Minnesota’s Economic News – W/E 4/16/21
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Nearly everyone acknowledges that the lack of housing available for people of low and middle income is one of the most serious problems facing the Twin Cities today.
Experts use a standard measure to determine whether housing is affordable: If a household spends 30 percent or more of its income on housing expenses (mortgage or rent), then that household is considered “cost-burdened” and their housing is not affordable.
By this measure, more than 27 percent of Twin Cities residents were cost-burdened in 2017, according to Minnesota Compass, using U.S. Census Bureau data. And the poorest are hit hardest. Nearly 85 percent in the Twin Cities making less than $20,000 per year cannot find affordable housing. But it’s not just a problem for the poorest. Nearly 23 percent of households earning $50,000 to $75,000 per year are costburdened. For context, the area median income (AMI) in the Twin Cities is about $100,000 for a family of four.
The Family Housing Fund estimates that nearly 375,000 working residents of the Twin Cities—one in every five— cannot find affordable housing.
The cost of newly built homes exacerbates the problem. According to the Housing Affordability Institute, 85 percent of Twin Cities households are unable to afford an average newly constructed home. In fact, in 2018, less than 10 percent of new homes built in the Twin Cities cost less than $225,000 and less than a third cost less than $325,000—and most of those homes were condominiums or townhomes, not single-family homes.
The Minnesota Housing Partnership says only 164 of the 1,336 units of “affordable housing” constructed in 2017 (about 12 percent) were affordable to extremely low-income households, defined as those earning 30 percent or less of AMI.
And the disparity in homeownership for households of color is also substantial. Thirty-nine percent of Twin Cities households headed by a person of color or indigenous person are homeowners, versus 75 percent of white households.
The Twin Cities
The shortage of affordable housing is not unique to the Twin Cities, but it is more acute in the Twin Cities metro area than most metro areas around the country, and it is far worse than any other metro area in the Midwest. Among the 100 largest metropolitan statistical areas(MSAs) in the United States, the Twin Cities MSA (MSP) is the 16th largest and is tied with Colorado Springs for the 19th highest housing cost (as defined by the Zillow Home Value Index: the cost per square foot of the typical home value). If we remove coastal MSAs from the list, the Twin Cities MSA has the 5th highest housing costs in the country. And if we look at the Midwest, the Twin Cities has the highest costs by far.
On top of the most expensive housing among the 10 largest MSAs in the Midwest, MSP is also 37 percent higher than the next highest MSA (Chicago), and MSP’s costs are more than double both Indianapolis and Cleveland.
Overall, MSP’s housing costs are 56 percent higher than the other largest metro areas in the Midwest.
Some might argue that the higher cost of housing is offset by the fact MSP’s per capita income is 12.4 percent higher than the average among Midwestern MSAs. Perhaps, but not enough. MSP’s housing costs are 56 percent higher than the average among the 10 largest MSAs in the Midwest. Likewise, when comparing median home prices to median household income, MSP is less affordable than all but Chicago and Milwaukee among the largest metro areas in the Midwest.
Nor does population growth explain MSP’s high housing costs. One might assume the fastest-growing large metro areas in the country would have high housing costs based on the simple principle of supply and demand. MSP, however, is growing slowly compared to other MSAs.
Of the 100 largest MSAs in America, 57 of them grew in population at a rate faster than the United States as a whole between 2010 and 2018. MSP is number 46 in growth on that list of 57 while our housing costs are 16th highest.
For comparison, MSP’s housing costs are higher than nine of the 10 fastest-growing large metro areas in America (while MSP’s rate of growth is much lower than any of those metro areas). In fact, MSP’s housing costs are more than 38 percent higher than the average cost in the 10 fastest growing large metro areas in America.
Experts cite many reasons for a lack of affordable housing across the United States. They include (in no particular order):
• Significant inflation in land prices and the products (like lumber) used in construction
• Labor shortage of those needed to build housing
• People staying in their homes through old age, limiting the supply of cheaper housing stock
• Rapid population growth in certain regions that outstrips supply
• A lack of land to build upon, usually because of physical barriers to growth
• Government policy and regulations that increase the cost of building housing
But what about the Twin Cities? Are there any unique circumstances that explain how out of step we are with every other metro area in the Midwest?
Physical barriers to expansion and population growth do not explain MSP’s uniquely poor position with respect to affordable housing. And there is also no evidence that people stay in their homes longer in MSP than other parts of the country.
That leaves labor shortages, inflation in land and building material, and government actions.
LABOR SHORTAGE. As of July 2019, Minnesota’s labor shortage is similar to other states in the Midwest and nationally, according to the U.S. Bureau of Labor Statistics. The ratio of unemployed people to job openings nationally is 0.8. At 0.7, Minnesota’s labor shortage is slightly worse than the nation as a whole.
INFLATION. Overall inflation in MSP over the past 20 years has tracked close to the average of other metro areas. Inflation of the price of land is a different story. Between 1997 and 2017, land prices in MSP experienced an annual increase of 9.25 percent during that same time period. That’s about 9 percent higher than the nation as a whole and more than triple the average major Midwestern MSA. In fact, while MSP saw a 185 percent increase in land prices over 20 years, four Midwestern MSAs actually saw a decrease in land prices over that same period.
In addition, land prices in MSP are 84 percent higher than the average in the 10 largest Midwestern MSAs, and more than 32 percent greater than the Detroit MSA, which has the second-highest cost of land in the Midwest.
Obviously, the cost of land in MSP is one cause of high housing costs that is unique to our metro area, at least in the Midwest.
Why is land so expensive?
The Metropolitan Council. The Met Council is the most powerful, unaccountable, regional planning organization in America. Its policies have created an artificial land scarcity that has sent land inflation through the roof in MSP as compared to any other Midwestern MSA.
The Met Council was created in 1967 as a small common-sense body charged with coordinating water runoff, the metro sewer system, and facilitating regional planning. Since then, it has become the most expensive, powerful, and overbearing regional organization in the country. The Met Council has an operating budget of about $1 billion, a capital budget of over $8 billion and more than 4,000 employees.
The Met Council’s operating budget is more than double that of the nation’s second-largest regional authority and larger than the 4th largest through the 20th largest combined, which includes Chicago, Los Angeles, St. Louis, and Denver.
The Met Council’s autocratic priorities are damaging the metro area rather than advancing it. Unfortunately, it no longer facilitates planning and growth but instead attempts to control and direct it, imposing its own questionable priorities on elected city councils as a condition of receipt of the state and federal funds it’s allowed to disperse.
Housing and land use are prime examples of this. The Met Council’s actions are driving up the cost of both land and housing in the Twin Cities.
The Met Council controls a “growth boundary” or “urban containment boundary” around the entire seven-county Twin Cities metro area. This invisible boundary is known as the MUSA line, short for “Metropolitan Urban Services Area Line.” Property inside the line is generally approved for streets, sewers, and other basic infrastructure. Property outside the line is not.
The Pioneer Press published an extensive article in 2017 that explained how government in MSP and Minnesota is contributing to the shortage of affordable housing. The article included the following:
Along Dale Road in Woodbury, farmland to the north is worth an average of $27,000 an acre, according to the Washington County Assessor’s records. Land just across the road—outside the MUSA line—is $11,000 per acre. Len Pratt, owner of Pratt Homes, builds homes in Washington County, where a one-third acre lot inside that MUSA line can sell for as much as $100,000. In most metro areas nationwide, there are no such regional lines. Builders choose from among thousands of landowners, wherever they are, and negotiate the best deal they can. They pay less for the land, and homebuyers pay less for their houses.
And this from an MPR story on the lack of affordable starter homes in the Twin Cities:
[Real estate developer Paul] Heuer said he thinks the way to build more affordable homes is to build further out from the Twin Cities’ urban core. That’s been a successful strategy for developers for decades. People drive to affordability, developers say. But that kind of development is restricted by the Metropolitan Council, which decides where it will supply critical infrastructure, like sewer lines, to homes… Heuer thinks they should extend those boundaries to allow developers like him to build further out.
The Met Council’s response in the MPR story: Extending the MUSA line would be too expensive and “the region doesn’t need more single-family homes”—a surprising response considering there are thousands of families in the region who are unsuccessfully searching for affordable single-family homes.
GOVERNMENT ACTION. There is also broad agreement that government policy and regulations have a negative effect on housing affordability across the nation. Land use regulations, zoning rules, permitting requirements, building and environmental codes, and voluminous fees all contribute to the cost of a home or apartment.
That is true, however, across the country. The question then is whether MSP, particularly in relation to other large Midwestern metro areas, has government policies that are uniquely onerous to explain, at least in part, why MSP’s housing costs are so high.
The answer to that question, in short, is yes.
Between state, regional and local entities in MSP, government policy and regulations are responsible for various costs when building housing.
While it is not possible to quantify these costs generally (as each jurisdiction varies) and compare them directly to other MSAs, ample evidence exists from those responsible for building housing that government policy in MSP (and Minnesota more broadly) contributes considerably to MSP’s high costs.
A recent report by the Housing Affordability Institute (HAI) found that up to one-third of a new home’s price in the Twin Cities is due to regulations and policies from local, regional, and state government.
More specifically, the HAI report sets forth how nearly identical homes cost considerably more in MSP than in other Midwest metro areas. For example, a home built in Lake Elmo costs $47,000 more than the same home built by the same builder just across the border, in Hudson, Wisconsin. Likewise, a home built in Blaine, Lakeville, or Victoria costs at least $70,000 more than the same home built by the same builder in the southwest suburbs of Chicago.
The Pioneer Press study acknowledged that regulations are only one factor in the cost of housing. Others include:
• Energy-saving rules and safety codes, which are tougher and costlier than in surrounding states;
• The cost of metro-area land, which is elevated by centralized planning, larger mandated lot sizes and public resistance to development;
• An increasing use of city fees, tucked into the price of a new house, which can add tens of thousands of dollars.
Moreover, the article goes on to describe how Minnesota cities are increasingly slapping fees on the sale of a new home—on top of taxes. Park fees alone tack up to $7,000 on house prices in Minnetonka, $6,000 in Plymouth, and $2,000 in Blaine. In addition, the Met Council levies a sewer availability charge of $2,500 per lot, and some cities charge a similar amount for the same purpose.
Regarding legislative action and Minnesota’s strict codes, the American Council for an Energy-Efficient Economy (ACEEE) ranks states and major cities on the stringency of government requirements for energy efficiency in buildings. The energy code is an important element of this measure. According to ACEEE, Minnesota has the 8th most stringent government requirements in the country and the highest of any Midwestern state. Minneapolis has the 4th highest requirements for a city, exceeded only by Boston, San Francisco, and Seattle.
In the Pioneer Press article, the authors state that over the past two decades, state officials “have been toughening up the energy codes every three to six years.”
That means taking the federal guidelines, reworking them in a years-long process, and writing their own. The latest code book affecting residential homes was 567 pages. It’s something states like North Dakota and Iowa don’t do. “We don’t rewrite the book. We don’t even publish,” said Ljerka Vasiljevic, deputy building code commissioner for Iowa, whose state code—unlike Minnesota’s—only applies to state-owned buildings.
One might wonder whether there’s a reasonable middle ground between Minnesota and Iowa.
There is no doubt that government action contributes greatly to the significant shortage of affordable housing in the Twin Cities metro area. What can MSP do to get in line with other major metropolitan areas in the Midwest?
First, do no more harm.
Unfortunately, that’s not obvious to many politicians. They propose to do more of the same. For decades, many policymakers turned to rent control, a “solution” that proved to be absolutely disastrous (although it still exists in several of the coastal cities with the worst affordability problems).
problems). Today’s new spin on rent control is called “inclusionary zoning” (IZ). IZ laws mandate that developers offer a percentage of “affordable” units in any housing project in exchange for permission to build with a higher density than would be allowed without it. This is the rent control of the 21st century, as it caps the cost an owner or developer can charge for housing.
IZ hurts affordability as much as rent control. Nonetheless, many policymakers are doubling down on their commitment to the concept, asserting that more inclusionary zoning requirements are necessary to address the affordable housing problem. The City of Minneapolis, for example, passed an IZ mandate effective January 1, 2020 that requires developers to include “affordable” units in any apartment building with 20 or more units.
Kelly Doran of Doran Cos., one of Minneapolis’s largest developers, told the Star Tribune that he now avoids projects in Minneapolis in favor of suburbs and other states. “I just know from a business standpoint the numbers won’t work, so why look?” he said.
Research shows that Doran is the rule rather than the exception regarding IZ laws throughout the country. Studies have shown that IZ mandates tend to prevent new housing starts and make market-rate housing more expensive. A 2012 study found that IZ mandates discouraged production of housing overall and raised prices in California. Another study found that IZ mandates contributed to price increases and lower construction rates in Boston.
Many of these same politicians also continue to champion age-old government “solutions” like rent or mortgage subsidies, tax credits, and government-owned housing. After spending hundreds of billions of dollars over the last few decades on these “solutions,” we find ourselves in the current situation.
The problem with subsidies is pretty basic: They increase housing demand but do little or nothing to address the supply problem, thereby creating higher home prices and rents. As one small example, the Minnesota Housing Finance Agency recently found that housing projects in the Twin Cities that used the federal Low-Income Housing Tax Credit (a significant federal subsidy to developers who agree to keep costs lower for a percentage of their tenants) cost 29 percent more than non-LIHTC projects in MSP.
That is not to say that some creative use of taxpayer dollars is not a part of the solution, but no amount of spending will solve (or even lessen) this problem unless government is willing to do what it hasn’t in the past: reform and actually roll back government mandates, regulations and fees that are contributing considerably to the lack of affordable housing in the Twin Cities.
Building and Environmental Codes
Minnesota has the strictest codes in the Midwest and there is broad consensus they contribute to the high cost of housing in the Twin Cities. If the governor and legislature truly care about the creation of more affordable housing in the region, they will conduct an in-depth analysis of every code requirement and begin to eliminate some of the requirements that have been added in the past two decades based on political considerations. Minnesota should strive to be at least somewhat competitive with our neighbors with respect to these costly requirements.
Local Government Fees and Zoning Requirements
It is also broadly agreed that the myriad fees and zoning restrictions placed on builders by cities contribute significantly to the high cost of housing in the Twin Cities. Certainly, more responsible action on the part of local governments would help, but that likely will not happen on its own. Both the state and federal governments, however, could spur action in this area.
For example, the Minnesota Housing Finance Agency provides funds to cities through economic development and “housing challenge” no-interest loans. The federal government provides housing money to cities through the Community Development Block Grant program (and several other sources). Some or all of these funds could be restricted to cities that maintain “reasonable” zoning restrictions and fee levels as defined by statute.
It’s encouraging to note that such a proposal has been championed by both the Trump White House and the Elizabeth Warren presidential campaign. If Warren and Trump can agree, we should be able to get it done.
Met Council Reform
The Met Council is the most powerful, expensive, and unaccountable regional planning organization in the country. In addition to the costs it adds to housing through fees, it has created an artificial restriction on housing development that has contributed to the uniquely high cost of land in the Twin Cities. Nearly every other metro region with housing costs as high as the Twin Cities has natural geographic barriers to growth in the form of mountains or an ocean. MSP does not, but the Met Council, through its MUSA line and attempts to direct the housing market, has created such barriers and contributed to the high cost of housing in the region.
There have been attempts to reform (or even eliminate) the Met Council in every legislative session for many years. Little has been done, however, to make it less powerful or more accountable. The ideal solution would be to dramatically scale back the authority of the Met Council to its original purpose of coordinating water runoff and the sewer system and serving as a facilitator of regional planning and growth. Taxing authority would not be necessary under such a charge.
Short of that, there are numerous reforms regarding both the power and makeup of the Met Council that would at least help. Bottom line, we will not get housing prices under control in the Twin Cities unless something is done to rein in the Met Council.
There is a role for government spending to address the affordable housing issue, but it will only bear fruit if accompanied by the reforms listed above. Ideally, that spending will be focused on vouchers provided to tenants and homebuyers, rather than grants to developers. And if aid to developers is deemed necessary, it will be dispersed through revolving loan funds rather than outright grants.
There are also creative solutions that are much less expensive than the massive subsidies we’ve seen over the years. One example is to preserve existing affordable housing through a program called NOAH (naturally occurring affordable housing). These programs seek to preserve older rental property that is at risk of conversion to higher rents and displacement of low- and moderate-income residents. Such programs often provide capital assistance or loans for capital repairs to owners of this housing in exchange for an agreement to keep rents at or near their current levels.
Jeff Johnson is an adjunct policy fellow at Center of the American Experiment.