Twin Cities home builders hit the brakes

After scrambling to keep up with buyers during the first half of the year, home builders in the Twin Cities are hitting the brakes.

During October, builders pulled 276 single-family permits, 54% fewer than in 2021, according to a monthly report from Housing First Minnesota. Multifamily permits, mostly to build market-rate rental apartments, fell 61%.

It was the slowest October for new housing in more than a decade. But because of the robust spring and strong demand for rentals, builders are still on track to have one of their busiest years since the Great Recession.

"Homebuyers are pressing pause on their purchasing decisions as they reevaluate what they can afford with today's interest rates," James Julkowski, a builder and chair of Housing First Minnesota, said in a statement.

"While the market shifts and many are forced to sit on the sidelines, there are opportunities out there for buyers that we have not seen in recent years," he said.

While multifamily permits tend to be volatile, single-family permits have been slipping for the past several months. Those declines have been closely tracking rising mortgage rates, which surpassed 7% nationally this week for the first time since April 2002.

During the week ending Oct. 27, the average 30-year fixed-rate mortgage was 7.08% with an average 0.8 point. That's more than double last year and up slightly from last week.

Those increases are rapidly eroding housing affordability. To buy the typical home in the Twin Cities, a monthly mortgage payment now consumes 25% of the median household income, according to a Zillow analysis. Over the past 15 years, the average monthly payment on a typical home would have used 21% of an owner's income. To return to that level, home values in the Twin Cities would need to fall by 16.6%.

Housing in the Twin Cities, however, remains much more affordable than in most of the country. Nationwide, mortgage affordability — the share of income a median household would need to spend on a typical payment — has increased to 30.2%, not including property taxes and insurance. That's above the 30% threshold when households are considered burdened, and much higher than the 2005-21 average of 22.8%.

"The next several years appear set up for affordability to be a major challenge for homebuyers," Zillow senior economist Nicole Bachaud said in a statement. "Filling the housing deficit continues to be the key to long-term affordability, but the recent slowdown in single-family construction is not a good sign that the market is getting closer to building enough to meet demand."

Higher mortgage rates come at a time when many home builders in the Twin Cities are restocking. Until this spring, builders were struggling to keep up with demand, forcing some to limit how many orders they'd take; others were selling by lottery.

The backlog was shaped by a combination of pent-up demand and limited supply because of supply-chain issues and labor shortages.

That's no longer the case. At the end of September, the latest data available, there were 1,913 newly built single-family homes for sale in the Twin Cities metro, 44.5% more than 2021 at the same time, according to the Minneapolis Area Realtors. That only includes homes marketed through the Regional Multiple Listing Service; many are sold directly through the builder.

While there are more new houses for sale in the metro, fewer people are buying. There were 15% fewer pending new-home sales in the metro during September, according to the Realtors group.

On Wednesday, the U.S. Census bureau said nationwide new home sales in September fell 10.9% from August and 17.6% below a year ago.