House in Ham Lake.
I believe the stage is set for large, outer-suburban houses to decline drastically in value. This will likely result in abandonment or subdivision into multiple units before mortgages are paid off. In the long-term future, many outer-suburban homeowners will probably foreclose, if the taxpayer doesn’t bail them out.
There are many factors predictive of this decline. Our housing stock is built for a lifestyle that is no longer the norm. Urban living is trending. Couples are downsizing as children grow up and leave the nest. The divorce rate is still high. Fewer couples are having children. According to the Census Bureau, by 2012 nuclear families had diminished to 20% of total households. Building quality has deteriorated drastically. Many houses won’t last as long as their original mortgages. Some consider a 25-year-old house to be “old”. Houses that are merely 15-years old tout updates in their sales pitches. Newer houses with open-concept layouts are designed in a way that makes subdivision costly. This will tip the scale towards abandonment and demolition.
Although data shows net worth is on the rise, there is more to the story. Families are accepting debt to sustain the same lifestyle easily afforded 30 years ago. Costs of health care and education have shockingly increased. Even food, insurance, and car and house maintenance have increased faster than incomes. Fewer families can afford a large house, particularly with the cost of a longer commute. Evidence suggests that homeowner’s insurance premiums may be starting to increase drastically to cover the cost of long-term changes in weather patterns resulting in more damaging storms.
Many homeowners have come to be described as “housepoor”. Paying off a large purchase comes at the opportunity cost of more fulfilling activities like recreation, and traveling. With increasing awareness and cultural shifts, it stands to reason that more households than ever before will downsize.
According to the Housing Affordability Institute, the cost of building a housing unit in Minnesota is tens of thousands of dollars greater than in other states. This is largely due to Minnesota’s regulatory environment. With the increased cost per unit, developers realize the greatest profit margin building large houses. Since supply has increased without a corresponding increase in demand, prices must decrease.
Spot-checking houses in various Twin Cities suburbs reveals that property taxes are increasing quickly even when corrected for inflation. “The Growth Ponzi Scheme” published by Strong Towns describes how low-density infrastructure costs more to maintain over the long-term than tax revenue provides. We are living on borrowed time. Property taxes must increase drastically to support costs. Public awareness of the degree to which taxes have increased and continue to increase seems to be lagging. With increased awareness, demand will decrease even further.
In today’s economy, there are remarkably few factors that could cause values to increase. The real estate industry has a financial incentive to be overly optimistic. The promoted narrative that a house is a good investment and will appreciate in value is still alive and well. This provides inertia for the industry to artificially inflate the market, but only to a point. Every boom has its bust. Once interest rates rise, this process will be accelerated.
Some large-house suburbs are already showing hints of a decline. This bucks the typical summer trend.
Although this is insufficient data to conclude with confidence, spot-checking Zillow, I have plenty of reason to believe it signals the beginning of a long-term decline. Decline in the high-end market frequently precedes decline in the general market.
During the recession, taxpayers were required to bail out the auto industry and mortgage lenders. With this history, it’s likely that taxpayers will be required to bail out lenders and possibly homeowners, and Minnesota’s political climate accentuates this. Already-strained taxpayers will likely be on the hook for the cost of demolition and reverting the land back to its undeveloped state.
As taxpayers, we are on track to pay for an expensive mistake-for-profit over which we had no control. Even with this, outer suburban homeowners are in for a wild ride. It would be wise to plan accordingly.