Each year I have a new speech title, with this year being The New Normal for Real Estate and the Economy. In many of the markets I deliver an economic forecast, that speech title is truly indicative of what is going on there and the respective economic recovery in both jobs and housing.
Last week started out with three presentations in the Twin Cities area, covering Minneapolis, St Paul and Bloomington (MSP) , Minnesota.
My economic mantra has always been that Jobs are Everything. Period. And that is the case with MSP.
MSP now has more total jobs than any time in history. In the past 12 months the Metropolitan Statistical Area added 33,700 net new jobs, which reflects a 1.88 percent annualized growth rate – just ahead of the U.S.’s 1.74 percent growth rate for the same period. The MSP job numbers are shown in the following graph.
Jobs are the ultimate driver for housing sales and rentals, not the population. The income produced by jobs delivers what economists call effective demand while population growth without an income necessary to purchase a home merely gives pent-up demand. As expected, increased jobs have driven home sales. The number of closings per month for the MSP area, unadjusted for seasonality, are shown in the following graph.
To truly reveal trends, however, requires removing the seasonality impact. The next graph shows the 12-month moving average of the number of closings.
- The last normal housing market was 2002, prior to the rise of subprime lending and the rising bubble.
- The sales level from 2004 through 2006 was unsustainable given that it was driven by buyers obtaining loans for which they had no ability in the long run to make payments. Their only hope was for continued above-normal appreciation in housing values, from which they could complete a cash out refinance in order to subsidize future payments.
- The 2010-2011 peak was a function of tax credits which likely cannibalized future sales, and again was not normal nor sustainable.
- Sales today are once again back to the level of 2002 – the last normal market. And this is with the most stringent lending requirements seen in the past 40 years.
- From the number of housing sales perspective, the market in MSP has returned to normal.
Prices rode a similar roller coaster to the number of sales. The next graph shows the monthly median home price in MSP followed by the 12-month moving average of median home prices.
The 12-month moving average median home price in 2002 (the last normal market as previously described), for MSP was $219,650. For the 12-months ending March 2014 it was $241,450, a gain of 9.9 percent. Just like the number of sales and the number of jobs in MSP, prices have returned to normal.
The last consideration of housing market health is the amount of new construction. The big question is if markets are being overbuilt. The resounding answer is not only no, but there is a such a shortfall between job growth and new construction that demand is accelerating far ahead of supply.
Total residential building permits are shown in the next graph. The 2014 number, which totals 11,468, is the number of residential permits issued in the 12-months ending March 2014. In that same period, MSP added 33,700 net new jobs. This works out to almost three new jobs per new dwelling unit (2.94). The normal number of new jobs per new dwelling unit hovers in the 1.25 to 1.5 range, assuming a limited inventory at the start of the period.
Simply stated, MSP could literally double the amount of residential construction, and assuming that the proper products, prices and locations were achieved, the market would not be overbuilt.
Just like residential sales, commercial real estate sales in Minnesota are recovering. Commercial real estate also had a bubble nationwide in 2007, with U.S. sales of commercial real estate plunging more than 80 percent from 2007 to 2009. Minnesota was worse, dropping more than 92 percent from the peak in Q1 2007 to the trough in Q1 2010. Since then, sales have risen back to 63 percent of the prior peak.
Commercial is making a strong recovery in Minnesota.
So let’s recap the Minneapolis-St Paul-Bloomington economy and real estate markets:
- There are more jobs in MSP today than any time in history.
- MSP’s job growth rate exceeds that of the U.S.
- The number of housing sales has returned back to the level last seen in 2002 – which was the last normal period in more than a decade.
- The current median price (12-month moving average) is 9.9 percent greater than the level in 2002 (again the last normal market).
- There are three new jobs for each new dwelling unit – hence demand is far outstripping supply.
- Commercial real estate sales in Minnesota have increased by a multiple of more than eight times from the trough in Q1 2010.
The bottom line is that MSP has returned back to normal. But given the limited new construction of residential property versus the number of new jobs, rents and home prices will continue to strongly escalate.
The new normal economy and housing markets are alive and well in Minneapolis-St Paul-Bloomington.