In Twin Cities, as demand rises, so do entry-level homes

After 12 long months of shopping for their first house, Erica Jost and her fiancé hit a dead end.

Though willing to spend up to $350,000 for a house in the 'burbs, there were few that fit their needs. When they found ones that did, they were already sold and sometimes for more than the seller was asking.

"We weren't seeing many on the market," Jost said. "The ones that were on the market were in my opinion priced a little high for what they were offering."

A co-worker had the same problem and suggested buying new, so Jost took that advice and ordered a four-bedroom, 3,000-square-foot house in Hugo that will be ready in October.

"We ended up going a little over our initial budget," Jost said. "But we got to customize this house to exactly how we would want it."

As first-time buyers in the Twin Cities slug it out over a paltry number of listings, homebuilders are scrambling to help satisfy that demand by ramping up construction of less expensive houses than the ones they've been building since the housing crash.

"There's a lot of opportunity out there and builders are looking to fill that need," said Herb Tousley, director of the University of St. Thomas Shenehon School of Real Estate.

A national survey of homebuilders last week by Builder Magazine shows a 25 percent increase in the number of companies that are devoting at least half of their new houses to entry-level buyers.

Before the Great Recession, inexpensive townhouses dominated the landscape, especially in exurban areas where developers were converting farm fields into highly affordable neighborhoods as they sought to expand their buyer pool.

Since the housing crash, however, builders focused on move-up buyers, many of them willing to spend a half-million dollars or more on custom-designed houses where there's far more room for profit than with starter houses where the margins are razor thin.

Though there's now plenty of demand, catering to the entry-level market these days isn't easy, builders say. That's because land, labor and material prices have risen, they say, making it difficult to keep costs low and to deliver quality houses that won't tarnish their reputation with ticky-tacky finishes and unattractive designs.

Plus, for companies building townhouses governed by community associations, there's the heightened risk of long-term legal liability of the state's stringent construction defect laws, which make builders and sometimes their subcontractors responsible for certain components for 10 years.

"It's an issue that's always in the back of my mind," said Tom Wiener of Cardinal Homebuilders in Oakdale.

Wiener said there's growing demand from millennials who are willing to spend more than $300,000 on their first home. The trend, he said, is forcing builders to think more seriously about how to change their marketing to attract those buyers. "Millennials are on our radar right now," he said. "They have a double income, no kids, and they have money and are willing to spend it."

Finding more profits in those deals has become a major challenge. On top of high labor and land prices, there are new state building and energy codes intended to make houses safer and more energy-efficient, but they can also add tens of thousands to the cost of a single house, Wiener said.

What constitutes "entry-level" varies dramatically depending on location, but they are generally defined as houses in the bottom one-third of the price range. And first-time buyers aren't as young as they used to be. Many are millennials who are buying in their 30s after waiting out the recession.

The average price of the 458 houses on display during the Builders Association of the Twin Cities Parade of Homes this spring was $591,000. That's nearly triple the median sale price of an existing home in the Twin Cities.

In the Twin Cities metro, townhouses are among the most affordable options because they take up less space and zoning rules in many communities have a smaller minimum size requirement than a single-family house. Townhouse construction peaked in the late 2000s when mortgage underwriting standards were so low that just about anyone with an income could buy a house. Even a brand-new one.

At the peak of the market in 2008, about 271 attached townhouses in clusters of 16 units or fewer were built in the Twin Cities metro, but by 2011 that number declined about 70 percent. That trend has reversed. So far this year, there's been a 7 percent increase in projects of the same size, according to the Builders Association of the Twin Cities.

The Twin Cities division of the PulteGroup is building townhouses with flexible floor plans that might appeal to a broad range of buyers, from millennials to empty-nesters. At Trey Point at Cobblestone Lake in Apple Valley, the townhouses have more than 1,900 square feet and can be configured with three to five bedrooms, depending on the needs of the buyer. Prices range from $238,990 to $272,630. The company is doing the same at a development in New Brighton, where sales have been brisk.

"PulteGroup is making a deliberate effort to provide new home construction opportunities to entry-level buyers and millennials," said Graham Epperson, head of the PulteGroup's Minnesota division.

He said that last year, less than 1 percent of the company's closings were attached product, compared with nearly 60 percent at the peak of the market. He expects to sell more than 50 townhouses this year.

"While we won't ever get there again, we do expect for our percentage of attached product to increase along with the industry and market dynamics."

According to an analysis of data from the U.S. Census Bureau, the National Association of Home Builders said that during the third quarter of 2015, single-family attached housing increased 30 percent from the previous year and at the fastest rate since the fourth quarter of 2007.

Like many national developers, D.R. Horton has recently launched its own entry-level option, which in some markets is called "Express." At The Gables in Ramsey, for example, the company has a 1,643 square-foot, three-bedroom townhouse that's on the market for $216,465. A spokesperson said that additional neighborhoods geared toward the entry-level buyer in the Twin Cities are in the works.

Jost, the first-timer who is buying a house in Hugo, said that as a new home buyer she had a surprising number of options, but pricing depended on how far she was willing to drive. Houses in Stillwater and Lake Elmo, for example, were about $50,000 more than in Hugo, but if she was willing to drive to Forest Lake they'd pay about $20,000 less.

"Every development has different pricing on the lots," she said. "So you definitely have to put in some research and run some numbers."

Jim Buchta • 612-673-7376