Real estate agents hung thousands fewer "sold" signs in the Twin Cities last year than in record-breaking 2021, which some might interpret as a real estate cool down.

If only it were that simple.

Home prices have defied the decline in sales, rising to record highs.

"The burners might be off, but the pans are still hot," said Dan Frank, a Twin Cities real estate agent who says that although bidding wars are happening, buyers aren't resorting to the kinds of buy-it-any-cost tactics they employed last spring.

In 2022, the number of home sales fell by double digits.

Mortgage rates doubled in the final six months of the year.

And yet house prices around the metro area and Minneapolis and St. Paul neighborhoods grew by double digits over the previous five-year average, according to the Star Tribune's seventh annual Hot Housing Index.

The reason? First, the Twin Cities housing market is chronically undersupplied. And, second, the Federal Reserve's consistent and aggressive interest rate hikes, which are meant to dampen consumer spending, are working their way through the real estate market in uneven ways.

The number of houses listed and available in the metro area is hovering near an all-time low. That's largely because home building plummeted and many potential home sellers opted to sit on the sidelines — playing it safe until the economy stabilizes.

At the end of January, Frank listed a three-bedroom, two-bath rambler in Fridley for $299,900. By the next day, he got five offers, all for above list price.

"If we could rewind the clock 12 months, instead of five offers we would have had 10," he said.

In Fridley, for example, sales were down 8% over the previous five-year average, according to the index.

Still, prices grew 30%, in large part because many sellers were easily able to sell for more than their asking price. At the end of the year, there were only enough listings to last less than a month given the sales pace at the time. For context, the market is considered balanced — between a buyer's and a seller's power — when there's a five- to six-month supply of listings.

Metro remains a seller's market

Even though there were fewer home sales in the Twin Cities metro area last year, it remained a seller's market and prices increased because both buyers and sellers retreated as interest rates rose.

Months supply of inventory

Price per square foot

Monthly closed sales

Months supply of inventory measures how long it would take to sell all the homes for sale in an area. The market is considered balanced with at least five months' supply. The metric is defined as the inventory of homes for sale at the end of the most recent month, based on one month of activity, divided by the average monthly pending sales from the last 12 months.

Bryan Brussee & Yuqing Liu, Star Tribune • Source: Minneapolis Area Realtors (MAAR) and RMLS of MN Inc.

Though it's still a seller's market, Frank and other agents say buyers are being far less aggressive than they were a year ago. Fewer are waiving inspection and finance contingencies or including escalation clauses that automatically increases their price over a competing offer.

Instead, more buyers are asking sellers to help cover their closing costs. In August, Frank said, sellers were asked to help cover closing costs in a little more than a quarter of the signed deals at Remax Advantage. At the end of January, however, more than half of all sellers contributed to closing costs.

"Buyers are definitely smarter and more cautious when they're submitting offers right now," Frank said.

For instance, only one of the offers on that Fridley house waived the inspection contingency. Last year, he said, most of the offers would have done so.

Kris Lindahl of Kris Lindahl Real Estate agrees. Higher mortgage rates, which have added hundreds of dollars to the average mortgage payment, have affected the pace of the market this year, he said.

"It's not the same type of market that it was last year," Lindahl said. "But there is more pent-up demand and supply is tighter than it was last year."

While higher rates are stymying first-time home buyers, higher home prices are helping people cash in their recently acquired equity to trade up to a larger, more expensive house. And that's driving sales of move-up houses.

Allison Frailich and Tim Kampa, the sellers of the Fridley rambler, bought the house a decade ago, before the big increase in prices.

They started hunting for a bigger house to accommodate their growing family before the early 2022 increase in mortgage rates. Outbid on three houses, they kept shopping, hoping rising rates would lessen competition.

In mid-December, normally the least competitive time of the year, they found a house in Golden Valley that checked all their boxes. Knowing it would sell quickly, they made an offer immediately.

"It is a crazy time to be looking for a house. You're making this huge decision for your family, finances and lifestyle and basically have to make the call in less than a day," Frailich said. "As a buyer, you have to go into it and be willing to take some risks."

New listings declined during the last half of 2022. Last year, there were 68,006 new listings, 10% fewer than the year before and the second-lowest figure since 2012, when there were 67,104 new listings.

A decline in home building has contributed to the problem by failing to keep pace with demand since the Great Recession, when home building plummeted. Household formation has exceeded home building ever since, leaving the region deeply undersupplied.

Despite rising home prices and relatively strong demand during 2022, home builders pulled back dramatically as they faced higher mortgage rates and the threat of a recession. Builders were issued 5,463 single-family permits during the year compared with 7,386 the year before, according to Housing First Minnesota.

The home shortage is especially acute in outer-ring suburbs and outlying areas where housing is often more affordable. In Lindstrom, where the median sale price is on par with the metro overall, there's plenty of room for development, with parts of the city still so rural that buyers there might qualify for a zero down-payment USDA rural home loan.

On average, houses in Lindstrom sold for $189 per square foot, making it among the most affordable in the metro. That also helped make it the second-hottest housing market in the metro last year, according to the index, which tracks five key metrics — such as changes in sale prices and closings — for every community with more than 80 sales in the year.

Like other popular cities across the metro, Lindstrom has been beset by a decline in house listings and an abundance of buyers who have bid up prices, making it increasingly difficult for first-time buyers.

Prices in the city last year were 43% higher than the five-year average, putting the median sale price on par with the metro median. Last year, only 28% of the sales were starter homes priced at less than $300,000, down from 89% just five years earlier.

That same pattern is playing out across the metro area as the supply of starter homes dwindles.

And while the overall housing inventory remains tight, there are segments of the real estate market with more slack. An example Frank said, is suburban houses built in the 1990s, especially those priced between $600,000 and $800,000. If it's a house that's dated and in need of a refresh, it can linger on the market much longer.

For now, anyhow, Frank said it remains a seller's market.

"I don't see any big influx of listings that's going to change the inventory numbers in a buyer's favor," he said. "Right now, it's still very tight."

MaryJo Webster contributed to this report.