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Why it’s extremely difficult to buy a first home in Minnesota right now

MinnPost photo by Corey Anderson
At the end of 2006, there was about a 7-month supply of home inventory in the Twin Cities. Today, there’s about a 1.4-month supply.

It’s an agonizing problem for a lot of young people. You want to buy a house of your own. You can’t find a lot in your price range. You keep throwing rent money more-or-less down the drain and wondering if your income will ever support owning your own place. You despair as, in some ways, that prospect seems to grow dimmer all the time, even though you’re not living in a coastal city with sky-high home values.

It’s not just millennials’ imaginations, and it’s not because they spend too much money on avocado toast. The housing market has been hot before, but several factors, including rising home prices, high demand, low inventory, and the rising cost of building new homes have conspired to make now an especially difficult time to get a foot in the door of home ownership.

Insufficient funds

The first piece of buying a house, of course, is having the money to pay for it — the down payment, the mortgage, the taxes and the maintenance. But the cost of houses is rising faster than people’s incomes, making affording each of those pieces that much farther out of reach.

In 2014, just after the economy came out of the Great Recession, median home list prices in Minneapolis-St. Paul were more than three times greater than median household incomes, according to data compiled by the Federal Reserve Bank of Minneapolis. Median home prices have been rising fast, and are now record-high, at $246,000 a year compared to a previous all-time high of $230,000, according to data from the Minneapolis Area Association of Realtors.

Median sale price for Twin Cities homes, 2003-2017
The median sale price for Twin Cities homes has been climbing in recent years. These figures are not adjusted for inflation.
Source: Minneapolis Area Association of Realtors

Wages have begun to see meaningful increases after years of stagnation, but house prices are rising faster: in the Twin Cities today, they’re more than four times greater than median household incomes, according to the Minneapolis Fed. Home list prices are also outpacing growth in household income in Fargo-Moorhead and Rochester (and nationwide, for that matter) compared to just a few years ago.

Ratio of median home list price to median household income
Source: Zillow; U.S. Census, compiled by the Federal Reserve Bank of Minneapolis

High demand, low inventory

Even though incomes are rising, albeit slowly, many people are less willing than they might have been a decade ago to look at more expensive homes, having watched the housing market implode during the financial crisis. That’s despite low interest rates for borrowing.

“If you’re most people, your first home, you’re probably looking to keep your payments in that $1,200 to $1,600 a month sweet spot” — analogous to the rent on a two-bedroom apartment, said David Arbit, director of research and economics at the Minneapolis Area Association of Realtors. “People are kind of payment sensitive, especially after everything that happened with the housing downturn.”

Meanwhile, there are people looking in that lower price range who can afford to offer over asking, said Karli Pikala, a realtor with Verve Realty in Minneapolis who is in the market for a starter home herself. Sellers, on average, are getting a high percentage of their asking price, with some would-be buyers offering above asking prices.

Whereas a family of four with an annual household income of $100,000 might have looked at buying a $400,000 to $600,000 home in 2006, “today they’re going to be much more focused on that $200,000 to $250,000, maybe stretching to that $300,000 house,” Arbit said.

In this environment, people with limited budgets are at a loss because “there’s these other people swooping in and they have more flexibility with what they can afford,” Pikala said.

All that adds up to even more interest in houses in the starter home segment of the market. But there aren’t necessarily a lot of them available.

“There’s definitely a lot of demand for houses in the lower price range,” Pikala said. “There’s a ton of competition, which can be really frustrating, of course, for first-time home buyers, because a lot of them really can’t afford to go over their (budget).”

We’ve seen high demand for homes before, but the short supply is more acute now, Arbit said.

That has ripples beyond the new homeowner set. The lack of homes under $250,000 means more competition in the market, which also affects, say, baby boomers looking to downsize. It means many young professionals who, in past generations, might have bought a house, are renting, putting pressure on the rental stock and making it harder for lower-income people to find places to live.

At the end of 2006, there was about a 7-month supply of home inventory in the Twin Cities. Today, there’s a less than two month supply, Arbit said.

Active listings in the Twin Cities, 2003-2017
The number of active listings in the Twin Cities (shown for December of each year) has declined in recent years. The Twin Cities population increased 12 percent between 2003 and 2017.
Source: Minneapolis Area Association of Realtors

The lack of inventory puts pressure on prices.

New homes

Compared to today, in the early 2000s, it was relatively cheap to build a house or a development, and relatively easy to get a loan to finance it.

Times have changed, with prices for materials rising and banks more hesitant to make loans.

Today, developers are sinking more costs into building a housing unit than they were in the past.

It starts with the land, which has increased in cost since the cheap, bank-owned land that flooded the post-recession market was scooped up.

“Before you put a house in the ground, it used to be, about 20 to 30 years ago, the rule of thumb was the cost of a lot that was about 30 percent of a house, so if you could build an actual house you'd sort of do a multiplier of three to four,” said Remi Stone, executive vice president of the Builders Association of Minnesota.

Today, the lot might cost $100,000 — multiply that by three or four and you’ve missed the $250,000 and below market entirely.

The rise in new construction costs is also a result of more expensive raw materials: tariffs and demands on lumber mean some construction companies are paying 30 percent more, Stone said, and some of the higher-tech materials that go into houses now drive up prices, too.

Labor, too. The construction industry was hit hard by the housing bust and is facing a major workforce shortage, especially acute among workers with five to six years of experience, because fewer made a start in the construction industry during the recession, said Mike Paradise, the president of Bigelow Homes, a residential homebuilder in Rochester, who serves on Gov. Mark Dayton’s housing affordability task force. The shortage of workers means contractors have to pay higher wages to attract and retain workers, which adds to the overall cost of a home.

There’s also the matter of regulations — local, state and federal. While some — like energy efficiency rules — have good intentions and good results, Paradise said, they add to construction costs. In his view, it's important to make sure regulations are needed and cost-effective.

The rising cost of new construction is driving up the cost of all homes, Paradise said, as existing homes are a substitute for new, and if people who live in starter homes now can’t move into a house that’s a step up, or a step over from the home they’re in, that starter home isn’t available for the next family.

“It’s the perfect storm — all the factors lining up to create some issues,” Paradise said. “If we don’t change anything, it can get worse.”

He urges policymakers to look at different types of housing: from townhomes to condos and single-family homes, to figure out how to meet the needs of a population whose preferences and needs are changing.

Advice from the experts

Between rising home prices, short supply and lots of competition, it’s a tough time to be buying a starter home. But all is not lost, experts insist.

Kath Hammerseng, an Edina Realty realtor and the president of the Minneapolis Area Association of Realtors, said it’s important for new homebuyers to be open-minded: your first house might not be your dream house — maybe not right away, maybe not ever.

In this market, a lot of reasonably-priced starter homes are going to need some elbow grease, she said.

“Think about what you can create, dream about the potential places have, but try not to need it to be ready, turnkey ready,” she said. “Look for that orange carpet and purple walls — some people can’t look past that.”

And, Pikala said, be patient.

“The advice I would give to people looking is just to keep your expectations realistic,” she said. “Just know that houses are (getting) multiple offers, so try not to get your hopes up too much. There’s always something else that will come along. Be patient, it’s a process.”

Comments (10)

  1. Submitted by Anton Schieffer on 02/01/2018 - 11:59 am.

    Thank you for this piece

    This is a good overview of some of the many issues facing a region in the midst of a housing shortage. It’s important to remember that as prices go up across the board, it’s often those who are most vulnerable that end up holding the bag by competing in a housing market they can’t afford. That’s one more reason we need abundant housing across the state: so people can choose where to live at any stage of live, rather than it being dictated by economic circumstance.

  2. Submitted by Mike martin on 02/01/2018 - 06:15 pm.

    this article ignore the Met council’s part

    The met council’s part isn’t the only piece to this puzzle but it’s certainly a big part. The legislature passed a law regarding builder/developer warranties for new condos. because Builders couldn’t get insurance to build condos. They stopped building condos. This eliminated one source of 250000 to $400,000 new housing units.

    Because the Met Council supports mass transit. It’s support density. Which means it restricts the availability of land to build single-family homes. Which means higher lot prices. Which means Builders can’t build single family houses for less than 300,000.

    In order to find affordable lots you have to go outside the area that the Met Council controls. This means long commutes to jobs inside the 694 494 Loop. Which conflicts with Millennials desire to live in neighborhoods where they can do without a car.

    Also some suburbs have restrictions on minimum lot size. Lake Elmo being a well-known example. Minneapolis has lots of 40-foot wide lots. Why can’t the suburbs allow 40 ft wide lots?

    When you talk to Realtors nobody seems to want to buy fixer uppers anymore. Everybody wants to move into homes in perfect condition. Often it seems people would rather pay a hundred fifty bucks to a pest control company to remove a wasp nest rather than go to the hardware store and buy an $8 can of wasp spray do it themselves. How many Millennials even know how to fix a faucet or a toilet, put in a new light fixture, reseed a lawn etc.?

    • Submitted by Max Millon on 02/02/2018 - 12:21 pm.


      How are millennials supposed to become proficient at DIY home repair projects when they don’t own homes?

      How are they supposed to have the confidence to rehabilitate a ‘fixer-upper’ if they have never owned a home and don’t have the practical knowledge to know what they are getting themselves into with complicated building codes, costs, and the labor it will take to do so?

      Obviously you have to start somewhere, but with the current status of prices, wages, and student loan debt, one certainly can’t fault millennials for hesitating to pull the trigger on a risky project like that they have little to no experience with.

      • Submitted by kurt mann on 12/09/2018 - 02:28 pm.

        I learned most of my fixer up skills in High School. Took ALL the shop classes and drafting. I knew how to fix cars and design / fix homes before I owned either. Unfortunately the modern lazy parent thinks industrial arts classes are no longer needed LOL, and they cant fix things them selves hardly. Some entitled people think they are too good for this. Bought a fixer upper garbage house with no garage and designed and built it with my own hands. Only subbed out the excavating and concrete floor. I poured the foundation too with my home made forms- with city approval of course. Jack of all trades types are rare people today it seems. People are entitled and lazy- bottom line. Retiring in Mpls area is no longer possible, I will kiss this state and its taxes goodby someday.

  3. Submitted by Ray Schoch on 02/01/2018 - 06:39 pm.

    A big flaw

    Among the several flaws in the notion that real estate operates in a “free market” is the development in the public’s mind of viewing a home as an investment. Not a relatively static one, but one that can be actively manipulated through various banking mechanisms like “home improvement loans” and other structures by which a family or individual can affect their financial bottom line via a 2nd mortgage, made more palatable because the interest on such a loan has been deemed tax-deductible.

    We currently have a tax structure that subsidizes such loans, and home ownership in general, among the relatively affluent, and penalizes those who don’t have the financial wherewithal to “purchase” (once the mortgage is finally paid off) a house. It will be interesting to see what happens to home prices and the mortgage market should mortgage interest be disallowed as a tax deduction at some future date – an idea that was nearly incorporated into the 2018 tax legislation just passed. For me, and many others of modest means, the home mortgage deduction is pretty much the primary (in some cases the **only**) reason to itemize deductions, since it can only be claimed if deductions are itemized. Take that away, and I’ll be filing the 1040A postcard return.

    As in so many other situations, them that has, gets. Them that don’t, don’t.

  4. Submitted by Paul Udstrand on 02/02/2018 - 12:16 pm.

    Building on Ray’s comment

    Realtors created this notion of “starter” homes and young people have to ask: “Starting what?” Of course the answer is a career in home buying, as if buying a home is the beginning of some kind of investment portfolio rather than…. buying a place to live.

    Everyone has to remember that there’s a difference between buying a place to live, and entering the real estate market. Realtors invented the concept of “starter” homes because their livelihoods depend on people moving around and selling homes whether they need to move to or not. That may make sense for realtors but it makes little sense for homeowners.

    The idea that home is an asset to be sold rather than a place to live, within a community, compresses the housing cycle and drives prices up for no reason.

    None of this explains rising housing prices, regardless of demand, if buyers can’t afford to buy, prices can’t continue to rise, because houses won’t sell, no matter how many of them are on the market. So something else must be going on.

    In the meantime, I would advise young people be wary of real estate advice. Buy what you afford and remember that what you’re buying is a place to live with some advantages that you may not have in an apartment. When you buy a home, you’re not dabbling in a new career, you’re buying a place to live while you pursue your real career and live you life, and have a family. Very very very few EVER get their “dream” home no matter how many homes they buy so you need to decide whether or not your dreams revolve around the house you live in, or something else.

    • Submitted by Joseph Hager on 05/13/2018 - 08:30 am.

      I love the comment above and agree 100%! Another thing that is so very important is location, location, location. While inventory is low, I’m saddled with a starter home I wanted to sell so I could move, but it’s in a less desirable neighborhood in St. Paul and I won’t get what it’s worth. I became a landlord because I can’t stomach having to sell below worth in this market. I was lucky enough to find a second home in my price range (albeit a fixer upper), while still keeping the other house. I love my new neighborhood and …listen carefully to this part…I was not very picky and just grabbed what I could get in my price range to live in the neighbnorhood I want to be in. I’m now renting it out the other house and keeping it as investment property. It rented FAST, as there are so many ironies in this market. My point is…be very careful about that affordable home you find in the hood, because it may be hard to sell when you can’t stand the hood anymore! Also…don’t be so picky because you might miss out as demand is high.

  5. Submitted by Gloria J Siller on 07/05/2018 - 05:03 pm.

    What about manufactored homes?

    Is this an option first time home buyers look into? Do these high rates and taxes apply to manufactured homes?

    • Submitted by Tammy Morimoto on 08/15/2018 - 08:18 pm.

      mobile homes

      Most are located in trailer parks. I do not recommend them, for several reasons.

      First of all, despite advertised as a way to “own” your own home, you would still be renting. Lot rent in trailer parks runs from around $400 to over $800, and I don’t think that usually includes utilities. I have heard many stories of people in mobile homes struggling to pay the rent, so what’s the point in owning? If you add in the cost of the home to the lot rent, renting an apartment is probably cheaper. (Plus if you don’t like the people in your apt building, it is easier to move.)

      Secondly, manufactured homes are a poor investment, especially if they are located in trailer park. When people think “starter home”, they imagine a beginning house that they can start in and later upgrade into a better home. However, trailer homes are more likely to drop in value than go up. This is partly due to the perception of them as a poor investment, the lack of a foundation, the lack of property, and their image as unsafe and inferior housing.

      A manufactured home that comes with is own land can be a decent starter home. But most are in trailer parks, and many city ordinances don’t allow them outside of trailer parks (because community residents worry about their effect on other people’s property values).

      Condos and townhouses also have monthly association fees, but that is usually much cheaper than lot rent, includes some or all utilities, and usually covers things like maintenance. They are also easier to resell than manufactured homes in trailer parks.

  6. Submitted by Tammy Morimoto on 08/15/2018 - 08:41 pm.


    The realtor’s advice to buy fixer-uppers is flawed, because there is a lot of competition in that market also. In fact, I wouldn’t be surprised if the competition was worse.

    If you buy a house that already looks good, you are only competing with other owner-occupants. If you buy a house that needs work, you have to compete with flippers also, and they often offer cash.

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