Minneapolis might be one of the Twin Cities, but it’s not just St. Paul the city has something in common with.
Like much of the country, the area has experienced waning housing demand due to higher mortgage rates over the last year. Slower building activity and ultra-low housing supply are also common threads between the Minneapolis-St. Paul-Blooming metropolitan statistical area (MSA) and other major U.S. markets.
Where Minneapolis diverges comes down to employment and population growth, both of which are on a downslide. Could those headwinds pose problems for the housing market down the line? Here’s what the data tells us, using information from the U.S. News Housing Market Index about the market over the past year, its current state and what to expect in the months to come.
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How the Minneapolis Housing Market Changed in 2022
Single-family housing permits fell considerably in Minneapolis last year, as they did in much of the country. From peak to trough, they declined from a high of 1,068 permits in May to just 365 by December.
While they’ve begun to recover since then, permitting activity was still down almost 44% over the first quarter of this year. In the first three months of 2023, 1,349 single-family permits were approved. For the same period in 2022, it was 2,402 permits. And with 655 permits issued, April 2023 shows a 35% drop year over year.
According to local real estate agent Paul Ektsrom, a big part of the decline is prohibitive fees that homebuilders have to contend with in the area. This also results in higher home prices on new construction properties, he says.
“It has gotten out of control on permit, water, sewer and park dedication fees over the past four-plus years,” says Ekstrom, broker and owner at Realty ONE Group Choice in Andover, Minnesota, a suburb of Minneapolis. “Our local builders association, Housing First Minnesota, and the Minnesota Association of Realtors are lobbying for tighter development controls over the city’s approval of developments. Hopefully, this will help on new construction pricing.”
Housing First has even filed lawsuits against a few local suburbs, alleging excessive plan review, permitting and inspection fees.
Permits on the multifamily side of things followed a similar trajectory last year, peaking at 1,545 in July and plummeting by year’s end to 1,097, a 29% drop. Multifamily permits have continued to decline into 2023.
In the first three months of the year, 3,032 multifamily permits were approved. A year prior, it was 3,747, a drop of 19%. And April permits declined 33% year over year.
Minneapolis Housing Supply and Demand
The number of homes for sale in Minneapolis is incredibly low. The metro currently has just a 1.8-month supply of housing. While that’s nearly a half of a month improvement over the year, it’s still lower than the nation’s supply (1.9 months) and well below the 6.5 months that’s generally considered a balanced market.
“Minneapolis’ housing supply won’t improve in the near future,” says Bob Clausen, retail branch manager for Planet Home Lending in Champlin, Minnesota, a suburb of Minneapolis. “Homebuilders are reluctant to build something they will have to sit on and not sell. Existing homeowners are sitting pretty at their current 3% rate, so they’re staying put for now.”
Rental vacancies are up 4.3% compared with last year, and at 10.1%, are well above the nation’s vacancy rate of 6.4%.
As for demand, that’s faltering. For one, the population of Minneapolis has been steadily declining in recent years. Census data shows that the city lost 4,000 residents between April 2020 and July 2022 alone. St. Paul lost nearly 2,000. The MSA in 2022 lost .34% of its population due to net migration.
Add to that higher interest rates, and buyer interest wanes even further. The average 30-year mortgage rate currently sits at 6.79%, according to Freddie Mac — 1.7 points higher than a year ago and nearing their 15-year high. As a result, mortgage payments have jumped almost a full percent since just March, and buyers have pulled back accordingly.
Mortgage applications decreased 1.4% from one week earlier, according to data from the Mortgage Bankers Association’s weekly survey for the week ending June 2. The seasonally adjusted Purchase Index decreased 2% from one week earlier. The unadjusted Purchase Index decreased 13% compared with the previous week and was 27% lower than the same week one year ago.
Just look at a recent survey from the University of Michigan for proof of how consumers are feeling. According to the findings, national consumer sentiment sits at a 67 out of 100 in February. While that’s a 4.2-point bump compared with a year ago, it’s nowhere near the 90-plus sentiment ratings seen before the pandemic.
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Median Home Price in Minneapolis
Minneapolis home prices are down 1.6% compared with a year ago, clocking in at a median $368,000 as of April, according to Redfin. While that’s well above the sub-$300,000 price seen pre-pandemic, it’s still notably lower than the nation’s median — a cool $408,000.
With such low inventory, it’s no surprise prices are rising. Increasing construction costs — which have jumped 3.5% nationally in the last year — also play a role.
Both Ekstrom and Clausen project prices will continue increasing — though not as quickly as we saw in the hot markets of 2020 and 2021.
“Home prices in Minneapolis are still going up, up, up,” Clausen says. “While it’s not at the pace it was, prices continue to appreciate. We’re seeing multiple offers on homes, which will keep driving prices upward.”
Rents, on the other hand, are rising at a faster clip. According to the Zillow Observed Rent Index, the typical Minneapolis rent was $1,655 in April — a 3.1% increase compared to April 2022.
As Ekstrom explains, “Our rent prices have skyrocketed the past two years, as inventory of available rental apartments and homes is at all-time lows.”
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Unemployment Trends in Minneapolis
Employment in Minneapolis has declined significantly. According to the Bureau of Labor Statistics, the area has lost over 9,000 jobs in the last year.
The April unemployment rate was 2.7% — up 1.2% over the year, but keeping pace with national numbers. As of February, 3.4% of Americans were unemployed.
Construction sector jobs have declined in the area, too. About 19,500 were employed in the industry as of March — down from 22,000 last summer.
With higher unemployment and the rising costs of homeownership, foreclosures have increased in Minneapolis. The current foreclosure rate at the state level, as reported by Black Knight, is 0.3% — up 0.1% compared with a year ago, but still below the national foreclosure rate of 0.46%.
Builder Confidence in Minneapolis wanes
Builder sentiment has fallen quite a bit in the Midwest over the last year, likely due to rising mortgage rates and falling buyer demand. The National Association of Home Builders/Wells Fargo Housing Market Index rates builder sentiment at 42 out of 100 as of April — a dip of 9 points in just a year.
Nonresidential construction has declined quite a bit in the Midwest, falling more than 6% year-over-year, according to the Architecture Billings Index.
Minneapolis Real Estate Market: Predictions
Though unemployment is up, the local population is declining, and builder and consumer sentiment are low, Minneapolis also has very little housing supply, which keeps the market afloat despite waning demand.
According to our projections, these conditions should persist in the near term. The U.S. News Housing Market Index predicts single-family permits will decline, with multifamily permits holding steady at least through August.
As Clausen puts it, “Until we get more housing inventory, we’re going to see prices continue to increase.”
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Minneapolis Housing Market Forecast originally appeared on usnews.com
