Fast-rising interest rates are injecting new urgency into the Twin Cities housing market, which is already distorted by a lack of listings and an abundance of eager — but often frustrated — buyers.
"There's uncertainty and even a bit of fear," said Isaac Teplinsky, a Twin Cities real estate agent. "It's already been tough on buyers. So now that we're seeing rates going up, it's a bit higher stress."
Mortgage rates have risen quickly since the start of the year, as lenders moved ahead of projected interest rate hikes by the Federal Reserve that began last month. Nationally, the average 30-year fixed-rate mortgage reached 5% this week for the first time since 2011, Freddie Mac said Thursday.
And on Friday, the Minneapolis Area Realtors reported that home purchasing in the Twin Cities fell 9.2% in March to 5,252 signed purchase agreements. Closings, a reflection of deals that were signed earlier this year, were also down compared with last year.
Those declines reflect a shortage of listings rather than weak demand. During March there were 6,416 new listings in the metro region, a slight increase from the previous month but 4.8 % fewer than last year.
And since the beginning of the year, inventory levels have remained near record lows with fewer than 5,000 available listings. In 2020's summer months, there were more than 10,000 available listings.
Home prices are still on the rise. During March, the median price of all closings rose to a record $353,000, a 7.5% increase over last year. For someone buying the median-priced home with a 10% down payment, the jump from a 4 to 5% mortgage rate increased their monthly payment nearly $190.
Twin Cities real estate agents say rising rates come at an especially challenging time for buyers, many of whom are battle weary after months of hunting.
Grant Chelstrom started shopping for a house in the western suburbs in early December. Just out of college, he was living at home and had saved enough for a down payment on a house priced at a maximum of $450,000.
He wanted to spend $375,000 to $400,000, but he quickly learned that houses were selling for more than sellers were asking. The first house he bid on was listed at $375,000. He offered $425,000, but the seller selected another bid.
When Chelstrom started house hunting, rates were in the mid-3% range, then steadily rose to nearly 4%. "The biggest pressure was the timing of interest rates," he said.
It took him four more tries before he got an accepted offer. One seller got 18 offers, another received more than 20. In most cases, he said, buyers paid at least $50,000 over the asking price.
When he and his agent, Teplinsky, realized that many of the winning bidders were making their offers more competitive by telling sellers they'd pay cash, Chelstrom decided to do the same.
And because many of the houses in his sub-$400,000 price range were in need of at least some fixing up, but still selling for far more than the asking price, Teplinsky started showing Chelstrom houses priced for more than $400,000 — a price point that seemed to eliminate a lot of competition.
The strategy worked. He paid $480,000 for a 3,162-square-foot house with four-bedrooms and three bathrooms in Maple Grove.
"It's more than I need," he said. "But not too much."
Though houses are still selling faster than they did last year and sellers are often getting more than their list prices, there are subtle indications that higher interest rates are having an impact on buyers. A nationwide Redfin survey showed that price cuts are on the rise.
The online brokerage said that on average, 3.2% of homes for sale each week had a price drop, with 13% dropping their price in the past four weeks. That's up from 10% a month earlier and 9% a year ago.
The share of listings with price drops is climbing faster during this time of year than they have since at least 2015. Typically during this time of year the share of homes with price drops is slightly down month over month.
Applications for new mortgages have also fallen in recent weeks, as have applications for refinancings.
In the Twin Cities, the shift in the market hasn't yet produced any significant advantages for buyers. During March, only 3.7% of all listings had a price reduction. That's on par with last year, according to a report from Realtor.com
"It's still competitive, but I can see it easing up a bit as we head into summer," said Teplinsky. "There are still a lot of buyers looking daily and putting in offers every weekend."
