Twin Cities area starter houses seem to have never been more expensive. Or elusive.

Last year, sellers listed just 20,000 houses affordable to most first-time buyers and empty nesters. That's half as many as four years earlier and the fewest in decades, according to a Star Tribune analysis of Minneapolis Area Realtors' data.

That decline coincides with soaring prices for move-up houses, priced at more than $400,000.

"Every house under $300,000 sells before we can even look at it," said 35-year-old father of three Robert Briggs. For years, he has socked away cash for a down payment but is struggling to find a house that won't become a money pit.

Years of record price gains have fueled the demise of the $300,000 starter house. The upward trend has naturally made houses in every price range more expensive.

And demand has grown far faster than supply. Rising mortgage rates have eroded affordability and scared off would-be sellers at a time when there's a swell of first-time buyers, deep-pocketed investors and downsizing baby boomers.

At the same time, higher construction costs (land, labor and materials) and regulations (zoning rules, municipal fees and design guidelines) have constrained home builders.

"I call it a 'nobody's market,' " Realty Group co-owner Mike Bernier said. "Not many people see an opportunity to put their house on the market, and there are not many people who see an opportunity to buy one."

With market forces so out of whack and mortgage rates hovering near historical averages, housing affordability in the Twin Cities — typically one of the cheapest in the nation to buy a home — is at its lowest level in decades.

A family earning the median income ($111,200) would have to spend more than three times that to buy even the median-priced existing home. That ratio has nearly doubled throughout the past decade as the cost of construction in the metro outpaced many other metros.

The median price of a new, single-family detached home in the Twin Cities is at a record $538,554: 26% higher than the national median, according to the real estate firm Zonda.

Bernier said while it's technically a seller's market, the mismatch between what buyers can afford and what sellers are asking makes it more of a "complex, low-opportunity market."

Settling for less

Briggs and his fiancee don't want to spend more than $300,000. They're shopping in a broad swath of the north metro, but the pickings have been slim.

Briggs said during a recent search there were only nine listings in their price range and preferred areas. Of those, one was a foreclosure and another required a cash buyer or conventional mortgage. One was a serious contender in decent shape but needed significant updating.

"It was like traveling through time, like I was walking through grandma's house," Briggs recalled. "The basement was dark, and there was no natural light."

But Briggs is still considering making a low offer in hopes of having money for updates.

"We're running into a lot of issues where buyers feel like they have to settle for less than they want," their agent Jennifer Oseth said. "It's like a roller coaster. And it's exhausting."

Rising mortgage rates have been a major headache for buyers who can no longer afford as much house as they could a year ago, but higher rates have also stifled the number of new listings.

From 2019 through much of 2021, when rates were the lowest in a generation, home sales rose to record highs.

Now, many of those buyers have no plans to sell because they don't want to give up a mortgage rate much lower than today's, tying up starter houses that might otherwise hit the market.

Another factor: the unusually high share of investors who buy starter houses as rentals. A recent report from the Federal Reserve Bank of Minneapolis said the number of investor-owned, single-family homes doubled between 2006 and 2015 and now account for about 25,000 single-family homes in the metro.

Many of those investors have targeted more affordable urban neighborhoods and shifted to the suburbs. They gain an advantage on typical buyers by paying cash.

A proposed bill at the Minnesota Legislature would prohibit corporate entities and other investors from flipping single-family homes into rentals. As of January, cash sales represented nearly a fifth of all sales in the metro, the highest in a decade, according to Minneapolis Area Realtors' data.

Insufficient construction consequences

Housing advocates said building more houses is the only way to help first-time buyers.

For years, population growth has outpaced home building. A new report from the Minneapolis Fed and the Itasca Project said to keep up with population growth and compensate for a decade of under-building, the region needs 18,000 new houses and apartments every year.

That isn't happening, with 12,000 units built each year from 2000 to 2016.

Nick Erickson,Housing First Minnesota's senior director for housing policy, said there are dozens of issues that drive costs in the Twin Cities: a lack of developable land, restrictive urban growth boundaries and zoning rules that deter high-density subdivisions or the compact houses many first-time buyers seek. He said local mandates range from extra-large garages (about $45,000 more) to aesthetic issues (up to $20,000 for a two-story home).

Erickson said from Jan. 1, 2022, through Feb. 24 this year, new construction under $300,000 represented about 1.7% of all new homes in the Twin Cities compared with 14% in Chicago and 21% in Milwaukee.

Before recent price increases, buyers could "drive until they qualified," meaning the farther from the metro, the less expensive the houses. That's no longer the case.

Throughout the past two years, the starter house supply as a share of all listings has declined most steeply in the exurbs. Starter homes accounted for more than 75% of all listings in 2016 but only about a third last year.

Among all suburbs, the biggest decline was in Andover and Centerville. There was a 91% decline in sub-$300,000 listings between 2016 and 2022.

And in Lindstrom, historically one of the most inexpensive places to buy, 25% of all listings in 2022 were starter houses, compared to 79% of all listings in 2016.

Marty Melby, a long-time north metro builder, has struggled to build the kinds of houses his clients can afford. A twin home he built is the only one of nearly 400 houses on the Parade of Homes Spring Preview priced under $300,000.

It's a 1,200-square-foot, two-bedroom, two-bathroom home with no basement in North Branch, nearly an hour from downtown Minneapolis, listed at $289,900.

That 1,200-square-foot twin home is the same price as a 1,700-square-foot single-family home he sold just a few years ago, in part because land prices have doubled.

He bought the undeveloped land for the project back in 2014 when it was far less expensive. Twin homes in the next phase of that development will cost about $20,000 more than the one on the Parade.

A growing number of advocacy groups and public entities are concerned about the impact the situation is having on families and the long-term economic health of the region.

Ron Feldman, COO at the Minneapolis Fed, said lower housing costs in the Twin Cities have always offset less-desirable weather.

Feldman is now worried higher costs will contribute to shifting migration patterns if people stop buying into this market because it's too expensive, reversing already slowed population gains.

"If this becomes a higher-cost place to live and has negative amenities because of the weather," he said, "it's hard to see how that pushes us forward as a region with a dynamic economy."