, its growing due to a drop in buyers who once were absorbing supply.

For the week ending August 21, there were 601 signed purchase agreements, down 40.6 percent from a year ago. That's the 15th consecutive week of significant declines compared to a year ago.

With supply growing and fewer buyers to purchase it, home sellers can expect a challenging fall and downward pressure on home values. Motivated sellers who want to move quickly may have to pursue aggressive pricing to attract buyers.

For 12 consecutive weeks now, the number of homes for sale in the Twin Cities housing market has been higher than it was a year ago, and the gap between this year's inventory and last year's inventory at the same time has been steadily growing. There are currently 27,784 homes for sale, up 8.1 percent from this time in 2009. Inventory is not growing due to an influx of new sellers putting their homes on the market. Rather, its growing due to a drop in buyers who once were absorbing supply.

For the week ending August 21, there were 601 signed purchase agreements, down 40.6 percent from a year ago. That's the 15th consecutive week of significant declines compared to a year ago.

With supply growing and fewer buyers to purchase it, home sellers can expect a challenging fall and downward pressure on home values. Motivated sellers who want to move quickly may have to pursue aggressive pricing to attract buyers.

Although we always knew that membership was a trailing indicator of market activity, this chart illustrates that there is a far greater correlation than we first suspected. The seasonality effect in home prices is also mirrored in the membership numbers with surges in the warmer months and decreases in the colder months. Buyer activity—as measured by the closed sales trendline—seems to have peaked about two years before prices did. The first tax credit could have slowed the decline in member numbers as prices received a boost in Summer of 2009, although that could be purely coincidental.

Click here for the the full Weekly Market Activity Report

 
The inventory of homes available in the lower price ranges is growing
dramatically from last year. With the number of new listings in these segments
outgrowing sales, the number of available homes has grown. For instance, below
$120,000 the current Months Supply of Inventory of 5.2 is a jump of 52.6 percent
from last year at this time.

Inventory in the higher price ranges is now dropping as sellers have pulled back
on their new listings. All price ranges above $250,000 now have fewer homes for
sale than they did a year ago.

Home prices are softest in the condominium category, where the average Price
Per Square Foot has dropped 13.9 percent in the last year.

Click here to view the full Housing Supply Outlook