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Twin Cities' Home Prices: 10 Year High

  • Nick Leyendecker
  • 03/7/16

Twin Cities Market Update: 2016 - Q1

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56,930 homes sold and closed in the Twin Cities in 2015. That's up 13% from 2014 and that's more sales than any other year in the past decade.

The end of 2015 represents the fourth year in a row of a bull market in U.S. housing during which, the median home price in the Twin Cities has risen from $155,000 to $225,000. That’s up 45% in just 4 years. Median home prices are now only four and a half percent below the market peak from 2006.

The important question that very few economists seem to be asking is, "Why have prices risen so high, so fast?" Did the U.S. economy return to a state of balance and launch into a true recovery in 2011? Or is this just a new, Fed-engineered, economic bubble, built on artificially low interest rates and monetary stimulus?

Let’s look back at a timeline of the Federal Reserve’s Economic Stimulus activities:

In response to the housing market correction that began in 2007, the Federal Reserve immediately began lowering interest rates until they reached zero for the first time in U.S. history. They then kept interest rates at zero from December 2008 until December 2015 when they raised the Fed Funds rate by a mere quarter of a percent.

In January 2009, with interest rates at zero and prices still falling, the Fed launched a new monetary experiment called Quantitative Easing or QE which they used to pump $3.5 trillion of new money into the system. Approximately a third of that new money was used to buy mortgage-backed securities from Fannie Mae and Freddie Mac.

When you consider all of the economic stimulus that has been pumped into the system over the past eight years, it’s no wonder that housing and stock prices have risen so dramatically.

Many economists, including Bernanke himself, have declared victory for the Fed’s stimulus programs, citing the recent boom in stocks and housing as evidence of a recovering economy – However, the results of an economic stimulus program cannot even begin to be measured until that stimulus has been removed from the market and the market has had a chance to stand on its own two feet.

Here are the biggest questions affecting my future outlook on the market: If tomorrow, the Fed were to allow interest rates to rise and/or credit to contract by shrinking their balance sheet, would these elevated prices be sustained or would they crash? If these elevated prices prove to be unsustainable absent the stimulus, will the Fed admit the failure of their initiatives and change course or will they double down? If so, what's next? Negative interest rates? More QE? Maybe both? Where and when does this new area of economic stimulus come to an end? Does the Fed have an exit strategy?

In the two blog posts linked below, I provide you with perspective on the current state of the economy, and the real estate market and give you some tips on how you can protect your home equity if there is a housing price correction, somewhere on the horizon.

As we move into the spring market here in the Twin Cities, we have inventory shortages in almost every segment of the market which is continuing to add support for elevated prices.

Setting the big picture aside, it’s important to remember that every neighborhood is different and that every real estate scenario should be analyzed thoughtfully and independently. Please don’t hesitate to contact me or a member of my team to request a free market analysis or to schedule a free consultation to discuss your real estate questions.


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