The current real estate storm may have you in a panic, but here in the Twin Cities, there is hope.

July 2008

Yes, there is shelter from the storm. Subprime credit woes are one thing, but will sky-high fuel prices spark a migration back to the city?

Here’s a shocker for you. You’re sitting down, right? The real estate market has been better. And it might be awhile before it returns to as good as it was.

The last eighteen months have made experts out of everyone who owns a home or wants to sell or buy one. Some of the trends, such as the unprecedented, never-before-in-the-history-of-this-country 80-plus- percent increase in the value of the average American home from the mid-1990s to 2006, have achieved legendary status. This run-up is now deflating, and there’s little agreement on how much of that 80 percent we’ll be giving back.

While Wall Street and industry pros are trading accusations about who is to blame for bursting the housing bubble and predicting when the market will bottom out, it’s important to remind ourselves that a long overdue market correction is not The End of Days, as painful as the retraction has been for some. Most things that go up very fast also come down. There is, however, a ying for every yang. While some Twin Cities communities and neighborhoods are experiencing steep, debilitating declines in valuation and even foreclosure, we have been able to identify twenty areas around the metro where sale prices have held ground reasonably well. And if that isn’t enough cockeyed optimism for you, just keep telling yourself things could be worse. Much worse. We could be living in Miami, Phoenix, Las Vegas, or Southern California.

In order to point our finger at neighborhoods where first-time buyers, young professionals or families buying up or empty nesters trading down can still buy and sell with comparatively stable prices, we sought the counsel of some of the smartest kids in the realty game, pros who have seen crazy times before and know what is unique to this era and area and what isn’t.

As a freshly certified expert yourself—and we all are after eighteen months of reading terror-infused headlines and trading apocalyptic statistics with our neighbors—you are free to disagree with the professionals’ perspectives and our choices of the Twin Cities’ best neighborhoods (in a bad market). But we think we’re on to something. (As opposed to, you know, to being “on” something).

If the subprime mess wasn’t bad enough and the ensuing credit crunch wasn’t bottling up a lot of demand, the skyrocketing price of energy—gasoline for commuters and heating fuels for homeowners—is adding further complexity to the real estate picture. Bad markets have come and gone, but this one feels different because of the “perfect storm” of tight credit and rapidly escalating oil prices. So, we wondered, is this particular confluence of factors convincing Twin Cities buyers and sellers that a seismic shift is taking place, and are they adjusting their real estate priorities accordingly?

In mid-May, Edina Realty cited the “pull of central areas—downtown, uptown, closer-in suburbs” as the “single biggest trend of the spring season.”

For years, Barry Berg has rung up as much in annual sales as any single agent in the market. Now the head of The Barry Berg Group, Berg often deals with a well-heeled clientele comparatively unaffected by the current turmoil. (He says his average sale price is “over $1 million.”) But he knows the Twin Cities market as well as anyone.

Over a late-afternoon coffee at a Caribou near his Lake Calhoun offices, Berg says the Twin Cities market has already hit something of a plateau in terms of receding value. For everyone overwhelmed by the thought of an apocalypse, he counsels, “What was artificial is what has gone before. Now we’re searching for the new reality,” which he thinks the Twin Cities market is close to realizing. “Think of it like a rubber band that is stretched very tight,” he says. “There are still vibrations, but it is basically level. I believe that describes the situation here. I really do.

“For the most part, lenders and buyers here behaved more responsibly than elsewhere. We are fortunate that we haven’t seen the speculative excesses of some of the Sunbelt cities.”

One post–Katrina study among the hundreds analyzing market behavior speculated it would take five years of high fuel prices before Americans would accept a new reality and begin adjusting their lifestyles—including relocating—to mitigate energy costs. If that’s the case, are the inner cities and first-ring suburbs, with their promise of less car time and more amenities within walking distance, poised to see an in-migration? As you can see in our chart on page 110, neighborhoods such as Merriam Park, St. Paul’s Cherokee/West Side, Nokomis, Southwest Minneapolis, Edina, and Hopkins are already showing greater resiliency than other areas, notably, commute-heavy exurban communities.

“It’ll be slow,” says Berg, “if for no other reason than people whose dream has been a newly constructed 4,000- or 5,000-square-foot home in Eden Prairie are going to have to alter their perception of their ideal house. There’s no question there are plenty of wonderful neighborhoods within a twenty- to twenty-five-minute drive of downtown and they are neighborhoods with good, well-built, interesting homes. But there are no significant plats of undeveloped land left in the city and first-ring suburbs for new construction. There just isn’t. This means the homes this group of people will be looking at will be for the most part older and smaller than what they have been imagining.”

Berg mentions that the “next iteration of condos” may also reflect a shift in thinking away from, as he says, the “mentality of the old bumper sticker, He Who Dies with the Most Toys Wins. In truth, it may be just the opposite. I’m hearing people say, ‘What do I need with 5,000 square feet? It has a lower level and I never go down there. Show me something interesting with 2,500 or 3,000 square feet. I want a home to raise my family in, not lose it in.”

Cynthia Froid, who sells in Minneapolis’s trendy Mill District, says she is not aware of fuel costs motivating her buyers—yet. She still sees quite a range of size and style interests from her clientele.

Over at Ralph Burnet’s Chambers Hotel, the chairman of Coldwell Banker Burnet and one of the Cities’ most irrepressible boosters (who also developed the W Minneapolis—The Foshay) is dismayed by the media’s barrage of doomsday stories. “Historically,” says Burnet, “we haven’t had the steep peaks and valleys here like the East and West Coasts, and we’re not seeing that this time.

“You don’t hear that often enough. Lenders here were more responsible. But, yes, there is an oversupply and there are price adjustments. That’s typical. We’re going to lead the country out of this, and I think it’s already begun.”

Glenn Dorfman, former COO of the Minnesota Association of Realtors and now president of Common Sense Solutions, shares Burnet’s essentially upbeat view. “Look,” he says, “we had an 85 percent run-up in prices over seven years. In a worst-case scenario, we may give back 30 percent. That is still a 55 percent gain over seven years—when the average increase has been 3 percent, maybe 4 percent. That is still pretty damned good.”

Dorfman believes the baby boom demographic is an even more significant factor than the price of gas in firming up demand for neighborhoods with easy access to restaurants, theaters, medical services, and other amenities. “Adjacency to services always has been a primary factor with aging populations, and the 80 million baby boomers will be the biggest aging population we’ve ever seen.” In addition to being upbeat about both inner cities and first- to third-ring suburbs such as Edina and Woodbury (“the exurbs will be problematic,” he cautions), Dorfman is optimistic about the prospects for established, amenity-rich recreational areas like Brainerd lakes—thanks again to aging boomers.

While the numbers aren’t as shiny and alluring for St. Paul’s Cherokee/West Side area as they are for neighborhoods such as St. Paul’s Mac–Groveland and Minneapolis’s Nokomis, Dorfman sees a now-rooted Hispanic community anchoring solid valuations there just as Asian businesses and families have bolstered Frogtown’s University Avenue corridor. Longer term, he says he can imagine the gentrification of Northeast moving across the freeway to the troubled North Side. Why? “There’s a lot of inventory on the low end,” he says.

Dorfman agrees with Barry Berg’s theory that this “amenity factor”—which includes walking access to St. Anthony, 50th and France, Grand Avenue, and other neighborhood business districts—is just as important to property values as the long-cherished belief in “good schools.”

“To tell you the truth,” he says, “I wish we had never had the 85 percent run-up. I really don’t. It convinced too many people they could get rich quick and easy. It doesn’t work like that. Now we’re finally returning to reality, and it really isn’t that bad. True, some people have been hurt very badly. But even if, as I say, in the worst of the worst-case scenarios 20 percent of all mortgages go bust, and we won’t get close to that here, that means 80 percent will not. Eighty percent will not only hold their own, they’ll be 50 percent or more ahead of where they were seven years ago.”

Bottom line: All hope is not lost.