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.
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.
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.”
One factor holding back new construction is the high cost of it, including, experts say, land use policies that limit the efficiency of building new units.
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.”
Comprehensive housing policy plans are strategies that assess current and future housing needs for specific communities, and consider barriers to home ownership and affordability. They are seen as part of the solution to the lack of housing construction because they help states, localities and regional coalitions plan for the future in a way that reduces barriers to new housing development while avoiding the displacement of current residents. Without community-specific plans, localities run the risk of creating unsustainable housing models or displacing people who could then struggle to afford housing elsewhere.
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.”