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Despite the economic slowdown brought on by the COVID-19 pandemic, cranes tower over new apartment developments all over in-demand neighborhoods in the Twin Cities and homebuilders are busy putting up a wave of new single-family houses.
But housing has still been getting less affordable: Between 2000 and 2019, rents in Minnesota increased 14 percent, while renter income remained relatively flat, according to the Minnesota Housing Partnership. Home values, meanwhile, increased four times faster than the income of households that own homes.
A big part of the problem, experts say, is a housing shortage hangover from the Great Recession. For a decade following that downturn, the number of new housing units built was not enough to keep pace with demand. Now, even as construction has picked up, the state still has catching up to do.
“We need to produce 10,000 more units a year, every year, for the next 10 years in order to support Minnesotans,” keeping up with job growth and population growth, said Anne Mavity, the executive director of the Minnesota Housing Partnership.
Supply drop
For most of the years prior to the Great Recession, homes were going up fast in Minnesota: In the 1990s, Minnesota averaged nearly 27,000 new housing units permitted per year, according to Census data. (Not every unit that is permitted is built, but looking at permits is a good estimate for new home construction.) Between 2000 and 2007, the state averaged nearly 34,000 permits per year.
Things started to cool around 2006, before the Great Recession, and permits for new units fell drastically after its onset. Between 2009 and 2011, Minnesota averaged just 9,400 permitted units per year — less than a third the rate of construction at the start of the century.
That’s typical of recessions, said Mark Wright, senior vice president and director of research at the Federal Reserve Bank of Minneapolis.
“You want to have a sense that it’s going to be completed and paid for at the end, so, unsurprisingly, in those environments, people are reluctant to buy a house to borrow for it. Banks are reluctant to lend, so all of those things work to suppress homebuying,” Wright said.
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The Great Recession formally ended in 2009 in Minnesota, but recovery was slow, and construction only crept back up. It has not increased to a level where it would make up for the lack of units built during the recession years.
In the last few years, permits have finally returned to where they were at in the 1990s, before the boom in the early 2000s. Based on permit data, that trend is likely to continue for now, Wright said.
But going back to ’90s levels might not be enough.
“We have to make up for what we lost,” Mavity said, citing Housing Partnership research that shows the shortage in housing caused by the Great Recession relative to what is needed to make up for it. “We almost have to overproduce.”
[image_credit]Source: Minnesota Housing Partnership[/image_credit][image_caption]The Minnesota Housing Partnership estimates Minnesota needs to produce 10,000 more housing units per year than current levels to keep up with population growth.[/image_caption]
Mavity called Minneapolis a leader in removing some of these barriers to building more housing. In 2019, the city passed its 2040 Plan, which expanded allowances for taller buildings along major transit corridors and allowed up to three units of housing in areas that had previously been single-family zoning.
This year, Minneapolis removed parking minimums, which required a certain number of stalls based on the size of a housing development. Mavity said a single parking stall can cost between $25,000 and $40,000 to add to an apartment development — costs that are eventually paid by homebuyers or renters.
Fighting housing insecurity at the federal level
This housing shortage isn’t unique to Minnesota — it affects communities throughout the U.S. That’s why, as part of its infrastructure plans, the Biden administration is calling for $200 billion in federal spending to increase the supply of housing — including $100 billion for low-income housing.
A bill introduced by Minnesota Sen. Amy Klobuchar may be part of this federal effort. The Housing Supply and Affordability Act, which Klobuchar wrote along with Sens. Rob Portman (R-OH) and Tim Kaine (D-VA), creates a program of grants to “help localities develop and implement comprehensive housing policy plans.”
[image_credit]MinnPost photo by Corey Anderson[/image_credit][image_caption]Pivot apartment units for rent between Shields Ave. and Spruce Tree Drive on Snelling Ave. in St. Paul.[/image_caption]
Klobuchar’s bill would authorize $1.5 billion for federal grants to communities working to develop and implement these plans. Localities will be eligible to apply for the grants if they can demonstrate rising housing costs or a reasonable expectation that costs will rise or there will be a shortage in affordable housing. The bill prioritizes grants that work with local transportation and workforce agencies to increase affordability near transit centers and workplaces. Preference will also be given to regional coalitions that work together to tackle their unique housing challenges. At least 10 percent of Housing Supply and Affordability Act funds must go to rural areas.
The bill also aims to address the housing crisis by giving local leaders resources to overcome obstacles to new construction, like discriminatory zoning regulations.
“Decades of racist housing policies and strategies … have had their intended result of really dividing up and creating these — it’s almost like zoning acts as a gated community,” Mavity said.
Minneapolis made history in 2018 when the city council endorsed a plan that would enable denser housing development throughout the city, especially in single-family neighborhoods. The city became the first in America to eliminate single-family only zoning, which city planners hope will help create denser housing near transit and jobs.
“Across the country, it is unacceptable that families must struggle to keep a roof over their heads,” Klobuchar said. “The Housing Supply and Affordability Act is a bipartisan solution that will provide grants to help communities identify their housing challenges, improve affordability, and implement unique solutions to expand their housing supply.”
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And inflation is already nuts in the housing construction industry.
So you want more inflation?
The rise in home prices across the U.S. is largely due to the lack of supply, an after effect of the Bush Recession. (The rise in the price of lumber is a similar story, and the two reinforce each other.)
How would an increase in the supply of housing increase its cost?
Inflation happens when the growth of the supply of money outstrips the growth of the economy. A rise in the price of a commodity is not inflation. If the supply of money tracks the growth of the economy, consumers of lumber will spend less on other things, or find cheaper substitutes for lumber.
The sure way to reduce rental housing starts is for MPLS to institute rent control. MPLS wants to punish rental housing investors when lumber prices have increased 300%. Common sense is not very common on the MPLS City Council!
I’m afraid these analysis are always somewhat incoherent because they rely on a number of problematic assumptions.
To begin with, this analysis assumes that it graphs out construction as a response or reaction to demand, it assumes a causal connection between “real” demand and “real” supply. In fact the “new” construction represented in this illustrates a construction bubble that blew up in the great recession. Bubbles aren’t rational attempts to meet “demand” they are runaway speculation based on inflated estimates of demand, that’s why they crash. Obviously the population that was supposed to occupy all those new units that were built during the bubble years never materialized, that why so many empty and abandoned projects were left sitting around when the bubble popped.
Another problem with this analysis is conceptual, what does Mavity actually mean when she claims we have to build 10k a year for 10 years? Is she predicting that if we don’t build we’ll have 100k people living in tents somewhere? That’s unlikely, it assumes that builders won’t try to meet “real” demand, and that people will bring tents with them when they move to MN because there’s nowhere for them to live. The really weird thing about these supply and demand claims is that they predict irrational behavior while pretending their claim is the bedrock of rational economics.
The truth is that there is a difference between an affordability crises, and an actual housing crisis. When you have an actual housing crisis, you build army surplus quonset hut neighborhoods all over the place like we did after WWII. When you have an affordability crisis, you stand around waiting for the market to do it’s “magic” and manifest cheaper housing. One is a shortage of actual space, the other is a product of artificial price inflation.
Our homeless crises isn’t driven by an actual shortage of housing space, the people in those tents and under the bridges aren’t there because they moved here and can’t find any open housing space to live in… they’ve lost their housing because they couldn’t afford to pay for it. There’s actually a huge difference between trying to figure out how the housing industry can be as profitable as it can be… and figuring out a way to provide housing for everyone who needs it. These are different objectives that neoliberal market fantasies combine into a single imaginary goal. Even at the height of the building bubble we had thousands of homeless in the Twin Cities, obviously the bubble was about making money, not creating housing security.
Finally, (although we’re skipping a number of other observations) no “housing” analysis can be coherent without recognizing simple fact that housing is a for profit industry, and every participant in that industry from suppliers to landlords is trying to make as much money as they can. This isn’t about actually putting roofs over people heads, it’s about wracking up profit. Neoliberal economic fantasy pretends that these objectives are either one in the same, or that by happy coincidence one objective (affordable and available housing) magically emerges from the pursuit of profit. These are demonstrably facile assumptions.
So to sum up, if building were to return to the levels we saw prior to the market collapse, that would just represent another housing bubble that would eventually collapse, it wouldn’t be a solution to our affordable housing crisis. The fact that housing construction hasn’t returned to those pre-collapse levels reflects rational attempts to control inventory and maintain or inflate housing prices, it’s not a failure to meet actual demand, it’s attempt to manage supply relevant to demand. Inventory control is basic and elementary management tool deployed by almost every profiteer in our economy. If Mavity or Klobuchar think they trick the housing industry into building below market rate or cheap housing by dumping millions of dollars on builders or investors, they’re just not reading the scenario. Sure, you can always find someone to take the money, but those who take want more money not less money, so don’t expect the housing industry to engineer it’s own collapse just because you’re dumping money on them.
Almost every word of this is wrong.
The housing shortage and the affordable housing shortage are the same thing. Those 100,000 people won’t live in tents, but they will all be competing for scarce housing, driving the price up. If there are multiple people who want to rent or buy the same housing, sellers/landlords can charge more. If there is vacant housing and renters/buyers have choices, prices go down. Adding housing is turning a seller’s market into more of a buyers market. That’s all supply and demand it, and it applies to housing and avocados and to the stone axes and pelts that the caveman traded thousands of years ago.
“The housing shortage and the affordable housing shortage are the same thing. ”
Pat, you’re telling us that right now, there are no vacant units for homeless people to live in? Or are there a bunch vacant units these people just can’t afford to live in? This is not the same thing.
If you are going to call out the Minneapolis 2040 plan, appropriately, for streamlining the ability to build denser housing developments, and contributing to raising housing supply, it’s also fair to call out the cities inclusionary zoning ordinance and the threat of rent control as possible obstacles to development, at least within the city limits as the costs to developers and uncertainty of their investment increase.
At least with the inclusionary zoning, developers know what they are getting into on the front end. But the looming rent control ordinances will undermine any gains from the 2040 plan.