Fees, regulations are key drivers of Twin Cities housing costs, builders argue

As the price of a new house in the Twin Cities rises faster than most would-be buyers' paychecks, the debate is heating up over what's driving up costs and what to do about it.

On Monday, a new report commissioned by a builders group pointed at municipal fees and regulations in the Twin Cities, which it argues are pushing up prices of new homes more sharply here than in other communities, making it nearly impossible to build a single-family house for less than $375,000.

Such fees account for up to one-third the cost of a new house here and are to blame for the area's affordable housing crisis, according the new report backed by Housing First Minnesota, which represents more than 1,200 builders, remodelers, developers and industry suppliers throughout the state.

The price of a new home "far exceeds what buyers paid years ago, even adjusting for inflation," David Siegel, the group's executive director said in a statement. "This disappearance of affordable new homes is not due to a change in buyer or builder preferences, but to homebuilders simply being unable to build at a price that many buyers in the region can afford."

Several factors are contributing to the rising cost of building a house, including a labor shortage and the spiraling price of basic materials, including land.

The builders group's report puts the spotlight on the cost of development fees and regulations levied by municipalities in the seven-county metro area. Those fees are levied before development can start to help pay for roads, streets, curbs, gutters and other infrastructure. They're paid by builders and developers and passed along to homeowners.

The group worked with four Twin Cities-area builders to determine the cost of building a home in nine suburbs. By studying the cost of local, regional and state fees in those communities, the group determined that by nearly every measure a new home in the Twin Cities costs more than those in every other comparable Midwest market.

For example, it found that an average home in Lake Elmo would cost $47,000 less in Hudson, Wis., and that a new home in the Twin Cities costs as much as $82,000 more than a similar home built by the same builder in the southwestern Chicago suburbs.

Irene Kao, a statewide lobbyist for the League of Minnesota Cities, said that given the skyrocketing cost of labor, land and materials, the portion of a home's cost that the group attributes to fees seems high.

Further, communities must be able to determine how much to charge for new development based on their individual infrastructure needs, she said, adding that some permit fees are established by state ordinances, so communities aren't always in total control of costs.

"Each community needs to figure out what's important to that community or what issues they're trying to address," she argued.

In August, in a ruling hailed as a victory for builders, the Minnesota Supreme Court limited how much communities can charge developers.

The suit, filed by New Brighton-based developer Martin Harstad, argued that he shouldn't have to pay for future road improvements outside a housing development he wanted to build in Woodbury. He sued after city officials said they wanted an additional $1.3 million in fees — about $7,000 per house — to help fund future improvements in other parts of the city.

Many municipalities argue they are simply trying to ensure that such development and infrastructure costs will not be borne solely by all residents of a city in the way of higher taxes.

Herb Tousley, director of the real estate programs at the University of St. Thomas, said the conclusions of the report are consistent with what he's been reporting for years. It's an issue that's being compounded by the failure of wages to keep pace with the rising cost of housing.

"That gap just gets farther apart every year," he said. "It's something we've been watching very closely for a while."

Because builders have little control over the skyrocketing costs of land, labor and materials, he's an advocate of getting more density in areas where people want to live and forcing cities to take a harder look at those fees.

"That's the easiest thing to change," he said. "There's not a lot you can do about building materials and labor prices, but zoning and fees are something that can be dealt with," he said. "It certainly wouldn't be easy, but that's why no one has solved the problem."

Jim Buchta • 612-673-7376