. . . . When Overall Housing Prices are Static
How can housing prices (average and median) be galloping ahead in some Twin Cities neighborhoods, when overall prices are only modestly rising (from still very low levels)?
Easy.
Explanation #1: not all neighborhoods are experiencing modest appreciation — some are doing GREAT; and
Explanation #2: tear-downs.
Case Study: Southwest Minneapolis
To see how these two phenomena interact to turbocharge appreciation, consider this hypothetical block of 10 homes, similar to real-life blocks in Twin Cities neighborhoods such as Linden Hills, Fulton, Morningside, Browndale, Minikahda Vista, Fern Hill, and Sunset Gables.
In fact, in Edina neighborhoods like Morningside and South Harriet Park, the metamorphosis is even more dramatic.
Step #1: Assume the block had these homes and associated fair market values in 2009:
House #1: $175k
House #2: $200k
House #3: $200k
House #4: $275k
House #5: $275k
House #6: $300k
House #7: $325k
House #8: $350k
House #9: $400k
House #10: $450k
Fast Forward to . . . Today
Now, fast forward 3 years, to 2012, and 
make these two (conservative) assumptions:
One. That the three most modest homes on the block have been torn down, and replaced by the three most expensive.
In fact, that’s exactly what has been happening; see, “From Worst to First, or Housing Leapfrog.”
Two. Neighborhood home prices have appreciated 25% since 2009.
Factoring those assumptions in, here’s the profile of the same block now:
House #1: $175k $750k
House #2: $200k $800k
House #3: $200k $850k
House #4: $344k
House #5: $344k
House #6: $375k
House #7: $406k
House #8: $438k
House #9: $500k
House #10: $563k
The takeaway?
Lopping off the most modest homes and replacing them with the most expensive — plus 25% market appreciation — is a high-octane mix.
Specifically, the median price on the block has jumped more than 60% (from $288k to $469k), while average prices have soared even more, from $295k to $537k — more than 80%(!).
Oh!
And there are two more factors making homeowners on this block even better off: 1) leverage (most borrowed 80%-95% of their home’s purchase price); and 2) record low mortgage rates.
