Change in Renters by Household Income

Is Home Ownership Out of Reach?

As Minneapolis moves forward with an update to its Comprehensive Plan, there’s been some great discussion around how we accommodate a fast-growing population. As our city grows, it’s important to talk about how to make this a more equitable city for everyone who lives here, and all the shapes and sizes of new homes that requires.

A concern I’ve heard repeatedly about the draft Comp Plan is that it doesn’t address home ownership. While home ownership has its advantages (as does renting), it’s also inaccessible to a large and growing number of people in our city. Renters are more likely to have lower incomes and to be people of color. It might surprise you to learn that renters are a straight-up majority of people in Minneapolis. It’s vital that the Comp Plan not ignore the needs of renters, whether they rent by choice or necessity.

But let’s say you’re one of those 53% of Minneapolis renters, and you’d like to become a homeowner. The first obvious realization to slap you across the face is that buying and maintaining a home is expensive! The average median sale price for a home in the Twin Cities has been rising for years, and now stands at $247,500. To help low-to-middle income buyers purchase homes, the federal government backs FHA loans. These loans require a down payment of at least 3.5 percent.

In Minneapolis, this means those who qualify for an FHA loan for a relative bargain-priced $200,000 home would spend $7,000 for a down payment, and would have a monthly payment of over $1,400. Here’s a helpful breakdown of those costs:

Mortgage Cost Breakdown, $200,000 Loan

Monthly Payment Cost Breakdown, $200,000 Loan

Note that MIP stands for Mortgage Insurance Premium, which is an amount paid by the borrower to insure the loan. This cost can persist over the entire life of the loan, but for simplicity we’ll assume it can be reduced after five years.

Depending on your perspective, this monthly payment might seem either reasonable or wildly out of reach. According to recent research, 57 percent of Americans have less than $1,000 in savings. Is it reasonable to expect people who live paycheck-to-paycheck to take on the substantial and ongoing cost of owning a home?

If you think landlording is a racket, let’s take a quick look at the mortgage lending industry. Here are the overall costs over the life of a $200,000 loan:

Overall Cost Breakdown of $200,000 Mortgage

Lifetime Cost Breakdown of $200,000 Mortgage (home maintenance/repair not included)

To recap: our bargain-basement $200,000 home requires a buyer to take on hundreds of thousands of dollars in debt, and to pay nearly a half-million dollars over 30 years.

A home also comes with significant ongoing expenses. If you buy a single-family home and need a new roof or your furnace replaced, expect to spend about $10,000 dollars. And if you’re living without much savings set aside, a loan for those repairs could add hundreds of dollars to your monthly housing costs. In a multi-family home like a condo, you’ll pay an HOA fee on top of your mortgage to cover the costs of routine building maintenance costs and the inevitable big ticket items, like the aforementioned roof or boiler replacement

Total housing costs are a major barrier to home ownership in our city.

Incomes: Stagnant for Some, Declining for Many

The Comprehensive Plan won’t change this mortgage math, and the cost of borrowing is likely to remain out of reach for many. A family would need to make $58,302.80 annually to afford to buy the above $200,000 home without being cost-burdened (that is, spending 30 percent of income on housing).

That might sound like a reasonable number to some, but economic reality suggests otherwise. This map, created by WNYC from 2012 census data, demonstrates how many of those in Minneapolis do not make enough money to afford such high housing costs:

Additional research from CURA suggests that income disparities across racial lines have widened specifically among renters:

Median Incomes of Rental Households in Minneapolis

Median Incomes of Rental Households in Minneapolis

When we talk about equity in our Comprehensive Plan, this is exactly what we need to address. Minneapolis has taken steps to directly address income disparities by passing a $15/hr minimum wage, but homeownership remains out of reach for many.

The Big Shift

Overall lifestyle changes and the inaccessibility of home ownership have led to more higher-income people renting. Renting offers mobility and flexibility, which is especially important for those whose jobs may be high-paying but also short-term. A monthly rent check also offers stability instead of routine home maintenance and unexpected bills.

The appeal of living in a vibrant city rather than a quiet suburb has also been an important recent lifestyle shift, and this is not just limited to millennials. Seniors who are looking to downsize also see the appeal of living in the city (though the perception among that generation that renting is “throwing money away” still persists).

One of the effects of these changes is that rents have crept upward over the last 10 years. Higher-income households are now competing for the same limited supply of rental units, contributing to a period of extended low vacancy rates in Minneapolis. This new class of renter, including some former homeowners in search of a downsized urban lifestyle, can afford a higher monthly rent on an apartment than your traditional lower-income renter and is driving rising rents in the Twin Cities.

Change in Renters by Household Income

Change in Renters by Household Income

A Way Forward

If Minneapolis is going to become a more equitable city, we need to build enough homes for everyone. For too long our housing policy has been written by homeowners with an emphasis on keeping renters and apartments out of certain neighborhoods. We can’t let those with housing security deny that same security to others who rent out of choice or necessity. If we value homeownership, the only way to live up to that value is to build enough smaller, less-expensive homes (and condos, and coops) to re-open a more-affordable door to homeownership across Minneapolis. And if we value people, we must recognize that renters are the great neighbors we already know, and we must offer them access to our neighborhoods, too.

This is what Minneapolis 2040 acknowledges: that as our city grows, in order to address racial disparities, we need many more, flexible home options in our city. It’s time for Minneapolis to embrace and make space for our neighbors.

Anton Schieffer

About Anton Schieffer

Anton lives in Minneapolis and writes about information technology, government transparency, and local housing issues. He mostly wants to build enough housing so that everyone has a place to live.