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An end to the house-buying boom in the Northland?

Minnesota Realtors report home prices in the Arrowhead Region remain high, while sales drop 22% over July 2021.

Closed home sales across Minnesota by region
In July, closed sales declined in 12 out of 13 regions compared to a year ago, bringing Minnesota’s average number of closed home sales down 19.2% year over year.
Contributed / Minnesota Realtors
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DULUTH — The Arrowhead Region was among 12 of the 13 in the state that experienced a decline in closed home sales (22.6%) compared to July 2021, according to a recent Minnesota Realtors report . Meanwhile, the median sales price in the region was up 14.6% to $235,000, with sellers receiving 101.2% of the original listing price after fewer days on the market compared to July last year.

“After two years of record-breaking sales, the market is beginning to look more normal. And that’s good news for buyers,” said Chris Galler, CEO of Minnesota Realtors. The nonprofit organization serves 22,000 of the state’s real estate professionals. Galler has been in the industry since 1985.

Arrowhead July.JPG
The local market update for the Arrowhead Region comparing July in 2021 and 2022.
Contributed / Minnesota Realtors

“While there’s still fierce competition for the best homes at affordable price points, the increasing inventory is beginning to ease those frantic bidding wars. Buyers are feeling less pressured and taking the time to do inspections. The sale may take longer, but the upside is it reduces the likelihood of future legal disputes," Galler said.

However, rising interest rates due to an increase in the Federal Reserve to address inflation remains a barrier, especially for first-time home buyers who are locked out of the limited market. Interest on loans went up 40%, resulting in mortgage rates rising from 3% to 5%, Galler explained.

"A lot of buyers wanted to get into a new place before school started. Some recognized that as interest rates went up they weren't going to be able to accomplish that," he said.

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A request to rezone a 27-acre plat being considered for development by P&R Properties was not recommended by Hermantown's Planning and Zoning Commission, but will go on to the city council for review.

As a result of high interest rates on home mortgages, the Northland is seeing a boost in the rental market. The demand for available rental properties is based upon the population and number of rentals available.

"In the short-term, this is increasing demand for rentals and pushing up prices. If you have 100 units and 112 people in the market, it puts stress on rentals driving up the costs. If it's a smaller community, depending on employment available in those areas, we may actually see a stabilization of the rental market," he said.

In St. Louis County and surrounding areas, Galler is also seeing a growing trend in cabin and vacation rental seekers, resulting in strong sales near lake areas.

"People are making investments in recreational properties, especially those with access to internet," he said. "College students are also more likely to stay in the area post-education for employment opportunities. Employment brings people in — government jobs, school and county-levels, or even state jobs. Manufacturing and recreation are still big markets up there, however, mining has reduced significantly through years with the reduction in permits being drawn and automation of work now done by technology."

A new permit could allow for sanctioned encampments.

Workforce housing remains a challenge across the state. The 2018 Minnesota Governor's Task Force on Housing report found Minnesota needs to enable private sector building of 300,000 new homes to stabilize prices and keep up with demand this decade. Galler anticipates the current market will impact the workforce housing dilemma in the northern region and across state.

Following the last recession, the trades experienced a decline in workers from 2008 through 2013. Nearly a decade later, the industry has not recovered. According to Galler, this is partially due to the emphasis on high school graduates to pursue college degrees, as opposed to entering labor-intensive trades to become electricians, plumbers, finish workers, construction workers, HVAC, heavy equipment operators — all careers that are in demand to develop the much-needed housing stock.

The difficulty to building is finding people to go into related industries. Galler has been working alongside District 3 Sen. Tom Bakk with the Builder's Association of Minnesota to develop related programs in high schools — some are currently without trade, auto or wood shops due to budget issues.

"It is a problem for builders. Regulation and fees drive up costs of housing. New construction is the only way to build way out of issue. Building new inventory is going to be key — especially building at affordable prices," he said.

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Arrowhead.JPG
The median sales price in the Arrowhead Region rose 14.6% to $235,000 in July over 2021. <br/>(This chart does not account for sale concessions and/or down payment assistance. Activity for one month can sometimes look extreme due to small sample size.)
Contributed / Minnesota Realtors

In Northeastern Minnesota, there is high demand for homes in the $200,000 to $300,000 price range. Building homes in that range would help alleviate the inventory problem, but Galler said developers find it difficult to get financing.

"From the time they purchase land and obtain city and county approval takes about a year. They have to pay interest in that time. Then to build homes, you're looking outward two years before pouring bases and getting people committed. The financial resources are not there to get housing developed. Another barrier is nimbyism — neighbors opposed to others living in their backyard, and putting pressure on city-elected officials not to develop," Galler said.

Since 2021 was a record year for the housing market, it is not surprising to see a drop this year. Next year, Galler anticipates the market will return to a normal level as it adjusts to the higher interest rates. Taking a look at the history of the Federal Reserve, Galler said the market has reconfigured itself, which is not unhealthy and will be fine long-term.

"As the overall housing supply grows and inflationary pressures ease, the trends will favor those who want to own a home,” Galler said.

Related Topics: HOUSINGREAL ESTATEDULUTH
Brielle Bredsten is the business reporter for the Duluth News Tribune.

She earned a bachelor's degree in Professional Writing & Technical Communication, with minors in Advertising and Creative Writing from Metropolitan State University, in addition to a two-year professional paid internship as reporter/editor of the student newspaper.

She is an award-winning professional writer, photographer and editor based in rural Minnesota. Over the past decade, Brielle Bredsten has contributed more than 1,000 articles, feature stories, non-profit press-releases, photographs and columns. Her work has been published in several community newspapers.

Send her story tips, feedback or just say hi at bbredsten@duluthnews.com.
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