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Legislators left plenty of work on the table as they negotiate a possible special session.

Minnesota legislators worked until their midnight Sunday deadline to pass key pieces of a sweeping global agreement to spend billions on public safety, education and other programs over the next three years while cutting billion of dollars in taxes.

In the swirl of late-night negotiations and votes, some of their priorities got done — but many did not.

Legislators are negotiating with Gov. Tim Walz about the possibility of a short special session to tackle some of the items they didn’t get to before their deadline to adjourn. Some prefer waiting until next year to spend the remainder of the state’s projected nearly $9.3 billion budget surplus.

Here is what legislators did manage to get done this session, and what they left on the table:

What got done

Hero pay: After nearly a year of negotiations, legislators struck a deal in late April to spend $500 million on checks to workers on the frontlines of the pandemic. Roughly 667,000 workers will be eligible for checks of up to $750.

Unemployment insurance: A historic level of requests drained a state unemployment insurance fund during the pandemic. The divided Legislature agreed to spend $2.7 billion to cover federal debt and replenish the fund, staving off payroll tax hikes on businesses.

Reinsurance: Fearing rate hikes as a time when costs are already high for Minnesotans, legislators agreed in March to extend the state’s so-called reinsurance program for three years, spending more than $700 million to help insurers cover the costs of the most expensive claims on the individual insurance marketplace.

Liquor: Legislators agreed in May to lift a production cap that has prohibited the state’s biggest breweries from selling beer to-go in growlers. The deal also allows small breweries to sell cans and distilleries to sell one full-sized bottle per day per customer to take home.

Broadband: State leaders will spend $50 million over the next three years to expand high-speed internet access through a border-to-border broadband grant program. Minnesota is also using federal dollars for broadband development, with $60.7 million from the American Rescue Plan and $100 million in Infrastructure Investment and Jobs Act cash.

Drought relief: Legislators passed a drought relief package, something farmers had been waiting for since last summer. The spending includes more than $8 million in grants to livestock and specialty crop producers, $5 million for tree planting and $2.5 million to the Rural Finance Authority’s disaster loan account.

ALS research: Spurred by Sen. David Tomassoni’s diagnosis of amyotrophic lateral sclerosis, legislators devoted $20 million to research grants to try to cure ALS or improve the lives of people with the disease. The state is also spending $5 million on caregivers.

Mental health: In the final minutes of the session, legislators passed a mental health bill. Some key provisions include the creation of a process for people who are found incompetent to stand trial, as well as increased funding for mental health provider loan forgiveness and mental health programs connected to schools and youth shelters.

Student data privacy: A last-minute deal struck by the Legislature would crack down on how tech companies can use student data and prohibit them from setting that information to marketing companies.

Opioid settlement: The two parties sent a bill to Walz to create a framework for distributing about $300 million the state is receiving as part of a settlement with opioid distributors and manufacturers.

Legacy: The House and Senate cleared package this year that spends $159 million for outdoor conservation and restoration, which will be distributed to projects across the state in 2023.

Southwest LRT audit: All sides agreed early in session to spend $200,000 for the Legislative Auditor’s Office to review the troubled Southwest light-rail project. The agreement also requires the Metropolitan Council to provide status updates on the project twice a year to legislators.

Structured settlements: After a Star Tribune investigation showed how companies prey upon catastrophic accident victims who get settlement payments, state leaders moved to protect people by becoming the only state to require the appointment of an outside attorney to advise on the sale of structured settlement payments.

Veterans funding: In early May, the House and Senate agreed to spend tens of millions to fund veterans homes and cemeteries, bonuses for military service and efforts to end veteran homelessness in the state.

What did not get done

Tax cuts: Despite striking a historic deal to use the state’s surplus to cut $4 billion in taxes — including the elimination of state taxes on Social Security income — the plan was held up in the final hours of session along with spending packages. The deal did not include direct rebate “Walz checks,” a top priority for the governor.

Education funding: Contentious disagreements between the two parties over funding for student mental health, special education and literacy programs kept them from striking a final deal for more than $1 billion for classrooms over the next three years.

Public safety: One of the top stated priorities for all state leaders entering the year, public safety proved to again be one of thorniest policy areas to try to work out. As lawmakers sailed past the deadline to pass legislation this session, Senate Majority Leader Jeremy Miller, R-Winona, described the House and Senate as still “pretty far apart” on funding dedicated to law enforcement versus community nonprofits.

Infrastructure: Top negotiators included $1.4 billion for public infrastructure construction projects in their end-of-session deal framework, which ultimately fell apart. About $400 million would have gone toward local projects, said Senate Capital Investment Chairman Tom Bakk, noting they had also planned to spend $150 million in cash. Legislators also wanted to designate matching funds to ensure they could access federal infrastructure dollars, but they failed to do so.

Health care: Top leaders agreed to spend $1 billion on health care over the next three years, but House and Senate negotiators couldn’t settle on how much of that total to devote to pay raises for workers in long-term care, group home employees, personal care assistants and more. Pay raises were a top priority for Senate Republicans in the midst of a long-term care staffing crisis.

Sports betting: Though a bipartisan group of legislators in both chambers was hopeful that this would be the year sports betting becomes legal in Minnesota, those hopes were dashed in the session’s final weeks. The House approved a bill that would legalize in-person sports betting at tribal casinos and online gaming through vendors that the tribes oversee. The Senate proposal would have included the same provisions, while also allowing betting at the state’s two racetracks.

Housing: House Democrats and Walz headed into the session hoping to put hundreds of millions of dollars toward adding affordable housing and keeping people housed as evictions climbed. Senate Republicans wanted some spending to expand homeownership and hoped to block cities’ rent control measures. They could not reach a deal.

(Star Tribune)

Good morning Construction Survey Partners –

We’re released general survey results into the wild, and I wanted to follow up with all partners to deliver a variety of data products for your organizations, at least some of which I hope you will share with your members.

• May 6 webinar discussing results (30 minutes) — https://www.minneapolisfed.org/events/2022/regional-economic-conditions-construction-sector-activity-may
• A summary PPT of survey results.
  • I also offer a lot of time-series results here that are not in the spreadsheet.
• A spreadsheet of survey results, by question, and including comments (always many, and very interesting)

A couple of notes on the survey results:

• The large majority of survey respondents were in Minnesota, so I am not doing any state breakouts
• I offer some sectoral breakdowns in the PPT, but do not provide the data in the spreadsheet in an effort to keep that shorter as well.
• I can provide special cuts of the data on request
• I am also available to talk to your members and/or board of directors to discuss survey results and other “economic conditions” matters

Next survey: On our new bi-annual survey schedule, right now I am planning on the Fall survey in early November (tentatively Nov 7-14). I’ll be in touch when we get closer to that survey.

Thank you again for your commitment to this survey. I hope it provides the value you need to continue.

Ron Wirtz
Regional Outreach Director

FEDERAL RESERVE BANK OF MINNEAPOLIS
Pursuing an economy that works for all of us

W 612-204-5262     M  612-430-4917
@RonWirtz I minneapolisfed.org I LinkedIn I Twitter

The rise in housing prices is nothing new, though prices weren’t rising quite this steeply until the pandemic hit.

Anybody who knows anybody house hunting in the Twin Cities right now has probably heard the horror stories: in the current real estate market, some people are putting offers on houses far and above the sellers’ asking price — and getting beat by people making even higher offers.

In recent years, low interest rates and high demand for a limited number of houses currently on the market has driven home prices up and up and up — and up, and up — even through a pandemic recession.

Even with mortgage interest rates rising — and expected to rise more soon — home price increases show no signs of slowing down, yet.

Why prices are up

The rise in housing prices is nothing new, though prices weren’t rising quite this steeply until the pandemic hit. If you go back to about 2012, the market started to show a steady recovery from the price plummet of the Great Recession.

“The market rebuilt strong all the way through, up until the COVID pandemic,” said Chris Galler, the CEO of Minnesota Realtors. Then, the market picked up — for a few major reasons on both the demand and supply side of the equation.

Zillow Home Value Index by month for the Twin Cities, 2000-present
Zillow’s Home Value Index is designed to be a seasonally-adjusted measure of a typical home’s value in a market, reflecting homes in the 35th to 65th percentile range.

On the demand side, things went a little nuts during the pandemic. Many office workers were suddenly using their homes as offices. The kids were home from school, too, which caused many to re-think their living situations and what they wanted out of a home.

Between government stimulus checks and staying home, household savings increased, allowing some people to save up for down payments. At the same time, low mortgage interest rates — under 3 percent for a 30-year fixed-rate mortgage at times during the pandemic — made it cheaper to borrow money.

30-Year fixed rate mortgage interest rate, averaged by year, 1971-2021


^{Source: Federal Reserve Bank of St. Louis}

And on top of all that are generational dynamics. Many millennials — people in mid-late-20s to early 40s — are the biggest generation since baby boomers — are in a prime home buying age group, which means a lot of people are in the market. At the same time, baby boomers are living longer and staying in their houses longer than past generations had, restricting the supply of units on the market.

The supply-side issues have roots in the Great Recession, when the construction of homes ground to a halt after the bottom fell out of the real estate market. In Minnesota as elsewhere, the number of homes built lagged behind growth in the population.

“Supply is lagging demand at tremendous levels,” said Libby Starling, director of the Federal Reserve Bank of Minneapolis’ Community Development and Engagement Department, who estimates that the seven-county Twin Cities metro’s housing stock is short 80,000 housing units relative to what’s needed to keep pace with population growth.  “What we’re seeing is the pressure of demand when there’s simply not enough supply to meet it.”

While home construction has picked up, it’s not making up for the lost years. Additionally, the rising cost of building materials means new homes are less affordable than they might be otherwise.

Put the demand and supply issues together and you have a lot of competition for a limited housing stock. Realtors often consider the market to have good inventory levels if there are six months worth of homes for sale, meaning it would take about six months to sell all the houses on the market. Inventory has been a lot lower than that lately, dropping from 0.9 months last February to 0.7 months this February in the Twin Cities, according to Minnesota Realtors.

Low inventory and high demand has prompted realtors to try to entice sellers into the market. In high-demand neighborhoods, some realtors knock on doors or drop off flyers that encourage homeowners to sell their houses or specify the types of homes their clients are looking for, including their budget.

“We’re having to actually go and pursue things through all different avenues to find things for [buyers],” said Tracy Baglio, who has been a realtor in the Twin Cities for decades and is the former president of the St. Paul Area Association of Realtors.

It’s in this environment that houses are selling quickly. Stories of multiple over-asking offers within the first day on the market are common. And in the Twin Cities, sellers, on average, are getting 100.9  percent of the list price for their homes compared to 100.2 percent a year ago, according to Minnesota Realtors.

All the supply and demand mismatch has created an especially tough homebuying environment for people looking to buy in the lower end of the market, Starling said.

Starling said some analysis suggests that with tight inventory in the middle of the market, households that can afford $400,000 or $500,000 homes are instead placing high bids on homes under that budget, beating out lower bids. Investors, too, are able to put attractive offers on homes, driving up prices.

“[That’s having the subsequent effect on affordability for lower income households, for whom these are the only options,” Starling said.

Another bubble?

Given fast-rising home values, Starling said it’s valid to ask whether this is another housing bubble, like the one that preceded the Great Recession. But the situation today is different in many ways that make it unlikely housing prices will see a major recession like they did at that time.

Leading up to the 2008 recession, people could borrow a lot of money to buy a house, without putting much — if anything — down, Galler said. This caused prices to rise as people paid large sums for homes. Lenders were also less scrutinizing of credit scores, which led some people to get in way over their heads, Galler said. When the Great Recession hit and home values dropped, many people were underwater on their mortgages, owing more than their houses were worth. Ultimately, there was a rash of foreclosures.

Today, Galler said, is different. Lending standards are stricter. Lots of houses are being bought with 20 percent or more down.

At a basic level, the fundamentals are pretty different now compared to then, Starling said, and without some huge factor — like the shutdown of a major Twin Cities employer that moves thousands and thousands of jobs out of the state, it’s not likely.

“I think the fundamentals are very much that we need more housing to keep up with household growth in our region,” she said. “Household growth is slowing but still we have a lot of housing needs to catch up on.”

Slowdown ahead?

While housing prices don’t seem likely to drop rapidly like they did when the 2008 bubble burst, there are some signs that the rapid growth in prices may start to slow down.

During the pandemic, there were a lot of factors injecting money into the economy: government stimulus payments, an increase in savings as people stayed home and low interest rates helped money flow, contributing to faster-than-usual inflation.

Mortgage interest rates began to tick up in early 2021. In mid-March, the Federal Reserve raised interest rates, and has signaled they will rise further – an effort to slow down inflation — in the future.

Even with interest rates rising steadily over last year and the recent rate hike — weekly 30-year fixed-rate mortgage interest rates averaged  4.7 percent in the last week, a jump from less than 4 percent in March — the housing market hasn’t shown signs of slowing down yet.

The effect of the recent rate hike, mid-March, likely hasn’t been seen in the market yet, said Andrew Babula, director of the real estate program at the University of St. Thomas Opus College of Business. Many people closing on houses now were locked into rates before the hike.

Behavior around housing doesn’t change as quickly as it does around, say, grocery store or gasoline purchases, Galler said. If you look at the trajectory of interest rates over time, they still remain very low.

“People say, well, once we hit the high interest rates people won’t buy homes,” Galler said. “They will. They did during the ’80s, when we had 15, 16, 17, 18 percent interest rates.”

Now, with interest rates expected to rise further, some people may be trying to buy quickly before they rise more.

But the effect of the rate hikes are likely to show up eventually, Babula said.

“The expectation is that is going to slow things down,” he said. Given that supply and demand issues remain, the rate will likely have some dampening effect on price increases but not stop them entirely.

“Prices will probably not continue to increase at the rate … they have been, but they’ll either remain pretty steady or slowly go up,” he said.

Still a good time to buy?

Given all the factors at play — rising prices and rising interest rates, a lot of buyers may be asking themselves whether now is a good time to buy a house.

That depends more on the homebuyer’s situation than it does on market factors, Galler said.

If people feel secure in their job, like the neighborhood they’re buying in, can afford the mortgage payment and plan to stay for at least five to seven years, those are good reasons to buy a house, Galler said.

“Price appreciation has been significant because of low inventory the last few years and very, very low interest rates. But it probably will go back to a more normalized marketplace and that’s where that five to seven years really comes in,” he said.

Baglio said the fact that investors — who buy based on numbers and not emotions — are buying is an indication the market is strong.

Her biggest advice for prospective buyers in this market is to have patience in this competitive market.

“Just have patience for the right thing,” she said.

(MinnPost/ Twin Cities Business)