Homebuilding in the Twin Cities is running woefully behind job growth, leaving would-be buyers with fewer options and higher prices.
For every 7.9 jobs created in the 13-county metro area, only one house was built from 2013 through 2015, the National Association of Realtors (NAR) said in a report last week. The Twin Cities is the 16th-most undersupplied housing market in the nation.
"There's just a gross insufficiency of new single-family houses in the Twin Cities, " said Lawrence Yun, the association's chief economist. "And the millennial generation has been disproportionately hurt in the conversion from rental to homeownership."
Yun said that with job growth outpacing construction, buyers have limited options and are paying more, even with mortgage rates at or near historic lows.
Historically, for every 1.6 jobs created in the U.S., one house was built, with the biggest deficit in New York City area, where there was a shortage of nearly 220,000 housing units in the 2012-2015 period.
Though homebuilders in the Twin Cities are now busier than they've been in a decade, housing construction is still far below peak. That's especially true for entry-level houses priced from $200,000 to $350,000.
"This is a long-term problem, and it's real," said David Siegel, executive director at Builders Association of the Twin Cities.
Builders say construction costs, including labor, materials and land, are outpacing price and income gains. And municipal fees are among the highest in the nation, making it difficult to build the less expensive houses that have tight profit margins.
Such fees can account for 25 to 30 percent of the cost of the average new house, Siegel said. That doesn't include the additional cost of complying with the state's building and energy codes, which are among the most stringent in the nation.
As a result, builders focus on catering to well-heeled people buying their second or third house, leaving a vast swath of would-be buyers with few options. The average price of the 423 new houses featured on the builders association's Fall Parade of Homes is $619,404; only 21 houses on the tour are priced at less $300,000. The least expensive house on the tour was $189,950.
Since the 2008 recession, builders have also been focused on apartments. Though the Twin Cities region permitted the highest number of new housing units in 2015 since 2009, a vast majority of those units were luxury rental apartments. And of the 12,800 new homes permitted in the region last year, 58 percent were multifamily attached, 37 percent were single-family detached and only 4 percent were townhouses, which tend to be the least expensive. And though thousands of apartments have been built, the average vacancy rate remains historically low.
Graham Epperson, division president at Pulte Group, said that even though the Twin Cities is undersupplied, the economics don't make it feasible to build entry-level houses.
"I want to build homes for everybody, but there are certain situations that limit our ability to do so," he said. "Some of it [is] just simple economics. There's not as much land to build on in the places where people want to live. It's a matter of supply and demand."
Buyers today want to be close to their jobs, shopping and parks, so land prices in those communities are on the rise. Labor costs, too, have soared. During the downturn, many of the skilled laborers left the industry and never came back, leaving builders scrambling to find workers who are now able to charge premium wages.
Yun, the NAR chief economist, says the problem has even been a drag on existing-home sales. During June, existing-home sales in the U.S., including single-family homes, townhouses, condominiums and co-ops, declined 0.9 percent to a seasonally adjusted annual rate of 5.33 million in August from a downwardly revised 5.38 million in July. After last month's decline, sales are at their second-lowest pace of 2016, but are still slightly higher than a year ago.
Libby Starling, manager of regional policy and research at the Metropolitan Council, said the NAR study is consistent with its research and that long-term demographic trends suggest the problem won't ease anytime soon.
"New construction is considerably lower than where we've been as a region long-term even though we're larger than 30 to 40 years ago," she said. "But it's hard to know how this is going to play out."
Mike DeVoe, division president for CalAtlantic Homes, said that while the company has a full range of options for buyers of income levels, it is actively trying to cater to a growing number of people who were once renters by choice but are now ready to buy. So the company has started building townhouses from $180,000 and up.
"There are a lot of first-time buyers that have not been in the market who are trying to get into the market," he said. "It's an opportunity we're trying to pursue."
