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Maple Grove Voice

Is There Another Housing Bubble Coming to Maple Grove? (Sponsored)

Oct 24, 2016 06:09PM ● By David Garves, Broker/Realtor with

(graphic provided by David Garves)

The following was written and sponsored by Broker/Realtor David Garves.

The below real estate data for the Maple Grove market as reported using data from the Northstar Multiple Listing Service (MLS). It is the best market data I have available to comprise opinions, statistics, charts, and analyze trends. I believe the information contained herein is an accurate reflection of the Maple Grove market

A decade ago, the housing market swelled to a bubble of epic proportions. Too many homes were built, and too many people were willing to pay top dollar for them with the help of faulty mortgage products.

We're living in a very different housing world today — from tighter credit to stricter regulations — compared with the dark days of the crash, but rising residential prices are starting to spark concern again from some warning of another housing bubble!  It’s worth taking a look at our local, Maple Grove housing market, and assess our risk.  

What Caused the Bubble of 2005-2006
Mortgage credit availability - Creative and risky bank loans open the doors for low credit scores, low income borrowers and require less down payment for home buyers.  
Supply and demand - Following more owner occupied buyers, investors/speculators and other non-owners occupants take advantage of the new programs. New construction developers get busy building homes to keep up with increasing demand, adding “needed” supply to the market.
Rapidly increasing prices - Heavy demand, and buyers willing to pay top prices, force housing prices up. Both traditional home buyers and investment buyers with little of their own money at risk force prices higher and consume growing supply of homes!  

Supply and Demand - Then and Now
Economics teaches us that supply and demand of any product will dictate price movement, and homes are no different. The housing bubble of early 2005/2006 didn’t necessarily happen as a result of a drop in supply, but instead from a rapidly expanding demand due to the risky credit practices. Then the bubble hit. Here’s how it looked, and how we look today.Housing Demand Drops 

As mortgage credit availability began to pull back in 2006, buyer demand began to fall off as new buyers could not qualify for the same loans which similar buyers had purchased with previously.  

As home prices reacted to the bubble bursting, buyer confidence further lead to a drop in buyer demand. new buyers could not qualify for the same loans which similar buyers had purchased with previously.  

Today, buyer demand has returned to 2006 numbers (see chart below). As home prices reacted to the bubble bursting, buyer confidence further lead to a drop in buyer demand.  

Supply Increases Due to New Construction

As demand for new home increased from 2000-2005, one way to answer the call was to build more homes. As developers brought more homes to the market, Maple Grove saw their housing supply boom - and new construction home listing rose to more than 15 percent of all home listings by the end of 2008. Today, new construction is down about 69 percent in Maple Grove. (see chart below)

Supply Increases Due to Short Sales and Foreclosures

As lending programs dried up, and supply began to grow, non-traditional home owners (investors, new construction, risky credit…) found themselves unable to sell their homes for the debt against their property. With few options, the short sale market and foreclosed home market boomed - adding not only increased inventory but a dilapidated market of which hadn’t existed previously. At the peak, Maple Grove saw 232 homes on the market that were bank mediated - today, we are down 89 percent. 

Today’s supply and demand market is actually the exact opposite of the market which created the bubble. Although housing demand has returned to 'bubble territory', our housing supply has failed to cooperate. As a matter of fact, our monthly housing numbers as the bubble occurred were at eight months of inventory in Maple Grove throughout most of 2008, a number clearly putting us in a buyers market. Today, we are at 2.3 month. This represents a sellers market stronger than the one that existed throughout 2006 even when “easy” mortgage credit availability created a somewhat false sense of demand.   

 Mortgage Credit Availability - Then and Now

Towards the end of the 1990’s through the peak of the bubble, the effort to create mortgage credit availability to an increasing number of Americans resulted in loan programs that created terms like “NINA” (no income and no asset verification needed), “Neg-Am” (loans in which balances increase as payments are made), and “Option Arm” (adjustable rate mortgage which gave the borrower a choice of what interest rate to pay).  It also opened the door to borrowers with poor credit histories and who had no money to put into the investment of home ownership.  

While temporarily successful in creating a higher rate of home ownership, the experiment had failed by 2006 when the need to continually find new, creative ways to approve loans resulted in a higher default rate on home loans and forced a tightening of mortgage credit availability.

While some people look to the last three years as proof that mortgage credit availability is again getting risky, the mortgage brokers index confirms that while the pendulum has in fact swung back towards more available credit recently, it remains a long way off from where we were even in 2004.

Rapidly Increasing Prices - Then and Now

From the bottom of the bubble bursting in 2012 until today, the Twin Cities real estate market has realized a 41 percent increase in the average sales price of a home sale as prices moved off the bottom realized in January 2012 (rolling 12 month average) to the $272,576 at the end of September this year.  

While the price movement has been sharp and produced impressive gains for home owners throughout the Twin Cities, this does not alone create a “bubble” environment.  In fact, the current prices remain more than 2 percent lower than the peak prices the bubble experienced 10 years ago. 

Additionally, the prices of Maple Grove homes specifically are still well within a reasonable valuation despite strong growth. In fact, if we look back 20 years at the average sales price of a sold Maple Grove home in 1997 and accept that was a “true value” of homes, we see some interesting results.

The blue columns of the chart above represent actual average sales prices for a Maple Grove home, peaking in 2007 and bottoming in 2012.  The red columns however represent a 3.75 percent inflationary improvement on our 1997 average sales price which experts agree would be a “healthy” value increase over the last 20 years. 

As the chart shows, while Maple Grove home values exceeded “normal” price expectations grossly throughout the bubble (2005-2007), we are currently slightly below the expected values for average sales price.   

Bottom Line - With supply and demand strongly in a sellers market, home prices remaining below “normal” expectations over the last 20 years, and lender guidelines keeping mortgages in check - there are simply no signs of a housing bubble similar to 2005 in Maple Grove.  

What to Watch for Going Forward

●     Interest rates - While home loan credit is not as available as the market which created the bubble, it is inexpensive creating opportunities for many buyers.  Eventually, we must see interest rates rise which will most likely cause the housing market to slow, but I don’t believe burst. 

●     Economy / Debt - From who is going to be our next president to growing personal debt and student loans, the overall economy always has an impact on the housing market.  While the housing market was the trigger for the declining economy in 2005/2006, if we experience a decline in our economy in the future, the housing market will be affected.    

●     Regional / Price Bubbles - This report focuses on our Maple Grove and loosely to our Twin Cities market. While a national bubble seems unlikely to exists, a regional bubble in areas with different number (Northern California, Las Vegas, Miami) could and I predict will occur. Additionally, as I’ve written in the past, Maple Grove’s housing demand changes depending on price categories which could create bubble like results within those price groups.

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