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.

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.

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.

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.”