Housing prices in Minnesota hitting all-time highs

NINA MOINI: Housing prices in Minnesota and the Twin Cities metro are hitting all-time highs. The latest report from Minnesota Realtors looked at the housing market in June. It found that statewide, median home prices rose to a record high of $370,000. And in the Twin Cities alone, the median price is $401,000. That's the first time the metro has been over $400,000.

So joining me to help understand what this means for the housing market and first-time homebuyers, and buyers in general, is Andy Babula, the director of the Real Estate program at the University of St. Thomas. Thanks for coming back on the show, Andy.

ANDY BABULA: Happy to be back. Thanks, Nina.

NINA MOINI: Always appreciate you breaking this down. These numbers seem so high. And so this median price cracking $400,000, what does that number signify for you? Is that something that you saw coming, or has there been a big, giant jump?

ANDY BABULA: No, there hasn't been a big jump. And we have seen it coming for quite a while. Housing prices typically go up a few percentage points every year. And so we've been hovering around that-- or I shouldn't say hovering, but we've been trending toward that the last couple of years. I'd say from an economic sense, surpassing $400,000 isn't that big of a deal. It's just another number. But from an emotional or mental sense, it's a big milestone when people were used to paying, not that long ago, $200,000 or $300,000 for a home, and now they're at $400,000. It's tough. It's a tough pill to swallow.

NINA MOINI: Yeah, and when you say not that long ago, the numbers that I'm seeing are when you're talking about $250,000 in 2020. So over the last five years, do you think that perhaps the pandemic and the economy had something to do with, and that perhaps people-- they'll hear that $400,000, and they'll have so much uncertainty from the last five years that-- I think you're right-- it's emotionally draining.

ANDY BABULA: It is. It is. Yeah, we did see very large increases during and shortly after the pandemic. So 2020, 2021, 2022, we saw double-digit 10% to 15%, 16% increases year over year. And so that's where we got our big jumps. In the last couple of years, '23, '24, they have increased-- home prices have increased, but it's been more in line with inflation or just slightly above that. So while the last couple of years, we haven't seen dramatic increases, the aggregate over the last five and even 10 years, but particularly the last five years, has been notable. And that's where the pain really lies.

NINA MOINI: Do you see differences for how these prices may impact, say, a first-time home buyer versus someone who's already owned?

ANDY BABULA: Well, there's a lot of factors that come into play for affordability of homes. So one is the price, but almost more than the price is what buyers are looking at in terms of their monthly payment. Because almost all buyers, especially on the lower end, are getting a mortgage. And so they've been hit both by increasing prices but also by increased interest rates. And so interest rates have jumped from roughly 3% to 7% over that same time period over the last few years.

So not only are they paying more for the home, but their monthly payment has gone up significantly. And that does affect the first-time home buyers more than buyers who are further along. They've had a couple homes. Certainly, those who are buying luxury homes are less dependent on-- typically less dependent on mortgage rates. But the first-time home buyers typically are fairly heavily leveraged. They have a large mortgage as a percentage of the purchase price, and so that impacts them quite a bit.

NINA MOINI: And those of us who live in the Twin Cities and look around, we see the prices of homes, but also, the prices all over the state have increased. We're talking about $370,000 for the rest of the state. What do you think about the different markets between where there's a greater population in the cities versus the rest of the state? How does that impact the market?

ANDY BABULA: Well, the Twin Cities-- as the numbers show, the median prices in the Twin Cities tend to be higher than greater Minnesota. And actually, the suburbs tend to be the highest, where you tend to have the largest homes, the newer homes, so they tend to be more expensive. In greater Minnesota, we tend to have smaller homes. The prices are a bit smaller, but an increase is still an increase. And so if prices have gone up 30% or 50% over the last several years, if you were living in Bemidji or Mankato or wherever in greater Minnesota, and you were used to paying $150,000 for a home, and now you're paying $250,000 or $300,000 for a home, it's still going to hurt.

NINA MOINI: Yeah, especially if salaries haven't kept up and the cost of living is greater. So this June report shows that compared to last year, Minneapolis saw a decrease in new listings and inventory, but St. Paul saw an increase in both. Do you have any thoughts as to why that may be?

ANDY BABULA: Yeah, I haven't dug into the numbers in that great of detail. There's some ups and downs, and we have to be careful about one month to the next. it Doesn't always signify a trend. Both Minneapolis and St. Paul have had all sorts of challenges and all sorts of things that also help draw people to the city. So I don't know if there's necessarily a particular factor at play. But yeah, I did notice that Minneapolis-- unusually, at least more recently-- had a decrease. But I wouldn't be surprised if we see that go back up again in the next month.

NINA MOINI: Yeah. And you mentioned that month to month, it's hard to say, oh, this is an overall trend. But do you have a sense for where we're at right now at this point in the year? Would you say we're in a buyer's or a seller's market?

ANDY BABULA: Yeah, we're kind of on the cusp. It appears as though we're trending toward being more of a buyer's market, which, obviously, for buyers is a good thing. So what's put us in this position is over the last 10, 15 years, really since the Great Financial Crisis in 2008, we just have not kept up with building. The population has steadily increased, but we haven't been building enough homes and apartments and whatnot. And so when demand goes up and supply doesn't keep up, then that pushes prices upward.

So where we are right now-- we are seeing inventory of homes, the number of homes for sale, slowly starting to increase, the monthly inventory overall. And--

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NINA MOINI: Oh I think we might have lost-- oh, Andy, are you with us?

ANDY BABULA: I'm here. Can you hear me?

NINA MOINI: Oh, good. Yeah, I lost you for just a moment, but feel free to just pick up. We were talking about a buyer's or seller's market.

ANDY BABULA: Right. Basically, I was just saying that we're starting to see some indicators that there's more supply on the market. And it looks like that trend may continue over the next several months. It's always hard to predict the future, but there's some positive signs, I think, for some buyers that it might shift a little more in their favor. I don't think we're going to see something where it is a dramatic shift that all of a sudden home prices drop, necessarily, or at least not significantly. We're probably going to still continue to see steady price increases over time.

NINA MOINI: And just lastly, Andy, there's-- what, four or so months left of the year? What are you going to be watching for? What are you tracking in your line of work?

ANDY BABULA: Well, the big thing is definitely interest rates. That's been the hot topic for many years. And that plays a role across the board. As I was mentioning earlier, the price plays a factor, but the interest rates, if they drop from 6.5% to 6%, or half a percentage, that can make a significant difference in the price that a homeowner pays on a monthly basis. So that's probably the biggest. We're always looking at the cost of construction. That impacts supply, things like tariffs, and then obviously, just inventory overall.

NINA MOINI: All right, Andy. Thank you so much for joining us again. Always appreciate your insights.

ANDY BABULA: Thanks for having me.

NINA MOINI: That's Andy Babula, the director of the Real Estate program at the University of St. Thomas.