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Why it’s so expensive to build a house in Minnesota right now

The inflation-adjusted median price of a new home in Minnesota is more than double what it was in 1970.

home building
The price of most of the materials that go in to building a house — things like lumber, steel, siding and windows — has gone up.
MinnPost file photo by Bill Kelley

It’s expensive to buy a new house right now.

Quite expensive, historically speaking. The median sale price of a new home in the U.S. has climbed pretty steadily since 2011. At more than $320,000 for the last three years, the median new home costs more than twice as much as it did in 1970 (accounting for inflation).

Median sale price of new homes in the U.S. (in 2018 dollars)
Source: St. Louis Federal Reserve

In a sense, not a lot has changed since then: to build a house, you need land, building materials, workers and you have to pay the cost of various fees associated with building.

But increased expense in all of those areas a mean construction costs are historically high, helping to constrict the supply of new homes being built. That’s contributing to a housing crunch that’s putting homes out of reach for more Minnesotans, whose wages aren’t keeping pace with housing costs.

Materials and labor

The price of most of the materials that go in to building a house — things like lumber, steel, siding and windows — has gone up over time.

Since they’re global commodities, their costs are somewhat volatile. They can go up when there’s lots of demand in one part of the country, like the cost of lumber did when the Houston area started rebuilding in the aftermath of Hurricane Harvey.

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In some cases, companies that manufacture building materials didn’t raise prices much during the recession, and now they’re making up for it, contributing to rising costs for the parts that make up a new home, said Issi Romem, the chief economist at Trulia, a real estate listing website.

But some building material prices saw an additional jump when the Trump Administration imposed tariffs on things like lumber imported from Canada, and on steel and aluminum, contributing to cost spikes in 2017 and 2018, said Deni Koenhemsi, a senior economist at consulting firm IHS Markit.

Labor costs are steadily rising, too.

Like many industries, construction is in the midst of a labor shortage: firms are having trouble finding as many workers as they’d like to hire. But the shortage is a little more complicated in the building trades than in other corners of the economy: Lots of young workers left the industry for other jobs during the recession, when construction slowed across the economy.

“Those were disproportionately the youngest workers at that time, and what you have now is an industry that has not only not recovered in numbers, but has aged,” Romem said. “There is, in some sense, a missing generation.”

The workers who did stick it out in construction through the recession didn’t get raises for a long time, and now firms are having to make up for that in order to attract workers, which has also raised costs.

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“Now they want a decent wage, they can’t get any help because they’re not paying enough, so they have to raise the cost,” said Mike Paradise, the president of Rochester homebuilder Bigelow Homes and a member of former Gov. Mark Dayton’s task force on housing.

Put together, material and labor costs in the Minneapolis metro area are up by a third since 2009 and are now nearly double what they were in 1999, according to a construction cost index from the Engineering News-Record, a construction trade publication that tracks prices.

And while the rate of price increase for materials has slowed down slightly, labor is expected to remain a driving factor in increased building costs. In 2018, builders’ biggest concern was the rising cost of materials, according to a National Association of Homebuilders annual survey. This year, it’s labor, Koenhemsi said.

“The cost issue is not going away anytime soon, either the labor or the material aspect,” she said.

Land

If it were just materials and labor, the expense of construction still might not be as high as it is today. But there’s another factor raising costs in Minnesota, says Paradise: the rising price of land.

During the recession, land prices were artificially low, he said. Today, the lots builders might have picked up for around $35,000 then are going for $60,000 to $80,000, tacking on an additional $25,000 to $45,000 to the cost of a house now versus just a few years ago.

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Where it might have been practical to build a less expensive starter home on a $35,000 lot, at a higher price for the lot expectations start to change. “If (a buyer is) going to hit close to $300,000, all of a sudden they expect the three-car garage, the granite countertops and the solid surface floors,” Paradise said.

Regulations

A sometimes contentious part of the homebuilding equation is the cost of regulations.

Cities, counties, regional planning agencies and states set their own standards dictating the way homes can be built. They might include where electrical outlets go, window safety measures, density, development, water, sewer and setbacks from roads, among other things.

A study by Housing First Minnesota, a trade group that represents builders, found that regulations can contribute up to a third of the cost of building a home in the Twin Cities. That varies by community, but generally, they found that Minnesota’s regulations added more cost to construction than it does in Wisconsin or Illinois.

“We literally found you could build an identical house, with an identical builder, identical trade partners, the material being purchased by a national builder who builds nationwide … you can build the same house in Hudson, Wisconsin for $47,000 less than in (Lake Elmo),” just across the river, said David Siegel, the group’s executive director.

A bipartisan-backed bill at the legislature would create a legislative commission called for by Housing First to study the impact of regulations on housing affordability.

The League of Minnesota Cities took issue with the report, arguing Housing First didn’t necessarily make apples to apples comparisons, among other concerns.

Regardless of whether people think they’re good or bad, Romem said regulations do add to the cost of housing, and the number of them has increased over time.

“As the building code becomes more involved over time, which inevitably happens, that means it’s more complicated to build something and you need people who are more skilled (and paid more) to abide by standards,” he said. “That kind of thing you won’t find measured anywhere, but it’s a real thing.”

In search of a solution

It’s not just people who are interested in building or buying new homes that are affected by rising building costs, though. The cost of new construction is part of what’s constricted the supply of new homes in Minnesota and pushed up prices for all homes in recent years.

The number of new housing units permitted in the next two years in the Twin Cities would have to equal the amount permitted in the last seven to reach the levels of new home permits seen in the 1970s and 1980s, according to permit data from the Metropolitan Council. And the population of the Twin Cities metro is considerably larger than it was then.

Housing units permitted in the Twin Cities metro by decade
Source: Metropolitan Council

That’s putting pressure on an already tight housing market — especially as people’s wages continue to rise just modestly, putting home ownership out of reach for more Minnesotans. The lack of new homes creates more competition for old homes, driving up prices.

Dayton’s housing task force estimated Minnesota would have to build 10,000 more new homes per year to keep up with demand.

That more housing, and more affordable housing is needed is an issue that few disagree on in Minnesota; it’s common to both rural and urban parts of the state.

Paradise called the situation a perfect storm that will require cooperation between builders, developers and governments to fix.

“It’s the combination of everything,” he said.