South Dakota Housing Frenzy Has Some Worried About Crash

SIOUX FALLS, S.D. (AP) — Real estate and home sales are setting records in Sioux Falls and across the country.

From cash offers to low mortgage rates to hundreds more real estate agents hoping to jump in the market and help buyers compete for homes, right now might feel like déjà vu.

Searches for “housing bubble” and related terms have skyrocketed on Google across the U.S., as people recall 2008’s housing market crash and the pain of the recession that followed for years.

Today’s buying frenzy for homes feels eerily similar for many, the Sioux Falls Argus Leader reported.

“Last year it started going crazy with people wanting new builds,” Andrew Theesen, a broker-associate at Sioux Empire Home Team at eXp Realty, said.

Theesen noted buyers, sellers and plenty of new agents hoping to cash in all have arrived.

“It seems like there’s so many agents that have come on that it’s saturated,” he said. “We have to go further out now to Brandon or Harrisburg.”

While there’s no way to truly predict the timing of a crash, there are signs pointing in either direction that real estate will stay strong or deflate.

The Great Recession all started with mortgage approvals for those who couldn’t afford them, plus a similar frenzy for real estate that exists right now in Sioux Falls and throughout the country, even the world. Although mortgages are more regulated now, pricing still is hot.

And it isn’t just buyers that are concerned. The bubble question is taking center stage.

In order to slow the impact of COVID-19 on the housing market, the Federal Reserve bought over $1 trillion in mortgage bonds last year.

The federal home price index shows how national home prices have jumped.

As it looks to future guidance, Federal Reserve Chair Jerome Powell is meeting with U.S. Treasury Secretary Janet Yellen to discuss risks with regulators in this hot housing market.

“I am a little bit concerned that we’re feeding into an incipient housing bubble ... I think we don’t need to be doing that with the economy growing at 7%,” St. Louis Fed President James Bullard said in a statement to the Wall Street Journal.

So, history tends to rhyme.

Even during the peak years of the Great Recession, Sioux Falls did not suffer as the rest of the country did. Even if the skyrocketing costs of housing fueled by demand and a lack of places to buy all created a perfect storm and foreclosures abounded, it’s not likely to be as strong now, according to those in the industry.

The massive growth in Sioux Falls, a lack of homes, plus plenty of first-time home buyers taking advantage of lending programs are all what’s fueling the market, according to the real estate industry. Even nationwide, Freddie Mac reports a 3.8 million home shortage in 2020.

And sellers are cashing in.

“We knew it was a good time to sell, an opportune time,” said Stephanie Collins, who along with her husband sold her home on the 600 block of S. Duluth Ave. in five days with a “generous offer.” They took the jump to move closer to family while Collins is a stay-at-home mom.

Stephanie Collins and her husband Scot sold their home in Sioux Falls recently with Mike Niemeyer to take advantage of the hot market and to be closer to family while Collins works from home.

Yet Sioux Falls growing is actually a good sign, in some historical respects.

“Our market was not nearly affected in 2008 compared to other markets across the country. I’m holding onto that as a real estate agent,” Kory Davis, a Sioux Falls real estate agent for over 20 years and owner of The Experience firm, said.

“We seem to be adding major employers compared to holding back (in 2008). That’s good news and shows how this is different,” Davis said.

In Sioux Falls, although homes could be overpriced, Davis stated that values won’t suddenly drop to a third of their worth if something were to change, like Phoenix and other markets did in those years when skyrocketing home costs turned out to be far more than buyers could afford.

That still doesn’t ease the stress for buyers now.

In early May, the median sale price of a home in Sioux Falls was $250,000, according to the Real Estate Association of the Sioux Empire (RASE). For the 12-month period spanning July 2020 through June 2021, pending sales in the Sioux Falls region were up 19.4 percent overall while the amount of inventory, or homes to choose from, was down nearly 40%.

“I’ve been in Sioux Falls since 1993 and haven’t seen a market like the last six months for sure. I’ve never seen the bidding wars; I’ve never seen the price overlist (like this),” said Brian Schmidt, owner of Ace Appraisal.

Schmidt’s job is to use past and more current sales data to help appraise the value of a home. He’s facing issues trying to fairly state what a home’s value is, and subsequently what a bank’s monthly payment loan offer to buyers will be, when prices jump within days.

“You’re not trying to be the bad guy, but at the same time you have to say this is what’s supportable,” Schmidt said.

Year over year home prices in June for Sioux Falls have risen considerably, according to monthly data from the Real Estate Association of the Sioux Empire.

Buyers could potentially have remorse in several months if prices drop. They’re willing to pay additional cash on top of their down payment and monthly mortgage to just get into a home now. And these days more are reconsidering.

“It’s half and half on our clients where half are able to go in and find a home. But we’ve seen where some of them say, ’Hey let’s wait until winter or let’s wait until next year,” Theesen said.

“At the end of the day, we looked at the market and how tough it was going to be to compete with other offers,” said one buyer working through Theesen. “Yes, we paid more, but after losing out to individuals paying cash, we had to adapt on the offers we made.”

This Sioux Falls home went well over asking, ”“Yes, we paid more, but after losing out to individuals paying cash, we had to adapt on the offers we made,” the buyer, who wished to remain anonymous, said.

As an overall trend, there are still a steady stream of homes sold now compared to the last several years during the January through mid-July season, with some 1,962 single family homes sold in 2016 compared to 2021’s 2,127.

Steady sales on the whole are good, and if the lumber and homes under construction can catch up in time for all the demand, there might not be much further issues for those looking to make the biggest investment of their lives.

Those who can buy a home and afford to hold onto it for years will still be strong winners in this market, according to John Maurer, member of RASE and the Weichert, Realtors — The Agents team, who doesn’t believe this market is a bubble.

“It’s easy to think it’s a bubble when the last time real estate was in the news daily was in ’08,” Maurer said, adding that “those who understand equity,” are winning.

Equity always wins over time, especially when they can take advantage of today’s super low mortgage rates that hover around 3% while “moving their net proceeds into a down-payment on a more expensive home,” Mauer said.

The best thing to do is to wait after buying a home, in order to let equity catch up.

Those trying to make a quick one- to two-year flip on their investment will be “sorely disappointed,” Lori Halverson, an assistant business professor at the University of Sioux Falls said.

Further, although renters can and should save for a home, rising rents and so few homes to buy under $250,000 makes it hard for first-timers to move up now, especially if they can’t take advantage of The First-time Homebuyer Program in South Dakota or enough savings to pay some large price over asking.

Still, homes are key to growing wealth.

“Whenever you make a purchase of a home, it’s a good investment not only for housing needs but for wealth creation,” Halverson said.

The trick is for those in lower incomes to lower their costs now, from school or credit card debt to car payments, in order to become attractive to lenders down the road. For those who don’t need a house now, it’s likely best to wait out the market and build credit in the meantime.