Twin Cities housing market loses momentum ahead of Fed interest rate decision

Twin Cities home buyers — and sellers — are a little less active than this time last year, even as mortgage rates dipped slightly ahead of an expected Federal Reserve rate cut this week.

Still, home prices managed to eke out a modest gain in August, as demand held steady in parts of the region last month.

During August, buyers signed 4,017 purchase agreements, 10.2% fewer than last year, according to a monthly sales report from the Minneapolis Area Realtors (MAR) and the St. Paul Area Association of Realtors. Sellers listed 3.3% fewer homes, but with not as many sales, buyers were left with nearly 12% more properties to choose from compared with last year.

"The biggest hurdle is affordability; the other big hurdle has been supply," Jamar Hardy, MAR president, said in a statement. "The trend in mortgage rates is promising, but it will take time to fix our long-term housing shortage."

Though buyers have more existing houses to choose from, more time to decide and slightly better mortgage rates than they had last year, house prices keep rising, putting many would-be buyers on the sidelines as higher prices erode affordability.

The median price of all sales in the 16-county metro during the month increased 2.6% to $389,700.

But David Arbit, director of research for MAR, said that mortgage rates, not prices, are the major factor driving buyer decisions these days. More houses to choose from is important as well, but that only matters if rates decline enough to make buying more affordable, he said.

During early September, for example, mortgage rates posted a notable decline, falling to to an average 6.11% for a 30-year fixed-rate mortgage. Buyers seemed to notice. By the end of the first week of September, pending sales jumped more than 10%, following four weeks of annual declines.

"Six percent mortgage rates might be a threshold [that would trigger more sales], where a 5.9% reading could pull some buyers off the bench and onto the dance floor," Arbit said.

After four consecutive months of annual declines in pending sales, Arbit noted that if mortgage rates decline in the coming weeks, driving more buyers to the closing table, a spurt in sales could create a more competitive market, leading to a larger increase in prices.

"Be careful what we wish for," he said. "A sharp drop in rates could bring out enough pent-up buyers that even our increased inventory levels would be overwhelmed. That could put us back in a competitive market where sellers are getting multiple offers over list price."

As the shortage of existing homes on the market continues, building of single-family dwellings in the metro has been holding steady, according to Housing First Minnesota, a trade group for homebuilders. Homebuilders pulled 586 permits for single-family homes in August, a 3% increase from last year and 30% more than in July.

Mortgage rates this year peaked in May at 7.22%, but have hovered at just under 6.5% for much of the month, falling to their lowest level since early last year. As of last Thursday, the average rate on 30-year fixed-rate mortgage dipped to 6.2%, according to a weekly survey by Freddie Mac. That's down slightly from the previous week and 7.18% a year ago, but not enough to cause a rebound in home sales.

Realtors — and buyers and sellers — are already eagerly awaiting the Federal Reserve Bank decision whether to cut its benchmark rate on Wednesday. Though mortgage rates aren't directly tied to the Fed's benchmark rate, they do tend to track the yield on the 10-year Treasury yield, which moves in tandem with other economic expectations, including inflation.

Despite the decline in sales this summer, market fundamentals still tend to favor sellers. Houses are taking longer to sell, but they're still selling faster than is typical. And at the current sales pace, there are only enough listings to last 2.6 months, far below the four- to six-month level that's considered balanced.

An August report from the Minnesota Association of Realtors shows that regions outside the Twin Cities are facing similar dynamics with one major exception.

While sales of upper-bracket houses in the Twin Cities are posting double-digit gains as starter houses languish, upper-bracket sales in some more rural parts of the state are sagging, said Geri Theis, broker at Scenic City Realty and president of the Minnesota Association of Realtors. In the most rural parts of the state, sales were down far more than in more populated areas. In the northwest region, for example, closings fell more than 30%.

"Unfortunately, the interest rate decrease was not enough to get buyers out there," Theis said. "We didn't see as many buyers as we'd like to."