Bye-bye starter homes: Builders not meeting biggest need in Twin Cities housing market

Real estate developer Paul Heuer wants to build houses that regular people can afford. But he says increases in land, labor and lumber costs — in addition to regulatory costs — have made building a new starter home virtually impossible.

"Definitely on the first-time home buyer, there's a substantial market that's not being met," Heuer said. "In the mid- to upper ranges, we're doing alright. But on the lower ends we're definitely not satisfying the needs."

Heuer is the Minnesota director of land planning for Pulte Homes, one of the largest homebuilders in Minnesota — and the country. If any developer could build an affordable house, it would be a company like Pulte: They have the efficiency of scale, so they're able to buy big, empty fields to build dozens of houses on, saving them money on labor and land. They're also able to negotiate lower prices on everything from faucets to gutters.

Still, out of the two dozen neighborhoods the company is building across the metro, the most affordable single-family home Pulte is selling starts at $327,000. Other developers in the region say that's about the minimum they could sell a new single family home for, too. The median price of a new house in the Twin Cities metro area over the past year was $450,000. That puts new homes far out of reach for the typical Twin Cities household, which has a median income of about $73,000.

Demand is strongest in the Twin Cities for entry level homes — those that cost less than $300,000 — followed by so-called "move-up homes" — which sell for between $300,000 and $450,000. If developers aren't building new homes within those price ranges, the Twin Cities' near record-low housing supply will continue to shrink — and affordable housing will become harder and harder for the middle class to reach.

In an area that's expected to have added roughly 890,000 people to its population between 2010 and 2040, that worries planners at the Metropolitan Council, economists and homebuilders like Heuer.

"I've got young daughters, from 18 to 30, and they will struggle to buy homes," Heuer said. "As our prices increase and less people are able to buy homes it leads to increasing inequality. The biggest way people build wealth in this country is by buying a home."

Land, laws, labor and lumber

Over the past decade, the median price of a new single family house in the seven-county Twin Cities metro area has increased by about seven percent, or more than $30,000.

Developers point to four main causes for the increase: land, laws, labor and lumber.

Labor and lumber have been particularly vexing to builders in recent years. Last year, the Trump administration put a 20 percent tariff on Canadian softwood, increasing the cost of lumber used to build homes. At the same time, developers say they've rarely experienced such a shortage of skilled workers. The labor shortage has driven wages higher and has slowed down construction time.

Heuer said he thinks the labor and lumber costs will eventually come down. What he's really worried about is the cost of regulation.

Regulation is perennial target for the ire of developers, who say they must navigate a morass of requirements from what kind of siding can be used to how steep the roof can be to how big the lots can be. Most of these requirements are set by individual cities, so builders must follow different rules in Chaska, for instance, than they do in Roseville.

The National Association of Home Builders, a trade group that represents developers, conducted a survey of homebuilders who reported regulations accounted for a quarter of a new home's cost and that the cost of regulation increased nearly 30 percent from 2011 to 2016.

Heuer said some regulations are very important, like the ones that protect lakes from storm water runoff or that increase a home's energy efficiency. The problem, he said, is that municipalities often add regulations, but seldom remove regulations they've already put in place. Over time, building codes just become more and more complex.

"I don't mean to be flip, but every time somebody has a good idea, the cost of homes goes up, and we've had a lot of good ideas in the last 30 years," Heuer said.

Cities across the metro set their own density restrictions, which limit how many homes can be built on any given piece of land. They also determine how small a house is allowed to be. Many of those small, post-war houses that were affordable to the country's growing population after World War II wouldn't be allowed to be built today.

Those small, existing homes continue to be affordable to first-time homebuyers and middle-income wage earners. The median value of an existing home in the Twin Cities metro area is about $277,000 — which means there are a lot of homes that typical Twin Cities households can afford. But if those small affordable homes are demolished or burn down or get new additions, their loss won't likely be offset with affordable houses elsewhere.

Pulte does build townhomes and twin homes — two houses that share a common wall — that are more affordable. They have three-bedroom row house models that start around $280,000. But the number of those they can build is limited by density requirements.

To build up — or out?

Heuer said he thinks the way to build more affordable homes is to build further out from the Twin Cities urban core. That's been a successful strategy for developers for decades. People drive to affordability, builders say.

But that kind of development is restricted by the Metropolitan Council, which decides where it will supply critical infrastructure, like sewer lines, to homes. The Met Council establishes what are called growth boundaries, and Heuer thinks they should extend those boundaries to allow developers like him build farther out.

But Lisa Barajas, the director of community development at the Met Council, said the region can't afford to extend sewer lines and other infrastructure farther than what they've already planned for. In addition, she said, the region doesn't need more single-family homes.

"We probably have enough single-family homes on the ground today to meet our total demand going through 2040," Barajas said. "The issue is not the amount of single family homes, it's who wants to have those homes and who's still living in them."

Barajas acknowledges there's a housing shortage in the Twin Cities metro area. And, she said, developers are not on pace to build enough housing for the region's projected population growth. In fact, developers are still building far fewer houses than they did in the early 2000s. But looking ahead, she predicts that the Twin Cities will need a different type of housing in the future.

"We would say overall there is a demand to live in more connected, walkable areas. That's not just true for millennials, that's true across generations," Barajas said.

But while denser housing may become more desirable to buyers and is less expensive to build, that doesn't also mean that more affordable condos and town homes — that dense housing Barajas is talking about — are being built. According to the Minneapolis Area Association of Realtors, the median price of a new townhome in the Twin Cities metro area over the past year was more than $300,000. For condos, it was more than $750,000.

Sales data suggests that the new condos being built are getting bigger, too. That's a troubling sign for middle-income people. Housing supply has rarely been so low, and if builders aren't keeping pace with demand, the market is just going to get tighter.

Correction (July 9, 2018): An earlier version of this story incorrectly identified the Twin Cities metro area's projected growth. It has been updated to reflect the Metropolitan Council's latest population forecasts, which project that the Twin Cities region will have grown by 888,000 people between 2010 and 2040.