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  • University of St. Thomas

    Minneapolis St. Paul Residential Real Estate Index August 2011

  • August 2011 2

    The University of St. Thomas Residential Real Estate Index for the Minneapolis St. Paul metropolitan area has been developed by the

    Shenehon Center for Real Estate to be a broad measure of the general strength and health of the Twin Cities residential housing market

    and covers the entire 13 county Twin Cities metro market. The index is a composite of a number of different factors that influence the

    residential real estate market, including selling price, number of closed sales, the proportion of distressed to traditional sales, days on the

    market, months supply, number of pending sales, number of new listings, number of homes for sale, and the sale price as a percentage

    of the asking price. These factors are then synthesized in to a numerical index each month.

    The baseline for the UST Residential Real Estate Index is January 2005 which was assigned a value of 1000. The index researchers

    began collecting data in January 2005 because that was near the apex of the residential housing bubble. Each month’s index number

    can be compared to previous month’s values to get an idea of the broad strength and the direction of momentum of the Twin Cities

    housing market. The UST Residential Real Estate Index is more than just a measure of median home prices; it also takes into account

    supply and demand factors that are indicators of market vitality and velocity, as well as upward or downward pressures on pricing. Ad-

    ditionally, the index takes into account the number of distressed sales (foreclosures and short sales) as a percentage of the total number

    of sales in a given month - a factor that drastically affects many other reported overall housing market levels and indices. The recent

    rapid increase in distressed sales as a percentage of total sales has many implications that need to be examined as to their effect on the

    housing market as a whole.

    The UST Residential Real Estate Index seeks to illustrate what is happening with both distressed and traditional sales. The index value

    for the month of August was 800, up from 799 in July. This leveling off of the index reflects the continued weakening of the market

    that began in July. See pages 4 and 5 for a more detailed analysis of the more recent data as well as a month by month listing of the

    index values recorded since January of 2008. As historical data for the index was analyzed, it became apparent that there was a high

    correlation with the actual behavior of the market. One of the design elements of the index is that all factors that are part of the index are

    constructed using a three month moving average. The use of a moving average smoothes out many of the irregularities that can occur

    on a month-to-month basis and removes month specific distortions that can exist in the data.

    Herb Tousley, CCIM Director of Real Estate Programs, University of St. Thomas

    Thomas Hamilton, PhD, CRE, FRICS Associate Professor of Real Estate, University of St. Thomas

    About the Index

  • 3

    Why another index?

    Some might ask how the UST Residential Real Estate Index differs from the S&P Case-Shiller Index for the Twin Cities market. The S&P

    Case-Shiller Index is based solely on sales data that comes from matched sales pairs of individual properties. Matched pairs analysis

    examines properties showing a recent sale as well as a sale at some point in the past. The difference between the sales prices of the

    property over the time interval when the property was sold is used in calculating the S&P Case-Shiller Index. The index finds as many

    matched pairs as possible in the Twin Cities market and uses that information to compute the index value for that particular month.

    One of the issues found with the S&P Case-Shiller Index is that, when looking for these matched pairs, it does not make a distinction

    between a traditional, normal market sale and a distressed sale. Traditional sales are the sales of homes that are unaffected by fore-

    closure or the threat of foreclosure. An example would be a property that was purchased in 2006 at the height of the market and then

    went into foreclosure in 2010 and was subsequently sold by the lender. Case-Shiller considers the sale of the foreclosed property by the

    lender as a normal “arms length” transaction that the UST Index does not consider that transaction an arms-length transaction because

    the seller (the bank as the lender) is not a typically motivated seller. In many cases, these properties are sold at lower than typical market

    prices because the lender simply wants to get the property off the books or the property has fallen into disrepair. This type of a sale

    paring is not the same as a normal (traditional) sale pairing and tends to skew the index downward whenever a disproportionately large

    number of the sales in a given time are distressed property sales. For comparison, in a “normal” market less than 5% of properties sold

    in any period of time would be classified as distressed. Over the past few years of the housing downturn, anywhere from 35% to 60%

    of all transactions recorded were distressed. This equates to seven to 12 times the normal number of distressed sales, and this dispro-

    portionality is what is driving other indices to exhibit low values.

    The UST Residential Real Estate Index differentiates itself from other indices because it explicitly accounts for the proportion of dis-

    tressed sales in the market. It reports a composite index value for the market as a whole and also an individual index for both “traditional

    sales” and “distressed sales.” The UST Residential Real Estate Index for the Twin Cities will be calculated on a monthly basis as soon as

    residential sales data is available to analyze. The previous month’s index and other related information will then be released during the

    second week of the following month.

    Real Estate Programs at the Opus College of Business Shenehon Center for Real Estate The Shenehon Center for Real Estate serves as a resource to the commercial, industrial, residential and corporate segments of the real estate industry and the community to advance the public interest in real estate issues. For more than 15 years, the center has supported improvement in real estate leader- ship and management by creating and developing real estate leadership and management programs for undergraduate and graduate degree programs and professional development, providing a neutral forum to convene real estate professionals to share best practices, supporting and working with local real estate industry organizations, conducting real estate research, and developing mechanisms to transfer leading edge business practices to the real estate industry.

    Master of Science Degree in Real Estate The Master of Science Degree in Real Estate is one of seven graduate business degree programs offered through the Opus College of Business. This part- time, evening program provides students with a comprehensive understanding of real estate financial and quantitative decision making processes, and ad- vanced issues in valuation and land economics, knowledge of critical legal issues, and techniques for market and feasibility studies and real estate investment analysis. Students in the UST MSRE program come from a variety of different backgrounds including appraisal, brokerage, property management, finance, development, engineering, design, facilities management and corporate real estate. The program produces alumni with strong leadership abilities, aptitude for sound decision making, focus on ethics and social responsibility, and a solid network of real estate professionals.

  • August 2011 4

    August 2011: Is it Déjà Vu all Over Again?

    The sales data for the Twin Cities housing market for August offered little reason to celebrate. The All Sale Composite index of nine key

    market indicators was essentially flat in August, increasing from 799 to 800. For comparison, in August 2010 it was recorded at 841.

    The median sale price for all homes sold in August decreased for the second month running, declining from $160,000 to $156,000.

    This follows a nice run up in median price earlier this year from January to June. Compared to the median price in August 2010 of

    $175,000, the year to year decrease was 10.8%.

    When we examine the different types of sales, several trends start to emerge.Our Traditional Sale index decreased from 920 to 917.

    The median price on traditional home sales also recorded it second consecutive decrease, from $197,000 in July to $196,000 in

    August. This decrease for two consecutive months in the summer market is concerning since prices normally reach their highest levels

    in the spring and summer. The Foreclosure Sale Index decreased from 602 to 596, showing continued weakness in the market for

    foreclosed properties. The percentage of distressed sales has been holding in the high 30% range for the last three months, which is

    still historically high but is down from the 40-50% levels that were recorded in late 2010 and early 2011. Based on past market trends,

    we expect the percentage of distressed sales will remain stable in September and October, but will increase again in t