With interest rates and inflation on the rise, overheated housing markets across the country started to cool off last year. Yet with demand for available housing still far outstripping supply, the local housing sector remains extremely competitive.
Across Minnesota, median home prices rose to record highs in 2022, while sales fell to their lowest levels since 2014. Median home prices in Minnesota now stand at more than $350,000 — making it harder for entry level and first-time homebuyers to get a foot in the door.
While the double digit valuation increases of 2020 and 2021 may have been an unsustainable anomaly, the tight housing market appears to be here to stay. Some new homes are being built, but market supply is still recovering from the 2008-09 housing market crash.
Faced with rising material costs, supply chain issues and a shortage of labor, builders have found themselves bearing the brunt of the blow from today’s inflationary pressures.
A survey published last December by the Minnesota Fed found that rising interest rates have led to a “worst of both worlds” scenario for home builders and buyers, making new single-family housing less and less affordable.
In Owatonna, Berkshire Hathaway Home Services Real Estate Agent Diane Holland said that while the strong local economy has helped keep many buyers afloat, the kind of home they can afford has dropped.
As a result, many builders are now shifting their focus outside of the residential sector. That’s bad news for communities like Owatonna and Faribault, which had already struggled to secure the attention of builders turned off by their comparatively lower property values.
Higher property values are available to builders in the south metro and in Northfield. Thanks in large part to the presence of St. Olaf and Carleton colleges, Northfield has managed to establish itself as something of a “destination community” locally, able to simultaneously meet higher demand and sustain elevated property values.
Northfield and neighboring Dundas have seen significant new developments from a handful of builders in recent years.
Realtor Ruthie Gilbertson with eXp Realty said housing in Northfield draws strong interest because of the city’s unique blend of small-town charm, college town feel and proximity to the Twin Cities.
“I think we’ll always have a premium (on housing) in Northfield,” Gilbertson said. “We aren’t a suburb of the Twin Cities, we’re our own little town and that will always keep our market a little more protected.”
Other local communities, like Faribault and Owatonna, are struggling to put more than a handful of new homes onto the market each year.
Given the continued disparity between supply and demand, Owatonna Real Estate Broker Matt Gillard of Re/Max Venture said sellers can still generally count on receiving multiple offers on a home. But he said those offers might not be as far over the asking price as they were in the last several years.
Gillard emphasized that the market returning to greater balance would be good news for almost everyone, not just first-time homebuyers or those of limited means. With shortages persistent at almost all levels of the market, it’s been a difficult time to make a move.
“The real estate market in the last couple of years was not good for anybody, except like an estate,” Gillard said. “If you move, you have to spend a lot of money.”
Owatonna Realtor Justin Ohnstad of Dwell Realty Group said that while many families may be interested in different housing that better suits their needs, they’re sitting put for now while they wait for the right house to come on the market at a price they can afford.
“With less than 30 houses on the market for the last several months in a market where we should have 130 houses, everybody is waiting for the right house to buy,” Ohnstad said. “When it does come onto the market, five people try to buy it.”
While demand may have eased a bit, Ohnstad said the market remains especially tight for lower-priced houses. Buyers looking at homes priced under $200,000 will be hard pressed to find them in Owatonna, and they’re quickly snatched up when they do pop onto the market.
One approach favored by policymakers has been to incentivize the construction of new multifamily housing developments. Cities have utilized tax increment financing districts, while the state has invested in housing infrastructure bonds to support projects.
While those developments have met a vital need, Faribault-based Realtor Daryl Bauer with RE/MAX Advantage Plus said that they haven’t put much of a damper on demand for homeownership as Faribault’s thriving business community looks to expand.
Despite the efforts of the Faribault Area Chamber of Commerce and Tourism and local businesses that have identified the housing crunch as the top barrier to their potential for growth and expansion locally, Bauer said that barriers to development remain.
While Rick Cashin Construction has been the mainstay of Faribault’s homebuilding market for years, the limited number of available lots and the potential costs and risks associated with developing new lots has scared away builders, according to Bauer.
Given the state’s tight labor market, Faribault Realtor Kathy Kalow with Edina Realty said local businesses face a significant risk of losing workers who can’t find affordable, suitable housing in town and would prefer to skip the commute and work where they live.
“If you’re an entry level worker and you have to add commute costs on top of that, it’s not very affordable to work here,” she said. “They’re better off working in the town they live in.”