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.

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36 Responses to Is Home Ownership Out of Reach?

  1. Bill Lindeke
    Bill Lindeke April 23, 2018 at 1:14 pm #

    This is wonderful!

  2. Jeffrey Skrenes April 23, 2018 at 1:36 pm #

    The data here shows that we have an affordability problem with both rental and ownership. It misses one or two items regarding ownership. First, with down payment assistance through programs like MN Housing or other loans/grants, one can sometimes purchase a home for as little as $1,000. With earnest money, appraisal, and inspection costs, that usually comes to $1,500 – $1,800. Still, that can make out-of-pocket expenses for ownership more attainable than some security deposits.

    Second, mortgage insurance on a conventional loan usually takes about seven years to go away, but it can be removed in as little as two. For most FHA loans today, mortgage insurance is permanent.

    Finally, a true “apples to apples” comparison wouldn’t focus on the median sales price since most low/mod-income first-time buyers are purchasing at levels below that amount. Not that the $170 – $240,000 price range in this market is any easier than the $250k level.

    • Matt Steele
      Matt Steele April 23, 2018 at 2:19 pm #

      While those programs are great, it’s good we are focused on increasing the housing supply too. I don’t see too many $170-240k houses these days. $250 seems like the starting point with $350 being more common. I don’t see how first time home buyer programs or Mpls2040 are in conflict… They seem to be ideas that work in concert.

    • Anton Schieffer
      Anton Schieffer April 23, 2018 at 7:27 pm #

      My monthly mortgage cost calculation is based on a $200,000 loan, which is less than $250,000 but you’re right, it’s out of range for many people.

      I couldn’t find much data on downpayment assistance (specifically, how often it’s given out), but it’s still money that needs to be paid back eventually. I do know it has a relatively high income cap (which is fine) but also requires a credit score of at least 650, which puts those most in need out of the running.

      To me, the bigger cost is not the up-front down payment or the PMI, but something I touched on briefly, which is the maintenance. I mentioned the expensive big-ticket items (a roof or furnace), but there’s also replacing windows or a water heater. Most advice I’ve seen suggests setting aside anywhere from 1 to 3 percent of the total purchase price for this per year. On a $200,000 home, that’s $2,000 to $6,000. Without that kind of money saved, you’re looking at a new loan to cover it, which adds to a budgeted monthly housing cost.

      Thanks for your comment.

  3. Jack April 23, 2018 at 3:53 pm #

    One thing that I see increasingly in my Longfellow neighborhood are small “affordable” homes being snatched up by developers as tear-downs to be replaced by homes in the upper bracket. We are losing our affordable housing stock at an alarming rate.

    • Samantha Strong April 23, 2018 at 6:12 pm #

      100% agreed. Wish the city could put a cap on such transactions. Or maybe a hefty tax on over X flips/new builds per yr. Like they did for converting owner occ props to rental.

      • Matt Steele April 24, 2018 at 9:47 am #

        I’m eager to see if legalizing multifamily developments reduces the flips/builds. In my neighborhood, flips or teardowns seem to go for $450k+. In hotter neighborhoods like Linden Hills or Greater Uptown, they start at $750k. Instead, it would be great to build a three or four unit building maybe with an owners’ suite as one of the units.

        I’d rather see fourplexes with multiple houses that rent for maybe $1000-1200/mo or that can be purchased for maybe $150-200k than a single house that sells for $500k.

    • Bill April 23, 2018 at 7:10 pm #

      I live in Longfellow too and do handyman work. Sadly, a lot of these seemly-affordable homes have been been neglected and never updated with modern bathrooms, etc. Some have structural problems — wet basements, etc. Frankly, some weren’t that well built to begin with and are at the end of their natural life. Often, it makes more sense to just gut or tear them down. I’d be careful about jumping on the “evil developer” trop. Often, they’re just contractors trying to make a run-down house habitable.

      • Anton Schieffer
        Anton Schieffer April 23, 2018 at 8:56 pm #

        Agreed, and this is another thing I wish I’d touched on more above. I was looking to buy a home a few years ago, and the homes in the middle-to-low end of my price range often required significant work, which would not be reflected in the purchase price. It’s similar to buying an older used car: the upfront cost is lower, but you’re going to need new brakes or several ticky-tack repairs every year just to keep it running.

        • Jack April 24, 2018 at 9:38 am #

          I bought my house in Longfellow precisely ‘because’ it was a ‘fixer-upper.’ I could not have afforded a ‘turn-key’ house, especially not one of the large, new homes that are replacing the older ones.

          I’ve done extensive work on my house –lots of it DIY. I taught myself how to do repairs and maintenance. I even re-roofed it, myself at a cost of about. $650 as opposed to the $5,000+ that the roofing contractors wanted. (No leaks ever since)!

          I tore off metal siding from the 70’s and restored the original wood clapboards that were hidden underneath. The house now looks much as it did when it was built in 1908. (I even painted it the same colors). I have had strangers stop and tell me they would buy my house without even looking inside, should I ever sell. And yes, I have done a lot of work inside, too –not all at once, but as I could afford it. The house is now paid off and owned free and clear.

          This house would’ve been a prime candidate for tear-down. All it took was a little elbow grease to bring it back to life. I get that not everyone likes to do DIY, but it is an option if you’re willing to put in the ‘sweat equity.’

          • Matt Steele April 24, 2018 at 9:52 am #

            But it also takes a significant chunk of change to make that transformation happen, even alongside significant DIY time. I also bought what would have been considered a teardown candidate in 2009, and since that purchase I have put well over $100,000 into restoring and expanding it. With friends renting bedrooms covering my mortgage for the first few years, and later having a high-earning spouse who was onboard with the improvements, I’ve been able to do this. But let’s not pretend that the extra $500-1000 month I’ve sunk into house improvements is going to be attainable for people who need housing the most. If anything, it costs just as much as buying a teardown in the long run.

          • Adam Miller
            Adam Miller April 24, 2018 at 10:01 am #

            You realize that you’re describing tens of thousands of dollars of work, right? It doesn’t become costless because you did it yourself. You had to spend all of that time, in addition to whatever you spent on materials.

    • Adam Miller
      Adam Miller April 24, 2018 at 9:58 am #

      I have more hope that we can turn those conversions into small multi-unit buildings with units that can be more affordable.

      As to saving the small (or more rundown) homes, there’s a point past which the land value makes them uneconomical.

  4. Alex Schieferdecker
    Alex Schieferdecker April 23, 2018 at 4:04 pm #

    Good piece, simple, straightforward, and useful. Thanks for putting it together.

  5. Samantha Strong April 23, 2018 at 6:09 pm #

    Excellent analysis. While I despise Uptown’s luxe rental mkt, it’s almost mandatory to charge crazy rents just to make the construction costs work. Have a small scale project in the works in longfellow, and I want to keep the rents more reasonable. But numbers don’t make sense (with 25% down, I’m still not covering costs). Very frustrating.

    • Matt April 24, 2018 at 11:01 am #

      I hear you charge very reasonable rents in Uptown btw!

    • Rosa April 25, 2018 at 9:54 pm #

      Are there popular-reading-level articles about what size of projects make easier break-evens? I’ve been wondering this for a while. My preference would be to live in a 4-8 unit building but it seems like there aren’t a lot of them being built, and that can’t all be zoning, some of it has to be business sense.

  6. Bruce April 23, 2018 at 7:07 pm #

    Very good article. the only statement I have a tough time with is –

    “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)”

    Like the affordable housing discussion where people think/wish we could build non subsidized apartments that can be rented at 60% of average income, the cost to build new housing for ownership is 30-100% higher than existing housing stock. It’s just the reality of the costs to get it done, not to mention the cut the city and other agencies take to beef up their budgets. It’s not a matter of people not wanting to build new, nice $250,000 houses/condo’s/coops, you just can’t with the cost of land added to the cost of building unless you get a lot for essentially free. Because of the costs/risk involved, the only way for developers to insure to make any money is to build more expensive homes.

    • Adam Miller
      Adam Miller April 24, 2018 at 10:02 am #

      Or build multiple units.

  7. Jack April 24, 2018 at 9:48 am #

    @Bruce

    So true. That’s why they buy up older, run-down properties, tear them down and put up a house that sells for $500,000. Nobody is building a $250,000 house because there is no profit in it.

    I would rather that someone buy the older house, moved in and fixed it up. There should be incentive loans available for this to encourage rehabbing the existing (affordable) stock.

    • Adam Miller
      Adam Miller April 24, 2018 at 10:04 am #

      But it’s not affordable after the rehab. You’re literally talking about turning an “affordable” (because we’re ignoring the rehab costs) house into one that is not.

      • Cobo R April 24, 2018 at 10:41 am #

        Run down and dilapidated houses aren’t good for neighborhoods either.

      • Jack April 24, 2018 at 2:09 pm #

        In my case, I made improvements as I was able to afford it, so I didn’t have to put out huge chunks of cash all at once. When I bought my house, I was only making $9.50 an hour! I ‘made do’ with the house as it was for a few years before being able to make any significant changes. I realize that some people aren’t willing to do that, but it paid off for me in the long scheme of things.

      • Bruce April 25, 2018 at 8:13 am #

        Adam, luv following your posts!
        But, I’ve taken about 20 derelict SFH/duplexes and rehabbed them from almost uninhabitable to good housing stock that is below market rate in the general uptown and Seward areas. I haven’t torn any down as it’s still cheaper to rehab. I also am building a triplex at 35th/Grand so I’d be glad to share the cost differences. The more informed info available the more we can push forward for more density/housing as there just isn’t enough.

        • Rosa April 25, 2018 at 9:55 pm #

          I would love to see an article about the economics of building small multiunits.

          • Janne April 26, 2018 at 11:51 am #

            +1

      • Bruce April 25, 2018 at 8:19 am #

        It depends on what you call “affordable” and what area of the city you are looking. Obviously the highest demand areas have higher land costs which prices some people out.

    • Cobo R April 24, 2018 at 10:39 am #

      Yep, Its really expensive to build a hosue. You can’t build a small modest house and sell it for less than 330K and still make a profit. And very few people can afford to build a home while they are living in another.

      The numbers don’t work out.

      From what I’ve seen is most teardowns are of houses that are barely worth fixing or not worth fixing up.

      If you use hired labor it can sometimes only cost a little bit more money to do a full tear down anyway.

      • Matt April 24, 2018 at 11:04 am #

        There’s also the reality that a newly-built house with regular modern finishes and features (not necessarily even luxury) are in high demand in Minneapolis simply because supply is so constrained. You can charge $400,000 for a new home in nearly every part of the city, which is why they sell for that much.

      • Jack April 24, 2018 at 2:18 pm #

        I disagree that all the tear downs are past the point of no return. There was one near my house that was adorable –dark Craftman woodwork for days. Yes, the kitchen and bathroom were ‘dated,’ and the windows were filthy, but it would not have taken much work to make that house shine. It was on the market for $175,000, was torn down, and the new house that replaced it went for almost $500,000. A house shouldn’t be condemned because the windows need scrubbing!

        • Matt Steele April 24, 2018 at 2:24 pm #

          The house is being condemned because someone will pay $500,000 on a new house in its place.

          • Jeff Skrenes April 25, 2018 at 12:04 pm #

            That’s not how condemnation works. It may be how acquisition and a demo permit get processed. Condemnation has to do with the condition of a property and not the value or even the cost of the rehab.

            • Matt Steele April 26, 2018 at 2:13 pm #

              I’m talking about houses condemned by their owners, not condemned by a public authority. Which is the vast majority of houses condemned, at least in the neighborhoods I’m familiar with.

  8. Jack April 24, 2018 at 3:49 pm #

    @ Matt:

    No kidding.

    My argument is that if you are looking for an affordable house, buy a modest fixer-upper, move into it, and reno it slowly over time as funds become available to you, like I did with my house. If all the modest homes are torn down and replaced with upper-bracket houses, this will no longer be possible.

    • Matt April 24, 2018 at 4:49 pm #

      The problems with that:

      1. Cheap fixer uppers don’t exist the way it did when you and I bought. There are only two houses in Minneapolis south of 394/94 equal to or less than what I paid for my house in 2009. 13 in the whole city (10 of which are in North), so a total of 4% of the entire SFH listings in the city. That’s essentially zero for a housing market with thousands of transactions each month.

      2. Cheap houses are snapped up by investors with cash in a matter of hours. A prospective buyer with a 3.5% down FHA loan and possibly additional down payment assistance doesn’t stand a chance against a prospector buyer with a conventional loan. And an offer with any sort of financing can’t stand a chance against cold hard cash.

      3. Finally, the big problem that none of this addresses and that’s the cause of #1 and #2 above. These types of transactions do nothing for housing affordability of the market as a whole. We have far more people who want to live in Minneapolis, and who want to buy housing, than we have new housing coming online. That’s why the buyer of the $500,000 flip or teardown gets what they want, and the buyer of the $150,000 fixer upper is SOL.

      • Jeff Skrenes April 25, 2018 at 12:06 pm #

        Buyers using assistance are still getting into those homes, although that market is tougher than it’s been in a long time. I’m not sure what data you’re using to say they’re losing out to investors. Most of my buyers who are in competition for these properties are losing out to more well-heeled occupant buyers.

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