Affordability gap grows

When Jessica Seidlitz was shopping for her first house, she got some advice from her dad. Houses, he told her, are like buses: If you miss one, there’s another right around the corner.

Now it’s Seidlitz’s turn to dispense the home-buying advice, and with inventory levels still at historic lows in Minneapolis, the Edina Realty agent tells buyers to know what they want and act quickly when they see it. Seidlitz suggested buyers focus on the location and condition of the home and be willing to concede on cosmetic issues that can be fixed with a bit of remodeling.

“If you hesitate,” she cautioned, “it will be gone.”

For first-time homebuyers, those opportunities have already disappeared in much of Minneapolis. As the lack of supply pushes prices higher, there are fewer and fewer starter homes in the hottest spots in the local market, places like Southwest Minneapolis.

In this region, $250,000 is generally considered affordable for a family earning the median income, said David Arbit, director of research and economics for the Minneapolis Area Association of Realtors. In Southwest Minneapolis, the median sales price for a single-family home was recently at about $390,000.

The median sales price for a townhome, by comparison, was $246,000, and condos were even more affordable at a median price of $168,00. But those opportunities remain rare; over the last 12 months, Southwest Minneapolis saw 852 single-family home sales but only 7 townhome and 66 condo sales, Arbit said.

“There are still some limited condo and townhome sale where people are able to find affordability — but not much,” he said.

Rising prices

The median sales price of a Twin Cities home reached an all-time high in 2017, and inventories hit a 15-year low. As of February, the Minneapolis housing market had just one month of supply, far less than the four to six months of supply in what is considered a balanced market.

Herb Tousley, director of real estate programs at the University of St. Thomas’ Shenehon Real Estate Center, said prices in the housing market are rising faster than area incomes, creating an “affordability gap” that can be difficult for would-be homebuyers to overcome. As of February, Twin Cities sales prices were up 12.8 percent year over year.

“People are either going to have to come up with more money down, or they’re going to have to dedicate a bigger percentage of their income to housing,” Tousley said.

Housing supply remains at historically low levels across the Twin Cities. Buyers are more likely to be facing off against multiple bidders, especially for low- to mid-priced homes, he said.

“Getting into that first home or that first move up is pretty hard right now,” Tousley said.

Jesse Godzala, another Edina Realty agent, said the combination of short supply and high demand for single-family homes has made this the most frustrating year in the last decade for his team. It’s now normal for houses to attract multiple bids and sell for over list price.

Godzala said he bought Chaska townhome for $163,000 as an investment property last year. This year, a unit in the same development sold for $190,000.

“That scares me,” he said. “I want a more balanced market.”

Back to the city

The monthly residential real estate index issued by the Shenehon center notes that fees, higher land prices, increasingly expensive building materials and a labor shortage are all driving up the cost of new home construction in the Twin Cities metro area. The effect is minimal in a built environment like Minneapolis, since most new home construction is happening outside of the metropolitan core.

Tousley said there’s also a trend — especially pronounced among members of the baby boom and millennial generations — of choosing urban over suburban locations to cut down on commute times and be closer to jobs and amenities.

“I see more people going that way, which puts more pressure on the housing stock there,” he said.

Arbit said that back-to-the-city movement is one of the factors driving what he calls a “spatial mismatch” in the metro-area market.

“There’s no question that new construction and homebuilding will help alleviate the shortage,” Arbit said, “but there’s also no question to the fact that where builders are able to build, in the Blaines and Lakevilles, is not necessarily where this Millennial, this up-and-coming homebuyer generation, wants to be.”

Demand softening?

Arbit said there were some early indications of “some slight demand softening” in Minneapolis, but that’s not necessarily good news. It may instead be a sign of just how tough the market has gotten for potential buyers.

“You can be in multiple offers and be over list price on all of them and still not win the day. It’s those folks who are feeling a little bit sidelined, and they’re kind of waiting,” Arbit said.

Arbit said early March numbers showed a 2-percent dip in pending sales from March 2017. Closings were down about 1.5 percent over that same period.

The economy hasn’t dipped back into recession, interest rates remain historically low and showings are still drawing strong foot traffic, Arbit noted. So the slight sales drop may be a measure of frustration.

“The one thing that’s changed is that this supply shortage has gotten so tight and has started to squeeze so many buyers that I think we are starting to see it influence our sales numbers,” Arbit said.