This series is brought to you by Josh Zuehlke + Co., a real estate group and Southwest Voices sponsor. Josh will be answering a few of your questions about buying a house, the real estate market, and more. This interview was transcribed from a recorded phone conversation. We’ll be publishing another one of these next month, so if you have a question for him that isn’t covered here, submit it in the “Add Context” box below.
What is the big story in the housing market in Minneapolis right now?
We are in a moment where people bought at between 2.5% and whatever low rate people bought in the last couple of years. Since that’s happened, I think there’s going to be a lot less desire for those people to sell. If they didn't just buy in that interest rate environment, maybe they refinanced.
It creates a lot of pressure – not just pressure, but it just creates a lot less reason for an owner to sell unless they have to. So, I think that the inventory shortage is going to remain. I think for those people that decide they are going to sell, I think maybe they’ll be surprised at what they're able to accomplish.
How would you tell people to look at and handle mortgage rate increases or decreases in the months to come?
In the conversations I’m having with the lenders that I trust and work with, I think we’re all hopeful that interest rates are actually at the levels that they will be at for a little bit – that they’ll stay flat. What happens in the mortgage market frequently is that the Fed will raise the fund rate, and that will go up a percentage point, or three quarters of a percent. The mortgage market will adjust according to that. It mimics what the Fed is doing. We think that as inflation stabilizes and we start to get some softer numbers on inflation, we think the Fed will start to reduce how much they’re increasing rates, and that the mortgage market will have already priced in those increases.
The anticipation is that mortgage rates will stay relatively flat to where they are now for the coming six months to a year. It will be interesting to see what really happens. We have seen this before, where the Fed will increase the fund rate, and we’ll actually see mortgage rates go down. That happens because the markets want certainty, and when they see the Fed responding on a consistent path, then the mortgage market says, oh, the Fed is doing what they say they are doing, we don’t need to hike our rates anymore. It will be interesting to see what really happens, but I think it will be pretty flat for the rest of the year.
How do people handle that? That’s maybe answered in the first part. I don’t know. I think a lot of people that are in at 2.5% or 4% will have a hard time selling their house. If they do need to move, their move may actually be to keep the house they’re in, put a renter in it, and begin a very small one house investment portfolio and move to the next house at a slightly higher interest rate and hope that rates will come down later on and they’ll be able to refinance at a slightly lower rate.
It feels like Minneapolis is becoming increasingly unaffordable. What advice would you give someone that doesn't think they'll ever be able to afford a home in this city?
Don’t wait to figure out how to buy. They aren’t wrong. I feel for that person that feels like we are becoming increasingly unaffordable. Affordable housing in our city is a huge topic. It’s a very difficult one. The facts are that if you’re renting a property, you’re paying someone else’s mortgage. The sooner you can try to figure out how to save enough money for an FHA mortgage with 3% down in a neighborhood where you feel comfortable, the better. They are right. Things are not becoming more affordable. Prices are not going down. In fact, if you look at historical averages in the Twin Cities over the last few years, we’ve seen 3% plus appreciation year over year. From 1995 to 2023, the median home price in the Twin Cities has more than doubled. Is that going to happen in the next 25 years? I don’t know.
I also think the Twin Cities is an undervalued market. If you look at the number of Fortune 500 companies we have, the natural resources we have, our climate, all of those things have the potential to drive people to our state, which will drive prices up.
What do you see as being the big trend or trends in real estate in Minneapolis in 2023?
Let me go back to the question about affordability. One strategy that they can deploy to own something at a more affordable rate that I personally did in a neighborhood that I couldn’t personally afford to live in was that I bought a duplex. I had someone else paying a substantial portion of my mortgage by renting half of the building. Lenders will allow you to use 75% of that rent to qualify. One way to get your foot in the homeownership door in Minneapolis is to set your sights on a duplex.
Affordability and accessibility are going to be big issues. I hope those stay front of mind for us as real estate agents. Multi-generational living has been a trend for a number of years. As we continue to find ways to make homeownership accessible, we should all be exploring those options for multi-generational living, and for multi-family living, whether that’s a duplex or triplex.