Of the existing homes in your price range, most aren’t turnkey properties. The fixer-uppers you’ve browsed are a total downer; you don’t have the time for DIY remodeling and can’t afford major renovation projects. With plans to expand your family, tiny homes may not cramp your budget, but they will cramp your quarters. You and your family start to wonder, What about building our dream home? I heard about a couple who saved thousands by buying land and building new—could that work for us?
This imagined scenario isn’t far from reality, as moderate-income millennials remain far and away the largest share of first-time home buyers, according to a recent NAR Realtors® Consumer Confidence Report. Millennial buyers rely predominantly on precious savings to make up the majority of their downpayment deposits—a fact that raises the financial stakes of a new home purchase.
The idea that you can get more per square foot by building new is something of an urban, or suburban, legend. While the buyer’s choice of materials, square footage, and new home location all affect price, new homes, overall, tend to cost significantly more than existing homes— up to 10% more nationwide according to a 2022 HomeAdvisor report.
New starter homes at the most affordable price points simply are not being constructed at a pace that can keep up with existing demand.
The Starter Home Problem
You don’t have to dig far into the data to see that Minnesota has a starter-home problem. Take the Twin Cities metro as an example. In that region last year, only 20,000 single-family “starter homes” priced below $300,000 were sold; the fewest in decades according to the Star Tribune. New homes in this same area were a whopping 26% higher than the national median, at an average price of $530,000. Adjusting for inflation, that’s more than double what it cost for a new home in the year 1970.
A 2023 report by the Housing Affordability Institute found that, over the course of the last 14 months, less than 1.7% of all homes built in the Twin Cities metro are priced under $300,000. How does that compare to other similar metropolitan areas in the nation?
Percentage of New Homes Built Priced Under $300,000:
Chicago—14.1%
Milwaukee—21.1%
Nashville—8.5%
Indianapolis—18.5%
Twin Cities—1.7%
That same study revealed that the costs of building a home in Minnesota appear even more glaring when compared to our neighbors to the east. Building a new home in Hudson, Wisconsin could save buyers an estimated $47,000.
The numbers don’t lie and the picture they paint is grim. New starter homes at the most affordable price points simply are not being constructed at a pace that can keep up with existing demand.
The result is a vicious cycle in which buyers who can afford to enter the market do so, but at a steep price. This drives costs up further across the market. In the last decade, the statewide median sales price of a single-family home has increased at a staggering pace, climbing from just under $150,000 in 2012 to over $320,000 in 2022. Thus, while existing homeowners have benefited from substantial equity growth, many would-be first-time buyers have struggled to enter the market at all.
At the same time, existing market conditions set the terms, at least on some level, that builders and developers must reckon with. It’s hard enough to construct affordable starter homes as is—throw in the challenge of an inflated market, and it becomes almost impossible.
Why is it so hard to build affordable starter homes in Minnesota? To answer this, we looked at three facets that comprise a wider and increasingly complex housing ecosystem.
The Three L’s and the Cost of Housing
To understand why building new homes is so expensive in our state, consider three root causes: lumber, labor, and laws.
Lumber
Some of these are intertwined, of course, in that regulations directly affect the cost of goods such as lumber. While many people rightly attribute the recent spike in lumber prices to the pandemic-driven housing boom and the ensuing supply chain issues, that particular market example has started correcting itself.
But we can zoom out a little further to see that numerous policy decisions, such as the Trump Administration’s 20 percent tariff on Canadian softwood in 2017, significantly impacted lumber prices as well. Following that tariff, developers immediately had to adjust to account for the increased cost of lumber used to build homes. Then in late 2021, the Biden Administration doubled the duties on Canada’s softwood, taking it from an average of 8.99% to 17.9%, only to come down again, scaling back to an 11.6% average in early 2022.
This kind of policy and economic volatility is bad for the homebuilding industry, as it forces builders and developers to constantly adjust their prices based on uncertain policy decisions and the economic repercussions that follow. In some cases, adjustments aren’t made in time and prices simply stay inflated. When push comes to shove, it’s not homebuilders who ultimately absorb these costs. Homeowners do.
Labor
We’re in the middle of a chronic labor shortage in not just the construction industry, but the trades more broadly. If we focus on homebuilding, consider the fact that the construction industry averaged a record high 390,000 job openings per month in 2022, according to a study by the Associated Builders and Contractors. The same study noted that approximately one in four construction workers are older than 55. Thus, unless something is done to address the imbalance in that vital workforce, it’s likely that the problem will only worsen.
This labor shortage negatively impacts would-be homeowners in two primary ways: wages have gone up, while construction time has slowed. Put simply, buyers looking to move into a new-build property can expect to wait longer and pay more.
Laws
Laws, or “regulations” as they are more commonly referred to in the industry, significantly impact the price of new homes nationwide. According to the National Homebuilders Association, regulations by cities, states, and the federal government account for roughly 25% of the cost of a new home.
While it’s not feasible to cover every law that affects the cost of new home construction, especially given that regulations vary between cities, municipalities, and counties, there are several unique regulations here in Minnesota that drive home prices up. Below are two examples.
Aesthetic Mandates
Aesthetic mandates, set forth by local units of government, are distinct from building codes and safety regulations. As the name suggests, these regulations limit the number of aesthetic and stylistic decisions property owners have, particularly on the exterior of their property.
A common example is the “vinyl siding ban”—which involves either a complete or partial restriction on the use of vinyl siding on a home’s exterior. Vinyl, one of the most common and economical siding materials available, is not permitted in certain developments. These regulations are often referred to as “beauty contest” laws, given their exclusion comes down to purely stylistic preference.
How does this affect the cost of a home? Vinyl siding typically costs about $2 per square foot, while brick siding—an oft-required alternative—ranges from $4–$10 per square foot. When taken as a whole, that alone will add thousands, if not tens of thousands, of dollars to the final cost of a new construction home.
Building & Energy Codes
As a state committed to increasing sustainability across industries, Minnesota has spearheaded innovations that both improve lives and reduce our collective carbon footprint. To this end, in the 1990s the state began adopting some of the most stringent energy requirements for new builds in the nation. Since then, officials have further tightened those requirements every three to six years. Builders and Realtors® have first-hand experience of how this impacts homeowners.
The Pioneer Press spoke with one such builder who works on the North Dakota–Minnesota border. When he meets with clients looking to build, his first question is always: “Which side of the river?” Excluding land price differences, the answer to that question will be worth anywhere from $15,000–$30,000. A big factor in the large price difference between MN and ND comes down to the tight energy requirements in place on this side of the Red River.
Another builder cited a similar situation. After being contracted to build two homes in Forest Lake— with the same floor plans, lot size, appliances, and overall design— one client was hit with substantial additional costs. This was because the first home was under contract in late 2014, while the other didn’t get there until early 2015—a year where dozens of new mandates were introduced. The difference of mere weeks cost the latter client over $15,000, all attributable to the updated building and energy codes that became effective that year.
One key argument, at least from a financial perspective, for tighter energy codes is that while the cost is higher on the front end, homeowners ultimately save money on their bills over the long term. For some homeowners, this is a viable way to purchase an energy-efficient property while also positively aiding our sustainability priorities—all while saving money in the long run. But for many would-be first-time homebuyers, even an extra $10,000 needed to close a deal can end up pricing them out entirely.
The challenge, as illustrated above, lies in the affordability and sustainability priorities working together rather than against each other. After all, implementing more sustainable materials into homes reduces overall environmental impact and saves consumers money long term. The million-dollar question is this: How do we implement sustainability in housing such that it’s affordable and accessible to all?
Bird's Eye View
If Minnesota hopes to increase the supply of new and affordable single-family homes, we’ll have to find ways of reducing the many expenses associated with construction, which are ultimately absorbed by the homebuyers. The high costs of building new homes further drive up existing home prices, which are also in very short supply. Housing advocates see building more affordable units as the most effective way out of our inventory crisis. For example, the Minneapolis Federal Reserve developed a Regional Housing Affordability Dashboard with the expressed goals of increasing the housing supply, meeting affordable housing targets, and doubling the Black homeownership rate in the state by the year 2030. Affordability has hit the pockets of low- to moderate-income buyers—and notably, people of color—the hardest.
While inventory challenges must be addressed locally, they’re also part of a larger economic web driven by many complex factors. A bird’s eye view shows that new home construction in the U.S. has yet to recover from the housing crash of 2008 when it plunged to historic lows. If interest and inflation rates fall, as many economists predict they will by 2024, housing affordability should improve, but that won’t magically solve the inventory problems in Minnesota. The issues of affordability and inventory go hand-in-hand. Until both issues are resolved, first-time buyers, like our invented couple, may have to remain flexible when searching for a starter home.