Why a Major Outer-suburban Real Estate Downturn is Imminent

Ham Lake House

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.

About Eric Sutterlin

Eric Sutterlin is a mechanical engineer living in West St. Paul with a passion for mapping and city planning. In recent years, he has become fascinated by the magnitude of the outer suburban building boom relative to the proportion of the metro area that it covers. He has developed an interest in panning around Zillow Maps, looking at how houses are selling and how things change over time, as well as learning about sustainable urban planning. This interest has led to the overwhelming realization that outer suburban boom subdivisions are very unsustainable.

27 thoughts on “Why a Major Outer-suburban Real Estate Downturn is Imminent

  1. Nicole SalicaNicole Salica

    Reclaiming that land for actual green space would be an improvement… if we can get enough of it, we can plant a small forest and sink some of the carbon we spent on the houses back into the ground… solid investment in our future, to me.

  2. Bob Roscoe

    I agree converting land for green space will be a trend, perhaps driven by law of supply and demand. This trend had been predicted for a long time, especially for former farm land that was flat and empty before the suburbanization took hold. Land that has natural features such as brooks and hills may actually rise in demand.

    I have never lived in a suburb. So I’d like to say “I told you so.”

  3. Jerome Johnson

    Interesting opinion piece and, I think, directionally correct. You might add the impact of rising gas and carbon prices that full and fair carbon pricing will bring about. It was $150 per bbl and $5/gallon gas at the pump that started the dominoes falling in California back in 2007. We know how that ended up. Combine that with some of the arguments you cite and a dramatic falloff in outer ring real estate along with more modest declines in middle ring properties is in the cards.
    But don’t necessarily think those homes will go unoccupied, as there will be affordability opportunities after the crash that are simply not available now to many, especially for those on the lower end of the income scale. The challenge here will be to make transportation alternatives available that preserve some semblance of mobility and, as opposed to the French experience, keeps the yellow vests in the closet. Locally, the challenge is to enable a lower income family in Ham Lake or Circle Pines to access jobs in Brooklyn Park, Minneapolis and Arden Hills within a reasonable commute window. Also with cheap(er) real estate, there will be industrial, logistics and even office activities looking to relocate to the cheaper dirt from more inner city venues. We see that today with employers vacating the Twin cities Terminal and Midway Industrial Parks for outer ring locales. It should make you think twice about how to use linear rights of way — like Ayd Mill Road.

    1. Monte Castleman

      Yellow vests are going to come out here if gasoline prices rise substantially no matter transportation alternatives are made available. Or more likely we’ll do it the American way by voting out the people responsible and voting in politicians that will reverse the price increases, rather than rioting in the streets. Absent political interference gasoline prices aren’t going to rise anytime soon because we have a lot of latent capacity in the Bakken that could be turned on if OPEC tries to raise prices.

      The movement of industry to the fringes of the metro is an interesting topic. It’s not just cheaper land in the suburbs, but also the shift from rail to truck traffic which makes being near a congestion free interstate exit more important than a rail siding, wanting newer, more efficient, single level buildings, pressure from the cities who’d rather have luxury apartments on the land than an old, stinky factory, and the lack off any available land to build new facilities in the city. The Amazon warehouse ultimately went to the city that gave the biggest tax incentives but I can’t think of anywhere in Minneapolis or St. Paul could have gone, even with reduced parking due to being transit accessible.

      1. Jerome Johnson

        Agree re nothing available for Amazon within Minneapolis and St. Paul. But you can get fairly close. One, the underutilized Crystal general aviation airport would have been a good spot and right on the extended Blue Line to boot but also close to freeways. Another would have been the arsenal property in Arden Hills where several freeways come together and reachable via an extended A line express bus. What better outcome for a recovering superfund site?

  4. Monte Castleman

    People aren’t going to abandon the safety, spaciousness, and ease of car travel that the suburb provide any time soon. Monday’s map showed that in relative terms, yes Hennepin and Ramsey County are growing, but Carver and Scott County are growing a lot faster. And the linked article pointed out several Minneapolis neighborhoods off expensive houses are also on a decline.

    The takeaway is that we’re probably at the saturation point for expensive houses to the point it’s hard to sell a used one because due to a variety of reasons that and mullti-family units all we’re building, Maybe if we get rid of the legal impediments that drive up the cost of housing like the MUSA line and minimum lot sized zoning the market might shift towards more modest single family homes like Richfield, Bloomington, or West St. Paul considering how hot that market has been for year. It’s rare to see a for sale sign on a house in my neighborhood more than a week and II’m constantly getting unsolicited offers to buy mine.

    I don’t see servicable housing being abandoned like Elko is some kind of Detroit. Maybe not at the current prices, but at some price someone will want to live there which is greater than the negative price of demolishing it.

  5. jared

    I don’t think any climactic downturn will occur.

    The housing markets of the various suburbs have various reasons and timelines for heating up and various reasons and timelines for cooling off.

    Since more people no longer seem to need or want 6 bedrooms, larger houses everywhere (but especially in the suburbs where there is room for them) are getting closer and closer to the price of 3 & 4 bedroom houses.

    But it won’t mean these mcmansions will be uninhabited or split up. They’ll just be priced according to decreased demand.

    Some of them can and are becoming great options for multigenerational families that are used to/prefer shared spaces as opposed to separate units.

  6. Brian

    I’m not sure why the author expects a newer large house to last only 25 years. How many 25 year old houses does the author see being torn down?

    Homebuyers buying homes in the $500,000+ range often expect a house will have been updated to modern standards. Homebuyers in all price ranges these days like to see houses updated to modern standards, but starter home sellers are unlikely to have much problem selling without updates.

  7. Eric

    I’m not really convinced here. I do think that density in the urban core, like any housing trend, will create winners and losers. There is no real evidence presented here that the winners will be concentrated in the urban core and losers in the outer burbs.

    What data we get is really just a generous gut-shot based on what we wish were true. Divorce rate is “still high” but that isn’t a trend, in fact divorce rates are on a generation-long decline. Net worth is up, but our author suggests that maybe debt isn’t being considered there (leaving a reader wondering what is being netted out if not debt).

    1. Mark

      Exactly. This piece is long on feelings and short on facts.

      Is a downturn going to happen? Of course. They’re cyclical and at some point we will see a recession. However, it will impact everyone, not just those in the exurbs.

      Also, I challenge the notion that someone in Ham Lake wants to move to downtown Minneapolis. Sure you may find isolated instances, but the majority of people living out there value lower density and the associated privacy.

      The extent of bailing out homeowners will come from super low interests rates designed to stimulate the economy and make borrowing attractive so they can sell their homes.

      Newer homes may be constructed with different techniques and materials, but the notion that they’ll magically fall apart after 25-30 years is absurd. And trends change. New products come out. New designs are unveiled. Tastes change.

      Finally, Zillow should be taken with a grain of salt. It may show some trends but their numbers should in no way ever be considered gospel. I’ve seen countless appraisals that were double digit percentage different than Zillow’s estimates.

  8. Elizabeth Larey

    This was an interesting piece. I’m not sure if the writer doesn’t understand that people who build in the suburbs have zero interest in living in the cities. If you’re going to spend $500 or more, you get a lot more house in the suburbs. In addition, homes built today have strict building codes, many are much more energy efficient than old homes with old windows and holes in foundations. People with families also like the suburbs for their schools. I seriously doubt housing prices in the suburbs are going to tank to the extent the author thinks they’re going to. I might add, the prices for crappy houses in bad neighborhoods in the city might take a nose dive first.

    1. Rosa

      but “the suburbs” aren’t all one place. The farther out you are, the more transportation costs and the less services you get for each dollar. There are lots of suburbs that aren’t the “far out large house suburbs” this author is talking about.

  9. Thomas

    Sounds like the author is pro urban and anti suburban living. That’s fine for him and all who choose city life. The city offers many wonderful benefits including shorter commutes and restaurants/shopping and cultural venues of all types.
    People that choose to live outside of the city with some acreage have a every right to do that.
    I’ve owned residential property in Saint Paul and out in the metro suburbs; the taxes are high for both locations. I have a hunch the citizens of Saint Paul are going to see escalating property tax burdens in the next couple of years.
    I am not in favor of bailouts of any kind. To suggest that there will be a bailout for upper-end homeowners in the suburbs is wild speculation.
    Values for upper-end homes in the suburbs are not being artificially propped up like all values were fifteen years ago with poor lending practices.
    A home is a liability. Anyone can become house poor; it doesn’t matter where the home is located.
    We have too much debt; individually and as a nation. Whether living in the suburbs or in the city, people need financial education. Some people can truly afford and will choose an upper bracket home with acreage farther out, and there will always be a demand for that type of home.
    “Homes won’t last more than 30 years”???
    Have you ever traveled out east and toured a 200-year old home on a stone foundation that is still fully functional and providing for its current owner?
    “Upper bracket homes will be abandoned and demolished”??? Seriously doubt it.
    I’m all for green spaces, recreational spaces and beautiful parks, and I pay taxes and yearly fees to my County and the State to support and enjoy them.
    I have faith that our free market system will continue to move towards solutions for more energy efficient travel, without subsidies from a government that tries to pick winners or losers based in part on lobbying efforts or talking points.
    Thanks for the discussion.

    1. Mike SonnMike Sonn

      “People that choose to live outside of the city with some acreage have a every right to do that.”
      “without subsidies from a government that tries to pick winners or losers based in part on lobbying efforts or talking points.”

      I mean, the whole reason the suburbs exist is massive massive subsidies. Whether that be gas, cars, roads or mortgages, planning, red lining.

      1. Thomas

        Brother Mike

        One reason why the suburbs exists is because not everybody wants to fit within the city limits in a 1,000 square foot condo highrise where they take the bus or take their life in their own hands taking the light rail to the places that those subsidized modes of transportation happen to stop. And yes I own a bike, and yes I’m in favor of taxpayer dollars making more bike lanes for safety reasons.

        Perhaps you’re anti-gas and anti-cars; our economy runs with transportation on these roads, the people in the suburbs are not the only ones using them.
        Because a person in the suburbs has a mortgage “they’re being subsidized”, and all the people in the city with mortgages are just paying interest, not being subsidized?
        Redlining? I assume you have examples of redlining that you could give.

        We’re not going to agree, but thanks for the discussion.

        1. Adam MillerAdam Miller

          There is no mode of transportation that is more subsidized than the personal car. And it is not close. Highways, roads, streets, parking. Users pay for only a fraction of them.

          And we make no effort at all to internalize their externalities.

      2. Mark

        So, Mike Sonn, what’s the solution?

        Do we create transit out to the suburbs that reduces dependency on cars?
        Do we create toll roads and raise the gas tax to force suburban dwellers into moving to the urban core?
        Do we make Wells Fargo start charging higher interest rates on suburban homes?

        Genuinely curious for a constructive dialogue that provides concrete solutions.

        1. Mike SonnMike Sonn

          Great questions. Just FYI, my mortgage comment was about the interest deduction, not rates.

          But I think this is where we have a serious issue of land use vs transportation and land use changes happen at a snail’s pace. We need to reduce minimum lot size, first and foremost, and also remove SFH zoning to allow multiple units on each lot. Those are two quick changes to increase population density in sparsely populated suburbs. I’d also like to see some loosening of zoning to allow some mixed use (eg a corner store in a subdivision so people can get basic needs w/out driving miles).

          I think there should be congestion pricing but I’m not sure that’ll make meaningful quick shifts. There isn’t enough housing w/in our core metro to accommodate a reverse migration back to shorter commutes. I do think a gas tax that is fixed to at least inflation would be a good start. Drivers need to start paying a larger portion of their impact. County wheelage fees are a good example. Notice how much work Ramsey County is doing these days.

          Also, a great example of infill is what Rosedale is planning. They want to add housing and more stores around the edge. Also, new development like what Ramsey County wants to do w/ the TCAAP site (not what Arden Hills wants) is how we can develop green (well, brown field in this case) field sites going forward. It allows for some sprawl but with a core that has transit access to employment hubs and amenities like shopping, eating, schools, etc.

    2. Joe

      “I have faith that our free market system”

      I have faith that a market system would respond to the incentives in an efficient manner, and right now the incentives created by government are pretty distorted. A free market system would operate based on prices that take into account externalities like infrastructure (currently subsidized by state and federal government) and environmental protection (not really accounted for at all). Suburban properties are absolutely being propped up; they’re just propped up in ways that people otherwise opposed to government tinkering are all too happy to ignore.

      1. Thomas

        Joseph,

        Thanks for your response.

        If I’m understanding you correctly you’re saying, in part, that people who live in the suburbs receive more subsidies for infrastructure, as a percentage, than higher density city dwellers.
        Might be tricky to meter out, but if possible perhaps you could share the source of those statistics.

        Of course there are many more streets and much more infrastructure per square mile to pay for inside the city compared to the outer suburbs.

        Do you think it’s possible that the developer and builder of the homes farther out of the cities had to pay infrastructure costs and passed those costs along to the home buyers in the purchase price?
        I have a home office but for those who commute, do you think they pay more in gas tax?
        Are the infrastructure systems in the city limits not subsidized with state and federal dollars?

        Of course we all are in favor of protecting our environment. What did you have in mind?

    3. Monte Castleman

      The quality of construction of houses has never really been an issue. My house is 50 years old, so it’s probably at the nadir of construction quality when they started using cheap materials but before cheap materials got better and building codes strict. It didn’t need “serious work” after 30 years and doesn’t today, the only thing non cosmetic has been a new roof every 20 years or so. Nowadays we have better engineered materials like pre-fabricated structural members and pressure treated lumber and codes require 2 X 6 construction.

      Maybe the houses on Summit Ave were built better, but a typical house in the days gone by was built worse in ways that counted. Maybe they had nice wood and cute windows, but I used to work for a company associated with the Hometime PBS series and once they started opening up the walls on some of the old houses it was shocking how skimpy the framing was compared to modern codes.

  10. Jeff

    Leaving most of this article aside (and my sense is that all housing values in the metro area will fall during the next recession, whenever that may be), I think the author’s citation of the bringmethenews article on housing declines from last June is somewhat lazy. It’s cited as evidence that housing in some (presumably far-flung) suburbs is getting cheaper, but in the table showing 17-18 price decreases, 9 of the 16 neighborhoods/suburbs is either a Minneapolis or St. Paul neighborhood, and (with the exception of Whittier) a relatively affluent neighborhood with higher median values. All you need to do is scroll to the next table (showing significant increases in median price between 17 and 18) to see that there are suburbs (i.e., Anoka, Mounds View, Bayport) where prices went up considerably.

    I suspect that this data is actually showing is that, in expensive neighborhoods/suburbs with higher median housing prices, fewer of these expensive homes change hands, so the data is more unreliable.

        1. Adam MillerAdam Miller

          And four out of seven ended with median house sale prices higher than when the recession started.

          Again, what happened last time – a big and sustained drop in housing values – is not the norm for what happens to house prices during recessions. Much more typical is that house values drop only a little and not for long.

          1. Mark

            You also need to factor in inflation, of course housing prices are going to increase naturally, but are they actually increasing in total value relative to the base market.

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