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Rising Home Prices Mostly Good

April 16, 2013 By Alex Christensen, Policy Associate

After a few long years of sagging prices following the housing bubble's burst, home prices are finally showing real growth again. Both the Minneapolis Area Association of Realtors and the S&P’s Case-Shiller Index show Twin Cities home prices have increased by double digits, 15.5% and 12.1% respectively, in the last year. That increase is larger than the national average of 8.1%. Since the housing bubble played a big role in the financial crisis of 2008 and the ensuing recession, that’s an encouraging sign. Let’s take a deeper look at what is causing the rebound and how it affects our economy.

Why Are Home Prices Rising?

Sure, the economy is getting better and more people are looking for homes – but that’s only one part of the recent trend in home prices. Just as important, if not more, are two other factors: fewer foreclosure sales and smaller supply of homes for sale.

Foreclosed homes and short-sold homes sell for a lot less than those sold traditionally. Since there are fewer of these homes on the market (there were 59% fewer foreclosures in Minneapolis in February 2013 than five years before), the median sale price naturally rises.

Fewer foreclosure homes on the market also impacts the area’s home inventory. The glut of cheap homes is slowing. Also contributing is a lack of new housing on the market. No builder in his or her right mind was breaking ground on many new homes in the past five years (even if they could get the financing for it!). Put together, active home listings have dropped more than 30% since the beginning of 2012.

Rising Prices Are Mostly Good

Even though they were artificially expensive before the recession, metro area homes are still worth 25% less than what they were at the 2006 peak. After being 37% lower in early 2011, this increase is welcome to many interested parties.

First and foremost, it’s good for current homeowners. Some estimates said that 40% of Twin Cities homeowners owed more on their mortgages than the home was worth in 2012. As long as prices continue to rise, more homeowners in the area will breach the surface on their underwater mortgages and their home investment will become sound again.

Not being underwater is hugely important for homeowners. First, it doesn’t make sense to sell an underwater home for a loss. That locks people into a location even if it means passing up a new job in a new city. Second, it erases any ability to tap into the equity of a home.

Third, being underwater can cost a homeowner thousands over the life of the mortgage. With interest rates as low as they are, refinancing today could drop a couple points off the mortgage’s interest rate (like I’m sure you keep hearing on radio commercials). But if a house is underwater, it’s a whole lot more difficult to refinance. Rising prices will keep money in pockets of homeowners for the entire length of their mortgage, since fewer and fewer will remain underwater.

The construction industry also stands to gain from rising prices. Between higher prices and lower inventory, there is finally demand for new houses again. If this trend continues and more homes are built, there will be positive repercussions throughout the economy. Demand for raw materials and workers will increase. The jobs will be especially positive. Between early 2005 and now, Minnesota’s construction industry has contracted by 27,000 jobs (although it has added back 8,000 jobs since 2010). If the homebuilding engine can start running strongly again, that jobs deficit will continue to steadily fall.

There Are Some Who Lose With Rising Home Prices

...mostly first-time homeowners and renters. Those who are starting to look now will be paying 15% more for the same home than they would have last year. No doubt that that will price some Minnesotans out of the market. Most of those hurt will be first-time homeowners, since they won’t be selling a home that has similarly increased in value.

They might be stuck renting for another year, putting more pressure on lower-income Minnesotans. The Twin Cities has uncomfortably low vacancy rates and rapidly increasing rent prices! On top of that, homeowners who have been renting their homes for the past several years will see the improving market and some will not renew their leases, and instead choose to sell the home.

On balance, it is a relief for Minnesotans to see home prices increasing again, although as mentioned above, some will feel the sting for less affordable housing. Overall an improving market will make homeowners and construction workers feel better about their prospects in the upcoming year, boosting an economy looking for a hand.

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