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Why Twin Cities housing prices might see some major increases in coming years

The Twin Cities metro has one of the lowest housing vacancy rates anywhere in the nation — worse than notoriously unaffordable San Jose.

housing
The vacancy rate reflects the basics of supply and demand that’s driving housing prices up across the Twin Cities.
MinnPost photo by Corey Anderson

Talk to someone in a big coastal city about housing and you quickly learn how lucky we are in the Twin Cities. People regularly pay astronomical prices for a home in California, the Pacific Northwest, the Eastern Seaboard. I’ve always felt a certain Minnesotan smugness when I tell people about Twin Cities homes that cost a fraction of what they would cost in other cities. (For example, here is what $500,000 buys in the District of Columbia.)

But that might be changing.

A recent analysis from Jonathan Schroeder, a research scientist for the Institute for Social Research and Data Innovation, found that the Twin Cities metro has the tightest vacancy rate in the entire country for cities over 1 million people.

Vacancy rates for U.S. metros, 2020
Metro% Vacant
Modesto, CA3.50
Stockton, CA4.11
Provo-Orem, UT4.23
Ogden-Clearfield, UT4.55
Oxnard-Thousand Oaks-Ventura, CA4.56
Minneapolis-St. Paul-Bloomington, MN-WI4.62
Lancaster, PA4.64
San Jose-Sunnyvale-Santa Clara, CA4.64
Los Angeles-Long Beach-Anaheim, CA4.81
Madison, WI4.94
Seattle-Tacoma-Bellevue, WA5.20
Portland-Vancouver-Hillsboro, OR5.25
Boise City, ID5.25
Salt Lake City, UT5.31
Washington-Arlington-Alexandria, DC-VA-MD-WV5.57
San Francisco-Oakland-Berkeley, CA5.58
Fresno, CA5.66
San Diego-Chula Vista-Carlsbad, CA5.68
Colorado Springs, CO5.81
Raleigh-Cary, NC5.88
Institute for Social Research and Data Innovation

The number, which measures how many housing units (both rented and owned) are unoccupied at any given moment in time: 4.62%. For some context, that’s even worse than San Jose, which is famously unaffordable.

More than anything else, the vacancy rate reflects the basics of supply and demand that’s driving housing prices up across the Twin Cities. If it keeps up, we could soon find home prices and rents on par with much more expensive metros like Denver or Seattle, exacerbating existing inequality and eroding one of the key things that makes Minnesota attractive in the first place.

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The origins of the housing crisis

The Twin Cities’ housing shortage has been a long time coming. Its modern origins date to the 2007 financial crisis and recession, triggered by wildly unethical housing loans orchestrated by Wall Street banks. The resulting long-term problems for U.S. cities include a long list of things like predatory lending and foreclosures that gutted homeownership rates, particularly for people of color.

Another major consequence of that housing collapse was a freeze on housing production, which dug a vast hole in the housing supply from which growing cities like Minneapolis-St. Paul have yet to escape. The rapidly increasing housing prices we’re experiencing today are a direct consequence of the shortage, which Gov. Mark Dayton’s 2017 task force reported amounted to around 50,000 homes.

“There is almost a direct drop in every single metric we use to track housing production,” explained Lisa Barajas, referring to what happened after the financial crash. “The building permits or even subdivision platting in suburban areas: all of those fell off to next to zero. If you look at big year-to-year averages, they were remarkably low during the housing bust.”

Barajas works on housing policy issues at the Met Council, which represents the Twin Cities’ superpower when it comes to tackling the housing crisis. Few other American metro areas boast an actual regional government body. For most other U.S. metro areas, local control and fragmentation mean that regional housing production goals are a nearly impossible task. That’s why California, in many ways a poster child for housing dysfunction, recently enacted a series of statewide policies aimed at wresting land-use control away from cities.

At least in the Twin Cities, the Met Council has some ability to affect housing policy. They deliver population forecasts to each of the metro’s 182 communities, and at least track whether or not each builds enough affordable housing. For example, over the last decade, only 13 metro-area cities got close to building their share of affordable housing.

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Vacancy vs. affordability

If you talk to the policy wonks about which city has the nation’s worst vacancy rate, they caution that “it’s complicated.” Both Jonathan Schroeder and Lisa Barajas pointed out to me that there are lots of variables when it comes to comparing vacancy rates across cities: things like Airbnb homes, people that own second homes or differences in turnover and mobility.

Another problem is that generalized vacancy rates paper over critical differences along what one Met Council researcher calls the “affordability spectrum.” Previously, affordable housing construction was done using overall averages: anything at or below 80% of the Area Median Income (AMI) counted in the tally. But the Met Council has recently added more nuance to its affordable housing calculations.

Metropolitan Council
“For the first time, [we have] affordable housing growth numbers in bands of affordability,” explained Tara Beard, who works on housing grants for the agency. “It’s a remarkable change and gives a very different perspective on the health of supply and demand for affordable housing in the region.”

The latest Housing Link data reveals that in Minneapolis there are no apartments available within city limits at the 30% AMI level.

“Vacancy rates look different across bands of affordability,” said Beard. “Again, if you generalize regional vacancy rates, you really miss the insane inequities across bands of affordability. The vacancy rate across 30% AMI is zero, and if you look at growth, where units are getting built, units at market rate 51% AMI and above are getting built, while units affordable at 50% or below are not.”

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The disparate vacancy situation reveals that the housing shortage and the affordable housing crisis are really two different problems, often lumped together by narratives of convenience. While the housing shortage drives up prices across the board, the affordable housing crisis revolves around low incomes and a lack of housing subsidies at all levels of government. That said, the fundamental shortage makes the affordability problem worse for everyone.

Rent regulation and housing supply: is a ‘both/and’ approach possible?

This distinction is why, as Minneapolis studies rent stabilization and other policies aimed at providing security for the city’s renters, it will be important to tread carefully around tradeoffs.

Metropolitan Council
If you look at the data on where new housing has been built in the Twin Cities, the City of Minneapolis has done the lion’s share. Compared to St. Paul or any of the suburban cities, the housing construction in Minneapolis has lapped the field: during the last decade, almost 25% of new regional housing has been built within city limits. (By contrast: St. Paul’s equivalent number is around 7%.)

This makes Minneapolis’ housing policy choices even more important for the metro area. Crafting rent regulations involves a delicate balance between alleviating pressure for renters while making sure that the pace of housing construction stays high enough. It’s a challenge that few cities have been able to meet.

This kind of “either/or” tension has been central to housing policies around the country, according to Mark Treskon, a researcher at the Urban Institute, a national housing think tank.

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“There’s a lot of research on stability, that it limits people getting kicked out of gentrifying neighborhoods,” explained Treskon, when I asked him about the housing shortage. “But I don’t think rent control is something that can actually really affect the overall affordability of a complicated housing market, with millions of households and growing population. Relative to a quickly growing area, rent control can’t handle that.”

The trade-off, as Treskon explains it, is balancing regulations around stability with the need to increase the housing supply. Most of the time, these kinds of policies come at the expense of the other. For example, if the Minneapolis rent stabilization policy passes, the details of the policy could either help or hurt the overall housing shortage.

“You need to figure out some way to getting more housing units in a growing community, to keep up the pace,” explained Treskon. “Rent stabilization is more effective as a both / and  to create some level of stability for renters, but you also have to create housing  that does the ‘economics 101’ [thing, the] increasing supply [and] lowering the price dynamic.”

The vacancy number, and the fact that the Twin Cities’ boasts the tightest housing market in the country should be an alarm bell. Without building a lot more homes throughout the metro, the basic supply crunch will keep driving up costs for everyone.