Costs rise as housing squeeze gets tighter
"We’ve got all this projected growth in our community, and where are they going to live?"
Mike Paradise sees the crunch coming. As president of Bigelow Homes in Rochester, Paradise is in a unique position to make the space necessary for growth in Southeast Minnesota. Unfortunately, the industry isn’t up to the task.
"In 2004 and 2005, we were pulling 1,000 permits a year in Rochester," Paradise said, referring to permits for new home construction. "Then the recession hit. In the last four or five years, there’s been a recovery. But the permits aren’t even halfway to where they were."
The new neighbor crunch
According to Minnesota State Demographer’s Office projections, the population in Minnesota and the population in Southeast Minnesota should grow at roughly the same rate. But the population in Olmsted County will boom at a roughly 50 percent higher pace.
While part of that boom – from 2015 to 2025, the population in Olmsted County is expected to jump 11 percent — is centered on Rochester, the surrounding communities are expecting to see ripple effects from Rochester as residents new and old look for places to live.
Buffy Beranek, executive director of Southeast Minnesota Multi-County Housing Redevelopment Authority, said the state is already short 15,000 rental properties and 40,000 owner-occupied homes.
"By 2030, the state of Minnesota needs to increase the number of housing units by 50 percent," Beranek said. "That’s 300,000 units across all types and price points." But, she said, as the state works to add those new homes, it’s also looking at new home prices that are too high for many low-income buyers.
Passing prices along
Those higher home costs, said Kevin Sternberg, a member of the Rochester Area Builders board and co-owner of Countryside Homes LLC, come from the cost of building those homes.
"The prices of everything keep going up and up," Sternberg said.
After the housing recession hit around 2008, lumber mills began to close. "They haven’t fired them back up," he said. "That’s the highest dollar value in a house."
The price of labor to build a house has also jumped in recent years. Sternberg said that during the recession, workers were reluctant to raise their prices, in order to stay competitive on the few jobs that were available.
"The plumbers and the house framers, they’d been working at the same price for so long," he said. "And now their people want more money. They deserve a raise."
Finally, changes to state building regulations have added to the price of a new home. Everything from air exchangers to additional costs in duct work and foundation insulation have all made for a better home, but one that costs more.
Rob Keehn, Lake City’s city administrator, said recent regulation changes have made housing costs in Minnesota high compared to the state’s neighbors.
"The state of Minnesota is an expensive state to build in because of regulation," he said. "Outside the East Coast, we have the highest cost of building."
What is affordable?
For Beranek and her clients, the question becomes how do you get people with lower incomes into housing when the shortage is pushing people above their income level into those same homes?
"The definition of affordable housing has not changed," Beranek argued. "The question is, affordable for whom? Affordable for a doctor at Mayo Clinic and affordable for a cashier at McDonald’s are different.
"It’s the ability to obtain affordable housing that has changed," she said.
Beranek said the definition of affordable is still a home at about $150,000. The problem is that a traditional house at that price is just not available anymore. That is why the state and federal governments, counties, private industry and employers all need to find a new solution for those families who need a home but can’t afford today’s prices.
One answer is for people to start looking for housing in communities outside of Rochester.
"There’s going to be more pressure, more demand on the bedroom communities of Rochester," she said. However, while affordable houses used to be found in Byron and Stewartville, lower-income buyers are now looking at the next towns down the road, like Plainview and St. Charles.
Today, the hypothetical college graduate making $40,000 can afford market-rate rent, but because they qualify for affordable housing, they are taking the affordable housing because that’s what’s available, Beranek said. And that means there’s no affordable housing for the people who are in greater need.
That chain reaction is having a real impact, she said.
"We’re seeing increases in homelessness, higher occupancy rates and longer waiting lists," Beranek said.
How do you fix it?
In Lake City, SEMMCHRA is administrating an $800,000 grant to refurbish existing housing stock.
"It does two things," Beranek said. "It keeps the tax value there. It also keeps the housing stock in good quality. It’s less expensive to rehab and maintain the existing housing stock than build new."
Keehn, the city’s city administrator, said the city has two types of housing. One type of home is a bunch of 1990 or newer homes in good shape. The other type is older homes with deferred maintenance. Those homes have an attractive price, but they need work.
"These grants make that money available for a workforce we have here that doesn’t qualify for that $350,000 mortgage," Keehn said.
Between the initial price and the grants, for someone looking for a home in Lake City, "You can’t build a house for this price," he said.
Final housing hurdles
Grants and refurbishment are fine, but that just keeps the region from losing some of its current housing stock and falling farther behind.
Paradise said there is a hard road ahead. During the recession, developers lost their buildable lots back to the banks, and those lots are being sold in some communities at a price below the cost of developing new lots. But that glut of cheap lots is going to run out soon.
"How do we replace those lots?" he asked, rhetorically. "We can’t. It’s not just the cost of the land. It’s the cost of developing it."
And, like labor and lumber, the costs of infrastructure like sewer and water connections are also going up. And that cost increase is passed along to the price of the lot, and eventually the home.