Across the country rising mortgage rates and inflation have had a stifling impact on the housing market. It is no surprise when considering that from the start of the year, mortgage rates have more than doubled, increasing from 3% in January to rates now over 6% this fall.
Permits for new single-family homes have fallen 16% year-to-date in the Twin Cities, according to the Keystone Report for Housing First Minnesota. While that is a notable drop, single-family permit activity remains on pace with pre-pandemic construction levels, with a 1% increase in the number of single-family permits pulled year-to-date compared to 2019.
“Rising inflation and climbing interest rates are having a clear impact on the housing market as more buyers are priced out of homeownership,” said James Vagle, CEO of Housing First Minnesota.
18 million U.S. households have been priced out from purchasing a $400,000 home since interest rates rose from 3% to 6%, according to John Burns Real Estate Consulting. During its latest National Housing Market Update, Zonda noted that monthly payments have risen 40% to 60% depending on the market.
“A lot of buyers have been pushed to the sideline and are going through some of the shock. I was talking to millennials from South Dakota, Ohio and California — all three are renting and they all absolutely want to own a home. They were all trying to buy a home and have all been moved to the sidelines,” said Ali Wolf, chief economist for Zonda. “That is an opportunity for how we reach these buyers and get them to a point to convert to homeownership.”
With so many buyers being priced out, overall housing inventory has started to tick up from its historic lows. Inventory of homes for sale in Minnesota climbed 2% in August, up to 13,271 homes for sale, but is still down 41% from the number of listings available in August 2019.
Many builders are offering rate buydowns as incentives to help homebuyers with the affordability issues from rising rates, but Wolf noted that even when builders offer these incentives there seems to be a disconnect for the buyers.
“One of the things that has become apparent to me is that consumers don’t know the same jargon as we do. The idea of a mortgage rate buydown is not as impactful for consumers who don’t track mortgage rates or don’t understand the impact of that on your monthly payment and on the lifetime of that loan,” said Wolf.
According to Vagle, now more than ever, lawmakers and leaders need to look at methods to bring down the cost of new homes in Minnesota. “The demographics remain the same: we have a large population in their peak homebuying age and a shortage of homes in our region. It’s more important than ever that lawmakers and leaders look at innovative ways to bring starter homes back in Minnesota,” said Vagle.