What will it take to lower housing costs in Minnesota? Our new report has the answer

Minnesotans are concerned about the cost of housing, and rightly so. With the median home price exceeding $400,000, the Twin Cities metro is the most expensive housing market in the Midwest. After adjusting for high income levels, the Twin Cities rank as the fourth most expensive among the top 10 most populous Midwest metros.

Housing costs must come down. But how?

As American Experiment’s recently released Affordability Agenda notes, housing is unaffordable due to a mismatch between demand and supply. While money printing during the COVID-19 pandemic fueled price hikes across the board, the U.S. also hasn’t built enough housing to keep up with demand. This has created sustainable upward pressure on prices.

Up For Growth estimates a national shortage of 3.8 million homes. Minnesota needs nearly 100,000 homes, with the Twin Cities responsible for approximately three-quarters of that deficit.

Tackling this shortage will require comprehensive reform. State and local governments must remove the various regulatory hurdles they have placed on housing construction and make it easier for developers to work.

I discuss several of the necessary reforms below, and in more detail here.

How to increase housing supply — local zoning and land use reform

Through zoning, local governments decide where housing can be built. They also dictate housing features through several land-use regulations, such as minimum lot sizes and setback rules. Taken together, restrictive zoning and land-use rules limit the production of affordable housing options, including smaller-sized single-family homes, duplexes, and townhouses.

So, to encourage housing development while maintaining autonomy, local governments need to take the lead in relaxing zoning and land-use rules.

Beyond zoning, local governments must also streamline the permitting process — by limiting discretionary approvals. Permitting housing by right, if it meets broader zoning requirements, would reduce uncertainty and delays for developers.

Reducing development fees — which are generally passed down to homeowners — would also reduce the cost of new homes.

The role of state policymakers

According to the most recent State Energy Efficiency Scorecard from the American Council for an Energy-Efficient Economy (ACEE), Minnesota imposes the country’s eighth most stringent energy-saving building codes. Among the 12 Midwest states, Minnesota ranked second only to Illinois

Certainly, tougher energy rules can reduce home energy use. But they also raise housing costs by complicating the building process or necessitating the use of expensive materials. For instance, Minnesota is the only Midwestern state to mandate the installation of balanced mechanical ventilation systems. These can cost up to five times as much as exhaust-only systems allowed in neighboring states.

Minnesota’s energy-saving rules will only get tougher and costlier due to a 2024 law that requires frequent energy code updates with the intention of cutting new home energy use by 70 percent by 2038. Estimates from the Housing Affordability Institute show that the 2038 mandate could cost between “$25,773 and $44,171 per home by 2038,” further worsening the housing affordability crisis.

To improve affordability, state lawmakers should repeal the 2038 mandate and relax other existing energy rules.

Beyond this, state policymakers should also encourage the construction of multifamily housing by legalizing mid-sized single-exit stairway apartments. With modern safety measures such as smoke detectors, these should be just as safe as other types of housing.

Why incentives don’t work

Subsidies do not address shortages; they merely transfer costs onto taxpayers. Even worse, when supply is limited, subsidies intensify competition, further raising prices.

If targeted at developers, as suggested by candidate for Governor Amy Klobuchar, tax credits and grants fail to create extra housing. Instead, developers pocket money for housing that they likely would have built even without incentives. The credits get factored into the final cost of a new home.

Another politically popular solution, demonizing corporate landlords, can also have a chilling effect on housing development. Corporate landlords often increase the supply of rental homes, lowering costs.

Supply-side reforms work because they impose zero costs on taxpayers. They merely address artificial hurdles standing in the way of housing construction.