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There’s no shortage of ways to measure housing market performance. If home prices are your favorite barometer of market vitality, we encourage you to check out absorption rates, percent of list price received and days on market as well. But there’s also no shortage of ways just to measure home prices. Here at MAAR, we produce monthly price metrics such the median sales price, average sales price, median price per square foot, average price per square foot and we even have our very own Housing Value Index. A slightly less well-known metric is the price to income ratio. The same way price per square foot normalizes prices by dividing out by the square footage of the home, price to income ratios normalize prices by dividing out by the median family (or household/per capita) income. For this particular study, we’re using the median sales price compared to the median family income.

 

 

 

 

 

 

 

 

 

 

 

While the median sales price was within 3.5 percent of its all-time high in June of this year, the price to income ratio still has 20.0 percent to go before reaching its previous peak (from 2.5 to 3.0). So what does that tell us? First, this might diminsh some concerns over whether another bubble is forming. Second, and despite consistent price increases, it tells us that consumers are not overstretched. Third, it tells us that the current for-sale inventory could be more affordable than some might have thought, perhaps based on other indicators. Fourth, as incomes rise (even in tandem with prices), this ratio should remain fairly stable, since both sides of the fraction are scaling up together. The ratio of 3:1 is 3. The ratio of 6:2 is also 3. If the numerator and denominator scale together, the relationship can remain the same. It’s also worth noting that several major cities in the U.S. as well as other countries have price to income ratios upwards of 10.0.

At a time when the median and average sales price measures both near their previous highs from 2005/6, it’s important to use other measures to either confirm or challenge this trend. Even as some metrics return to levels not seen for years, it’s important to remember that we currently have extremely low supply levels, traditional market share still isn’t back to where it once was, new construction and condos make up a smaller slice of the sales pie than in the past and multi-decade low interest rates have joined forces with a recovering labor market and tightening rental market to bolster purchase demand. In other words, there are a number of factors that make today’s market different than the last time prices were this high. For that reason, now more than ever, it’s critical to examine market data through a variety of lenses so that we can get a more holistic perspective on what’s really happening given the shifts that have taken place over the last 10-15 years.

 

Remember: use the data for good, never for evil.

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INTERVIEW: Nicole Knuckles of Wells Fargo Home Mortgage

1. Give us the background story on Wells Fargo Home Mortgage (WFHM)?

Wells Fargo Home Mortgage is the nation’s leading originator and servicer of residential mortgages. With 164 years of home lending experience, we get how emotional the connection to a home is for our customers. For two-thirds of Americans it is also their most important asset. We take a longer-term view of this business, growing it one customer at a time by making home loans achievable and sustainable. And if a customer encounters financial challenges along the way, we are there to help him or her explore the options available to keep the home.

Diversity and inclusion is a business imperative that helps us meet the changing needs of our customers, team members and communities we serve—around the world. Wells Fargo has a mission of turning houses into homes for customers in all communities. The Home Lending Diverse Segments team plays an important role focusing on four areas to help these groups achieve homeownership:

• Increases diversity of Wells Fargo team members, including Home Mortgage Consultants
• Increases the company’s presence in diverse communities
• Provides products, processes and programs that support diverse homeownership
• Works with referral sources like real estate agents and nonprofit credit counseling agencies

2. Nicole, what is your role at WFHM?

I am the Regional Diverse Segments Manager and Charitable Giving Manager. I am responsible for developing strategic plans to help the home lending organization provide financing opportunities for ethnic minority, low-to-moderate income households, and first-time homebuyer customers. I primarily work with a sales team made up of three hundred home mortgage consultants in my region. Connecting my team to the amazing network of nonprofit providers is critical because providing homebuyers with education opportunities helps people prepare for homeownership. As Charitable Giving Manager, I manage the Homeownership Grant Program for nonprofit organizations, which provides financial resources to local nonprofit housing organizations to create sustainable homeownership opportunities for low-to moderate-income people.

3. What new programs is WFHM offering?

My FirstHomeTM, a free, interactive online tool to help first time and ready-again, homebuyers learn and prepare for the process.

My Home Roadmap, a service that offers participants up to two hours of free, phone-based financial coaching from an accredited credit-counseling agency, paid for by Wells Fargo.

Hands on Banking, an interactive tool that helps individuals learn about the basics of finances and money management.

Community Development Mortgage Program, the prospective homebuyer is in a low-to-moderate income bracket and is not required to be a first-time homebuyer. The minimum down payment is 2%. Mortgage insurance is not required. The income is restricted to 80% or below area median income limits.

Home Opportunities Loan Program, may help first-time homebuyers and low-or moderate-income
homebuyers who don’t have a large down payment to purchase a home.

4. How has MAAR and WFHM partnered in the past?

WFHM has been a longtime supporter of MAAR. We have been a premier sponsor and I have collaborated with Donnie Brown MAAR Community Affairs Director on a number of community efforts. We are both passionate about the racial disparity gap. I’ve also worked with David Arbit, MAAR Research Director, who is a great resource in terms of housing affordability. A few times a year, we review the market reports so I can share them with my team.

5. Can you tell us about the TPT Documentary, “Make Money Work” that WFHM is sponsoring?

The project is designed to build bridges between various cultural communities and the banking/finance world. We hope this website will help with complex processes like purchasing a home, securing mortgages and making sound decisions and transactions. | WATCH VIDEOS

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If you find yourself strolling down a cobblestone street surrounded by beautiful, historic mansions near the bluffs overlooking downtown St. Paul, there’s a good chance you’re in Crocus Hill. Even though it’s not a valid pre-defined area in Matrix, it spans from Lexington to 35E and from St. Clair to Summit. The following visuals are derived from a custom user-drawn area within Infosparks. It’s also worth knowing that Crocus Hill is wholly contained within the official Summit Hill Neighborhood of St. Paul, one of several neighborhoods hosting the Twin Cities Marathon this past weekend.

Home sales in the area have been on their own marathon of sorts, reaching levels during the summer months not seen in over 10 years. Note that this is only single family home sales activity.

Crocus Hill buyers pay a slight premium to acquire properties compared to Summit Hill, at least on a per square footage basis. The most recent numbers show Crocus Hill homes selling for $184 per square foot while Summit Hill homes sell for $177 per foot. For the second half of 2014, however, Summit Hill prices were more in-line with those in Crocus Hill.

Median sales price, unlike price per square foot, does not factor for square footage. In other words, even if the price per square foot figure was constant between the two areas (at, say, $200), the median sales price in Crocus Hill will still be higher because those homes tend to be larger and thus have more of those square feet. The Crocus Hill median sales price over the last 12 months is $594,500 while the Summit Hill median sales price is $430,000.

Looking at sales activity by price range for single family homes, the $500,000 – $1,000,000 price range is once again dominating in terms of unit volume. This segment has surpassed the $250,000 – $500,000 range, which is now the second most popular price tier.

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1. What are you most looking forward to in your new role?

I’m excited about working with an organization with an excellent reputation nationally.
I’m a member-driven person who wants to make sure our benefits match what the members need. Homes are a consumers’ single, most expensive investment decision of their lives. Our members help them make that decision. We as an association need to make sure we are meeting the needs of REALTORS® so they can best serve the public.
In my role, I’m looking to expand what we offer, while keeping in mind that we should be proactive and show members where the trends are going.

The best part of working for an association is the relationships you build. Some of my best friends are members who I’ve worked closely with over the years. I’m also interested in the generational philosophy and how to balance the technology and communication differences between millennials and baby boomers.

2. What’s something we would be surprised to learn about you?

I don’t drink coffee, so you see me with a soda. I love doing laundry; the washer and dryer are the two most important appliances I own. I am also meticulous about my lawn. I don’t love shopping in stores but I do like shopping online. In fact, I’m a marketers dream; I buy what’s new and techy. I have multiple laptops, phones and gadgets. My favorite apps are Sensi Wi-Fi Programmable Thermostat and the OnStar App.

3. What do you like to do in your free time?

I love to golf, read and garden. I also love being near the water. I used to coach a USS swim team and a park district team. I played rugby and want to learn how to play lacrosse and to fence.

4. Do you have a favorite football team?

I love the Patriots. Years ago, I was visiting some friends in Massachusetts and they took me to a Patriots game. It was how the Boston – Cambridge people supported the team that really turned me into a fan.

5. When you have a day off how do you like to spend it?

I’m new to Minnesota but I went to Lake Minnetonka and loved it. I’m a huge water person and plan to buy a boat in the future. I also went to the state fair and had some cotton candy, taffy and funnel cakes.

6. What’s one thing you’ve purchased to get ready for the MN winters?

I bought an expedition Norway jacket and it’s currently on its way from Germany. I have one because it gets pretty cold in Chicago too but the new one will be even warmer!

7. We understand you love to read. How many boxes of books did you bring to Minnesota?

How did you know? I had seven boxes of books delivered. They were not small boxes either. The movers gave me a hard time about it. One of my favorite books is “Elizabeth I, CEO: Strategic Lessons from the Leader Who Built an Empire” by Alan Axelrod. I am a historian and I’ve really enjoyed reading about Alexander the Great and George Patton and I think they are the two best generals in the world.

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Occupying approximately eight square miles of land off the southwest shore of Lake Minnetonka, Victoria is home to about 8,400 souls. Twins fans have a relatively pleasant (most days) 25.5 mile drive from Victoria to Target Field. Throw in some rain, snow or construction, and all bets are off. On warmer days, residents can enjoy the immense natural beauty of the Carver Park Preserve.

At a median of $397,700 versus $394,000, Victoria home prices are very comparable to the rest of the Lake Minnetonka Area. When comparing a larger geography with a smaller one, expect some volatility in the smaller area compared to the larger. That’s simply a function of small sample size.

When it comes to absorption rates (also known as months supply of inventory), Victoria is more balanced than the entire Lake Minnetonka Area, with 5.0 months of supply versus 7.4 in the broader area. Typically, 5 to 6 months of supply is considered “balanced.” This should translate into homes spending fewer days on the market, since the balance between supply and demand is tighter in Victoria.

Sure enough, homes in Victoria tend to sell after a median of 54 days on the market, while homes in the entire Lake Minnetonka Area tend to go under contract after 72 days on the market. This tells us that the Victoria market is a bit more competitive than its surrounding community. That’s a positive sign.

For homes priced at $500,000 and higher, absorption rates are much closer. Victoria has 11.1 months of supply for $500,000+ while the Lake Minnetonka Area has 11.6 months.

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Located along the southeastern shore of Lake Harriet, Lynnhurst is a mostly residential neighborhood in the Southwest Community of Minneapolis. Most homes in the area were built prior to the 1940s. With easy access to the Chain of Lakes, regional transportation networks and employment opportunities, it’s no surprise this neighborhood is so popular for residents and visitors alike.

Lynnhurst properties tend to fetch $210 per square foot compared to $190 in the Southwest Minneapolis community. That represents a roughly 10.5 percent premium on Lynnhurst homes compared to the surrounding community. For the sake of comparison, Minneapolis homes tend to sell for $157 per foot while Twin Cities homes sell for $115 per foot.

Homes with more than 2,500 total finished square feet make up the largest slice of the unit sales pie. That was not the case in 2005, 2006 and 2007, where the 1,500 to 2,500 segments made up the lion’s share of sales activity.

The Lynnhurst neighborhood currently has 3.3 months of supply, which indicates it’s a seller’s market. Back in late-2010, the area had 8.5 months of supply, marking a buyer’s market. Things have loosened up a bit since mid-2013, when the neighborhood had just 2.1 months of supply. Lynnhurst absorption rates now mirror those in the broader Southwest Minneapolis community.

Even though the market is fairly tight and sellers have a fair amount of leverage in terms of setting prices and limiting seller concessions, inventory levels do seem to be rising. That’s a positive sign for buyers who have been frustrated by the lack of inventory in some of the most desirable parts of the city.

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Roughly 17 miles due south of downtown Minneapolis where I-35 branches out into 35W and 35E lies the City of Burnsville. The Mdewakanton Dakota were the earliest known inhabitants, and now roughly 61,500 people reside in the northern Dakota County city. The downtown area is known as Heart of the City and features a Performing Arts Center, mixed use condominiums projects and the Nicollet Commons Park.

Between 2011 and 2014, home prices in the city lagged behind the metro. Around the beginning of 2015, the city regained its position with home prices slightly above those found in the metro as a whole. That reflects all sold properties.

Narrowing down to just single-family homes, Burnsville home prices hover slightly above the metro, though the gap appears to be narrowing.

New construction prices—on a price per square foot basis—exceeded those of the metro until about the middle of 2011. Ever since, Burnsville new construction prices have been under-performing those of the metro.

Absorption rates in the city are tighter than those in the Twin Cities region as a whole. Burnsville currently has 3.0 months supply of inventory compared to 3.7 in the region. That’s allowed Burnsville homes to sell in less time relative to the metro area. The median number of days a home spends on market before an offer is accepted is 39 in Burnsville compared to 43 in the broader metro.

 

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What a summer it has been. Home sales reached 10-year highs, prices continued to rise but at a more sustainable pace and interest rates and job growth have both been favorable. With housing, the labor market and the broader economy all performing relatively well, the Federal Reserve seems committed to lifting their key rate off zero by year-end.

As the busy summer season draws to a close, activity levels have begun to cool month-to-month, but most indicators continue to show year-over-year improvement. Pending sales rose 12.2 percent to 5,347 for August, but are up 17.9 percent so far in 2015. Closed sales increased 7.8 percent to 5,811, but have risen 15.7 percent so far this year. Seller activity was flat compared to last year, new listings fell 0.3 percent from 6,945 to 6,922. Inventory levels tumbled 13.6 percent to 16,398 active listings.

“The August numbers show that homes are selling in near-record time and that sellers are getting close to full list price,” said Mike Hoffman, Minneapolis Area Association of REALTORS® (MAAR) President. “The average time a property spends on the market fell to 64 days, just above the 9-year record pace of 63 days.”

Strong demand combined with low supply levels means homes don’t linger on the market for long. It also means prices are still feeling upward pressure, though to a lesser extent compared to the initial phases of recovery. The August 2015 median sales price rallied 2.7 percent to $224,900. The average price per square foot also increased 2.7 percent to $129. Sellers are accepting offers at a median of 98.0 percent of their original list price but 99.3 percent of their final list price, which indicates near-full price offers arrive quickly once the home is priced right.

The Twin Cities region has 3.5 months’ supply of inventory, which means sellers are firmly in the driver’s seat. That figure sank 23.9 percent since August 2014. However, not all local areas, market segments and price points reflect that metropolitan-level reality.

During August, mortgage rates hovered just under 4.0 percent, compared to a long-term average of over 7.0 percent. The Department of Commerce reported that national construction spending rose to its highest level in seven years. The economy added 173,000 new private payrolls in July while the unemployment rate fell to 5.1 percent. The latest Bureau of Labor Statistics figures show the Minneapolis-St. Paul-Bloomington metropolitan area had the second lowest unemployment rate of any major metro at 3.7 percent.

“Anxiety surrounding interest rates might be overblown,” said Judy Shields, MAAR President-Elect. “Yes, we have likely seen the bottom in terms of mortgage rates. But they will go up very slowly and incrementally and won’t affect the typical borrower very much. We see it as a positive sign that our economy has improved and is resilient enough to withstand it. We’ve come a long way and we knew this was coming.”

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Most of us have heard some variation of the phrase “correlation does not imply causation.” To borrow a popular example, almost every time it rains, you see umbrellas. Do umbrellas cause the rain to fall? Or does the rain cause umbrellas to open? The answer is neither. But that doesn’t mean that there isn’t a strong and direct correlation between rain and umbrellas. There is. But even data science has its limitations. We cannot say with statistical certainty that one phenomenon causes the other.

It is possible—encouraged, even—to use statistics to describe both the nature and strength of the relationship between two variables. Take, for example, the percentage of closed sales that are either foreclosure or short sales (i.e. the Distressed Sales Rate or “DSR”) and home prices (i.e. the Median Sales Price or “MSP”).

On the surface, one might expect a relationship. As foreclosures and short sales make up a larger share of activity, there is more lower priced product selling. One could reasonably expect prices to weaken. Indeed, this dynamic exerts downward pressure on home prices. In other words, a high DSR should correspond to or correlate with a low MSP. That means the relationship is inverse or negative—whereby MSP decreases as DSR increases. That’s the nature of the relationship but what about the strength?

 

The (X,Y) scatterplot above shows the linear and inverse relationship between DSR and MSP. MSP values are high when DSR values are low and MSP values are low when DSR values are high. The relationship is linear and can be described by the equation Y = -149,595X + 234,195. That equation tells us that the Y-intercept—or the Y value (MSP) when X (DSR) is set to zero—is 234,195. That means when the percentage of sales that are distressed approaches (or hypothetically reaches) zero, home prices should be at about $234,195, based on the 10 years of data used. The slope of the line, represented by the coefficient of X, tells us that every 10% absolute increase in DSR (from 20% to 30%) corresponds to a roughly $15,000 decrease in MSP. Thus, every one percentage increase in DSR corresponds to a roughly $1,500 decrease in MSP. Sure enough, as our local DSR went from about 0% to 60%, home prices went from $235,000 to $145,000. In case you missed it, 60 x 1,500 OR 6 x 15,000 = 90,000 and $235,000 – $90,000 = $145,000. The linear model is pretty accurate and seems to describe the relationship between DSR and MSP fairly well. If only there was a way to measure that quantitatively.

That brings us to the R-square value of 0.94325. We’ve already described the direction or nature of the relationship (inverse), but the R-square describes the strength of that relationship. A value of 0.94325 means that approximately 94.3% of the variation in home prices can be accounted for or explained by the variation in the percentage of sales that are distressed. Now we can say that we have a very strong and indirect relationship, and an extremely low P-value tells us that our results are statistically significant.

There you have it. We’ve used statistics to determine that the distressed sales rate is a major factor affecting home prices. The nature of the relationship is indirect or inverse and the magnitude of the relationship is very strong. Some of you are thinking “well, duh, I could’ve told you that more foreclosures correspond to lower prices.” And that’s true. Yet we hear so much about how supply and demand are the primary drivers of home prices. This brief study suggests that the product mix effect—or the share of sales activity that is distressed—may be an even stronger determinant of home prices than the old standby, supply and demand.

 

For some funny correlations, see this.

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The Howe neighborhood is a flourishing area in the Longfellow Community of Minneapolis. With tremendous access to the river, biking and walking trails, light rail, dining, theater, night life and other resources, it’s no wonder prices in this area have recovered off their lows and have been quite stable for the past year.

The median price paid per square foot was $163 in August. That figure hasn’t changed much since June 2014. But it has recovered significantly from the $97 per foot paid in February 2012. While that figure fell below the entire Longfellow Community as well as the City of Minneapolis in the dark depths of the Great Recession, it’s been outperforming both comparable areas since November 2013.

Absorption rates—or the number of months it would take to completely sell off all active housing supply assuming no new listing activity—are tighter in Howe than in Longfellow and the city as a whole. With just 1.9 months of supply, a dramatic 34.5 percent decrease from the year prior, the Howe Neighborhood can be described as a strong seller’s market. But attractive interest rates, prices below their nominal and inflation-adjusted peaks and steady job growth are just a few factors motivating buyers.

With monthly inventory levels tied at a 10-year low, many market participants and spectators are watching the number of active listings closely—and rightly so. Some sellers are motivated by rising prices and strong purchase demand but many sellers are sitting tight for now.

Aside from increased new listing activity of existing homes, another way to replenish inventory is via new construction—though to a lesser extent in the core cities. While nine newly constructed new listings may not seem like a lot, the fact that June 2015 had five times the new construction listing volume of the previous record is fairly impressive.

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