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

The lack of homes under $250,000 means more competition in the market ... 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 ...

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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 crisisThat’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 herselfSellers, 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 marketBut 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 setThe lack of homes under $250,000 means more competition in the market, which also affects, say, baby boomers looking to downsizeIt 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 CitiesToday, 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 yearsThe 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, tooThe 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 GovMark Dayton’s housing affordability task forceThe 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 federalWhile some — like energy efficiency rules — have good intentions and good results, Paradise said, they add to construction costsIn 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 homeBut 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 muchThere’s always something else that will come alongBe patient, it’s a process.” MP.highcharts.makeChart('.chart-incomesaleratio', $.extend(true, {}, MP.highcharts.lineOptions,{ xAxis: { categories: ['March 2014', 'April 2014', 'May 2014', 'June 2014', 'July 2014', 'August 2014', 'September 2014', 'October 2014', 'November 2014', 'December 2014', 'January 2015', 'February 2015', 'March 2015', 'April 2015', 'May 2015', 'June 2015', 'July 2015', 'August 2015', 'September 2015', 'October 2015', 'November 2015', 'December 2015', 'January 2016', 'February 2016', 'March 2016', 'April 2016', 'May 2016', 'June 2016', 'July 2016', 'August 2016', 'September 2016', 'October 2016', 'November 2016', 'December 2016', 'January 2017', 'February-2017', 'March 2017', 'April 2017', 'May 2017', 'June 2017', 'July 2017', 'August 2017', 'September 2017'] }, yAxis: { max: 5, title: { text: 'median home list price divided by median household income'} }, tooltip: { formatter: function(){ return ' ' + + ", " + this.x + ' ' + ': ' + MP.formatters.number(this.y,2); } }, series: [ { name: 'Minneapolis-StPaul', data: [3.33, 3.33, 3.47, 3.47, 3.47, 3.47, 3.54, 3.47, 3.47, 3.47, 3.38, 3.51, 3.52, 3.52, 3.6, 3.65, 3.66, 3.66, 3.66, 3.66, 3.66, 3.73, 3.62, 3.62, 3.69, 3.67, 3.67, 3.68, 3.67, 3.59, 3.62, 3.66, 3.73, 3.82, 3.89, 4.03, 3.96, 4, 4.03, 4.03, 4.03, 3.96, 4.04] }, { name: 'Rochester', data: [2.49, 2.49, 2.6, 2.57, 2.57, 2.57, 2.57, 2.64, 2.64, 2.64, 2.66, 2.74, 2.87, 2.89, 2.89, 2.92, 2.9, 2.97, 3.05, 3.05, 3.05, 3.05, 2.85, 2.9, 3.03, 3.12, 2.93, 2.85, 2.85, 2.85, 2.92, 2.93, 2.98, 2.85, 2.57, 2.85, 3.14, 3.21, 3.14, 3.14, 3.21, 3.28, 3.28] }, { name: 'Fargo-Moorhead', data: [3.51, 3.46, 3.71, 3.71, 3.62, 3.71, 3.71, 3.94, 3.99, 4.18, 3.83, 3.85, 3.84, 3.91, 4.16, 4.26, 4.10, 4.19, 4.26, 4.28, 4.28, 4.09, 4.08, 4.12, 4.08, 4.12, 4.08, 4.23, 4.21, 4.23, 4.17, 4.16, 4.08, 4.16, 4.16, 4.16, 4.25, 4.28, 4.27, 4.21, 4.17, 4.16, 4.06] } ] })); MP.highcharts.makeChart('.chart-medianprice', $.extend(true, {}, MP.highcharts.columnOptions, { legend: { enabled: false }, xAxis: { categories: ['2003', '2004', '2005', '2006', '2007', '2008','2009','2010','2011','2012','2013','2014','2015', '2016', '2017'] }, yAxis: { title: { text: 'Median sale price' } }, tooltip: { formatter: function(){ return ' ' + this.x + ' + ': $' + MP.formatters.number(this.y,0); } }, series: [ { name: 'Median sale price', data: [199900, 215840, 227900, 230000, 224900, 194000, 165000, 168000, 150000, 166000, 190000, 205000, 219000,230000, 246000] } ] })); MP.highcharts.makeChart('.chart-inventory', $.extend(true, {}, MP.highcharts.columnOptions, { legend: { enabled: false }, xAxis: { categories: ['2003', '2004', '2005', '2006', '2007', '2008','2009','2010','2011','2012','2013','2014','2015', '2016', '2017'] }, yAxis: { title: { text: 'Active listings' } }, tooltip: { formatter: function(){ return ' ' + this.x + ' + ': ' + MP.formatters.number(this.y,0); } }, series: [ { name: 'Active listings', data: [15569, 19247, 21428, 25156, 28374, 26314, 21230, 23264, 17918, 13392, 13115, 13367, 11509, 9425, 6850] } ] })); Email Share Tweet Print Get MinnPost's top stories in your inbox First Name: * Enter your first name. Last Name: * Enter your last name. Email address: * Enter the email you would like to sign up with. Subscribe to these regular newsletters: Daily newsletter Sunday review Greater Minnesota newsletter D.CMemo Subscribe Now Leave this field blank: Login or register to post comments Email Share Tweet Print Related Tags: Economy Housing Real Estate About the Author: Greta Kaul Greta Kaul is MinnPost's data reporterShe can be reached at Comments (5) Thank you for this piece Submitted by Anton Schieffer on February 1, 2018 - 11:59am This is a good overview of some of the many issues facing a region in the midst of a housing shortageIt'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 affordThat'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. Login or register to post comments this article ignore the Met council's part Submitted by Mike martin on February 1, 2018 - 6:15pm The met council's part isn't the only piece to this puzzle but it's certainly a big partThe legislature passed a law regarding builder/developer warranties for new condosbecause Builders couldn't get insurance to build condosThey stopped building condosThis eliminated one source of 250000 to $400,000 new housing units. Because the Met Council supports mass transitIt's support densityWhich means it restricts the availability of land to build single-family homesWhich means higher lot pricesWhich 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 controlsThis means long commutes to jobs inside the 694 494 LoopWhich conflicts with Millennials desire to live in neighborhoods where they can do without a car Also some suburbs have restrictions on minimum lot sizeLake Elmo being a well-known exampleMinneapolis has lots of 40-foot wide lotsWhy can't the suburbs allow 40 ft wide lots? When you talk to Realtors nobody seems to want to buy fixer uppers anymoreEverybody wants to move into homes in perfect conditionOften 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 themselvesHow many Millennials even know how to fix a faucet or a toilet, put in a new light fixture, reseed a lawn etc.? Login or register to post comments Millenials Submitted by Max Millon on February 2, 2018 - 12:21pm 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. Login or register to post comments A big flaw Submitted by Ray Schoch on February 1, 2018 - 6:39pm 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 investmentNot 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 houseIt 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 passedFor 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 itemizedTake that away, and I'll be filing the 1040A postcard return. As in so many other situations, them that has, getsThem that don't, don't. Login or register to post comments Building on Ray's comment Submitted by Paul Udstrand on February 2, 2018 - 12:16pm 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 marketRealtors invented the concept of "starter" homes because their livelihoods depend on people moving around and selling homes whether they need to move to or notThat 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 marketSo something else must be going on In the meantime, I would advise young people be wary of real estate adviceBuy 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 apartmentWhen 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 familyVery 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. 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