The doubling in mortgage rates over the past year is beginning to impact home sales across Minnesota.
Mortgage rates surpassed 6% this week for the first time in 14 years as lenders continue to skip expected increases in the Federal Reserve’s benchmark interest rate.
On Friday, a new report by Minneapolis Area Realtors showed the lowest monthly August sales in eight years and the lowest number of August listings in at least a decade.
“We’re seeing a less competitive landscape as the market has slowed given current interest rates,” said Denise Mazone, a real estate agent in Twin Cities and president of Minneapolis Area Realtors. “But the silver lining is that a less hectic market could mean more inventory and opportunities for die-hard buyers.”
A similar story is playing out across the country. St. Cloud saw the sharpest decline of any region for home closures, down 26% year over year.
Real estate prices are still rising, sales are happening fast and sellers are still closing in on their asking prices. At the same time, entry-level and working-class buyers are stretching their budgets as they search for a dwindling number of offerings.
The move to a 6% mortgage rate from 3% a year ago is having a bigger impact on monthly payments than most people realize, said Chris Galler, chief executive officer of Minnesota Realtors.
“In most people’s minds, they’re like, ‘Oh, that’s only 3 percent,'” Galler said. “Is not it. You really have to look at the effect, which is there’s 100 percent more interest.”
That’s why the monthly payments for a $270,000 home today are the same as for a $310,000 home bought a year ago. “That’s about $40,000 that they’ve lost in purchasing capacity,” Galler said.
According to Minneapolis Area Realtors, buyers in the Twin Cities signed 4,981 sales contracts last month, down 24% from a year earlier and the lowest number since August 2014. Deals, which reflect deals signed two to three months earlier, also fell by about the same amount.
The median price of those sales rose 5.6% to $369,750, the smallest annual gain since summer 2020.
There were also far fewer home sellers last month. The Twin Cities saw just 6,186 new listings in August, down nearly 20% from last year and the fewest in a decade.
According to Minnesota Realtors, trends were similar across the state. The group said deals fell 17%, with the median selling price rising 4.4% to $330,000. New registrations fell by 19%. St. Cloud saw a 32% drop in listings.
The market slowdown isn’t just bad for potential buyers. In this market, sellers are likely to invest more time and money to ensure their home is in good condition, Galler said. And because there will be fewer multiple-bid situations, buyers can insist on home inspections — a practice some buyers skipped to improve their bid during the height of the home buying spree last year.
“I wouldn’t call it a buyer’s market just yet,” said Shawn Hartmann, a sales representative for Twin Cities. “But it’s moving towards a balanced market.”
Most of Hartmann’s clients are looking for homes priced under $500,000, and these buyers are being hit hardest by the higher rates.
Sales in the upper price segment are still strong. While closures of homes priced less than $500,000 are down year-over-year, closures of homes priced more than $500,000 are up nearly double-digits year-over-year.
That’s partly because there are fewer options for entry-level buyers, but also because these buyers are the hardest hit by higher mortgage rates. Redfin said Friday that cash purchases remain above pre-pandemic levels, with a quarter of all homes in the Twin Cities being bought with cash in July.
Properties that are competitively priced, in excellent condition and in good locations are still in high demand, Hartmann said. He recently received a dozen offers for well over asking price for a mid-century modern home near Como Park in St. Paul.
It sold for $120,000 more than the asking price of $535,000 late last month.
The deal is something of an anomaly, Hartmann said. Demand for housing usually slows down in the fall, but the drop is more pronounced this year. He said that as mortgage rates rise, he’s hearing from more would-be sellers than buyers.
“If more people are talking about selling than buying, it gives me a hint that the market might change a bit,” he said. “And right now, more people are interested in selling.”