As I travel the country working on real estate development projects in other markets, it’s evident costs in the Twin Cities are higher than most Metro Areas I provide real estate consulting in. This Easter Sunday I am in beautiful Fort Myers, Florida and am renting a VRBO in a gated master planned community. As I talk to home owners and the Realtors, housing is priced much lower and PSF costs. For example, a new three bedroom townhome has about 2,500 square feet and will sell for about $260k, or just over $100 PSF. A similar priced townhome in the Twin Cities would be at least $160 PSF. The Mullins Group supports smaller lots sizes as one way to increase density which results in lower land costs to the end consumer. We hope local governments can revise zoning and building codes so housing can be more affordable for not only the affluent.
Why do Twin Cities homes cost so much? We went to find out.
Mary Kay Curtis wrinkled her nose at the window.
It wouldn’t go up. After three inches, it was just stuck.
The salesman for the new Woodbury home she toured last fall explained that, no, it wasn’t broken. It would only open so far because of a state regulation. Windows more than six feet off the ground in new homes must be unlatched by an adult to open any further.
“It’s a good feature if you have younger children, but we don’t,” she said.
When her husband Rick learned the required safety feature adds $1,000 to the house’s cost, he balked. “I wouldn’t pay any more for that,” he said.
Talk to a builder about why Minnesota’s housing costs are so high, and they’ll mention regulations. And it’s true: Minnesota’s regulatory process is far more complex than many of its surrounding states.
But it’s only one factor why. According to interviews with more than 60 government officials, builders, Realtors, housing and energy lobbyists and home buyers, Minnesota’s housing costs are higher because:
- Those regulations, including energy-saving rules and safety codes, are tougher and costlier than in surrounding states;
- The cost of metro-area land is elevated by centralized planning, larger mandated lot sizes and a public resistance to development;
- An increasing use of city fees, tucked into the price of a new house, can add tens of thousands of dollars.
“It’s kind of like the perfect storm,” said Mike Paradise, president of Bigelow Homes of Rochester and the former head of the Builders Association of Minnesota.
And just how high? Outside coastal states like New York and California, the Twin Cities was No. 1 in housing costs among the nation’s 20 largest metro areas, according to 2014 U.S. Census data. And they have remained at or near the top of other cost-comparison surveys since then. Statewide, Twin Citians pay an average of 26 percent more than neighboring states. That price gap explodes when compared with southern states like Texas.
Supporters of Minnesota’s tougher codes admit they increase purchase prices but say the money spent is worth it.
“The reason we have codes is to protect buildings, protect public health and not unduly waste energy,” said Michael Noble, executive director of Fresh Energy, an energy conservation nonprofit.
But the equation has made some housing advocates state the obvious: if only expensive homes can be built, only the affluent can afford them. And increasingly — as concern about affordable housing intensifies — many Minnesotans can’t afford to live here.
One in four Minnesota households pay too much for their housing, according to the Minnesota Housing Finance Agency.
THE “R” WORD
In the U.S., regulations by cities, states and the federal government account for 24 percent of the cost of a home, according to the National Homebuilders Association.
There are no statistics showing what the regulations cost in Minnesota, but Clay Dietrich has a pretty good idea.
“The first thing I ask homebuyers is this: Which side of the river?” said Dietrich, who builds homes in both Moorhead and Fargo, the Minnesota/North Dakota border towns split by the Red River.
Top to bottom — from roofs requiring higher “snow loads” to automatic air exchangers to basement walls needing two inches of extra insulation — Minnesota requires more expensive construction.
“I can tell you, it’s just as damn cold in Fargo as it is on the other side of the river,” Dietrich said. But by his books, a higher-end build on the Minnesota side of the river will cost $17,000 to $29,000 more, not including land price differences.
As a member of Fargo’s Code Board of Appeals and a former Moorhead assistant fire chief, he’s hardly anti-code. “But you can over-engineer something so all you’re doing is spending money. And that’s kind of where Minnesota is right now,” he said.
Greg Houston agrees.
He built two houses in Forest Lake, one in 2014, and another one a year later. They were perfect twins — built side-by-side, with the same floor plans, lot sizes, appliances.
The only differences were the 2015 changes in Minnesota building codes. The new rules mandated a long list of tweaks to plumbing, heating and insulation. They were nothing, said Houston, that a homebuyer would notice — except for the price tag.
The cost difference? $15,000.
“That price difference is outrageous,” said the developer, who works with Bald Eagle Builders of Centerville.
State officials and regulation advocates say builders often exaggerate the impacts of new codes.
And, others argue those changes were for the better.
GAINING A REPUTATION
Fresh Energy’s Noble compares the energy-saving rules to seat-belt laws — inexpensive, widely accepted, sensible.
And he wants more.
“Denmark is twice as efficient as Minnesota,” said Noble. “I don’t really want to compare myself to Texas — I want to compare myself to Denmark.”
Minnesota’s reputation for regulation accelerated in the early 1990s. That’s when the Legislature passed a lofty mandate: Adopt the most stringent energy code of any jurisdiction in the nation.
The mandate has since been rolled back. “Still, it got all of our code officials and all of our builders in the habit of thinking about saving energy,” Noble said.
SEARCHING FOR A NEW HOME? Begin here
Since then, officials have been toughening up the energy codes every three to six years.
That means taking the federal guidelines, reworking them in a years-long process, and writing their own. The latest code book affecting residential homes was 567 pages.
It’s something states like North Dakota and Iowa don’t do.
“We don’t rewrite the book. We don’t even publish,” said Ljerka Vasiljevic, deputy building code commissioner for Iowa, whose state code — unlike Minnesota’s — only applies to state-owned buildings.
One year’s energy revisions in Minnesota — in 2012 — cost homebuyers about $1 per square foot, or $2,400 for a typical 2,400-square-foot home, said Scott McLellan.
“That was a big jump and really caused a lot of discussion and controversy,” said McLellan, who is the Director of Construction Codes and Licensing with the Minnesota Department of Labor and Industry.
That’s the department that oversees the code process. Legislators have, at times, trimmed regulations — a rule affecting sprinklers, for example, was softened at the Capitol. But for the most part, the work is done by McLellan’s department with input from builders, but without a legislative signoff.
And McLellan believes the rules were reasonable. While some builders say homebuyers don’t appreciate the improvements, McLellan and energy-saving advocates say they’ll sure notice when they get their utility bill.
Homes built under the 2012 code consume an average of 30 percent less energy, McLellan said. A study by the U.S. Energy Department stated that Minnesota’s 2012 energy code revisions will save consumers an average of $10,000 over 30 years — which exceeds the added cost to a mortgage.
It’s one reason Noble says the tough energy codes should be a source of pride.
“Why wouldn’t you be in favor, Mr. Builder, of a minimum standard raising you up? You have a better product now.”
But the impact of such regulations hits less-wealthy buyers harder, said Bob Michels, owner of Michels Homes of North Oaks.
Someone buying a $500,000 home might not complain about paying an extra $1,000 for safety windows, but the buyer of a $200,000 home would. Which encourages builders to focus on higher-priced homes, Michels said.
Safety codes are a different animal than energy codes. They’re about saving lives, not money. And their value is harder to assess.
“With some of these safety codes, there isn’t a right or wrong. It’s just the degree of safety you build in,” the Department of Labor and Industry’s McLellan said.
In the case of the safety windows, noted home-builder Paradise, legislators were told about the death of a Minnesota child from a window fall.
“To fight it — how can you?” said Paradise.
But like the energy-saving codes, safety codes have expanded in scope and in price.
One example was raised by Arlen Tietel as he counted sprinkler heads in a Woodbury townhome during last fall’s Parade of Homes.
There were 28. Two in a single closet.
“People say, ‘Why are these here?’ ” Tietel said.
Potential buyers didn’t even realize how much extra they were paying — about $10,000 for the sprinklers, which the state mandated in all new townhomes in 2014.
Its effect in Moorhead has not been subtle.
In the two years prior to the code change, 94 twin homes were permitted in Moorhead. This past year there were four — and two didn’t get built.
But in Fargo, with no sprinkler mandate, twin homes permits shot from 54 to 82 last year.
According to 2009 statistics from firefighters’ groups and the state, once sprinklers are installed over the next 40 years, they would then save about three lives per year.
“To their credit, they’re interested in preserving loss of life,” McLellan said of firefighters’ lobbying efforts. “One life — any life. Their call is to do that at any cost.”
“FEES” NOT “TAXES”
Then there’s the matter of mandating things that have nothing to do with bricks and mortar.
More than ever, Minnesota cities increasingly slap an array of one-time fees on the sale of a new home — on top of taxes — to support police, parks, boulevard trees and even streetlights.
Park fees alone tack up to $7,000 on house prices in Minnetonka, $6,000 in Plymouth and $2,000 in Blaine.
The Met Council levies a sewer availability charge of $2,500 per lot — and some cities typically charge an equivalent, for another couple thousand.
“It’s always been that way to some degree. But it’s intensified,” said Jim Erchul, who runs Dayton’s Bluff Neighborhood Housing Services of St. Paul.
A new $277,000 townhome in Woodbury recently was charged $53,000 in land-related fees. That included city fees, pass-through fees from other agencies and a fee for infrastructure including roads and sidewalks. The total was 19 percent of the value of the home.
Fees can even be charged for development that hasn’t happened yet. “Impact fees” are charged by cities for off-site improvements, should the development generate increased traffic.
That way, said Woodbury associate planner Eric Searles, taxpayers don’t have to pay for improvements necessitated by newcomers. “The development pays its own way,” Searles said.
But home-builders say the cities have gone too far — and Minnesota’s courts recently agreed.
New Brighton-based builder Martin Harstad wanted to build the 183-unit Bailey Park in Woodbury. He was already paying a “seven-figure sum” in fees, according to lawyer Peter Coyle.
But Woodbury charged him $1.3 million more — for future improvements that would not be on his land.
Harstad sued and won in Washington County District Court in November. The savings, per potential home buyer: $7,000.
SIZE MATTERS A LOT
A key factor in Minnesota’s higher housing costs is very down to earth — the land itself.
In the Twin Cities metro area, land costs can reach $100,000 for a plot — before a single wall is built.
That’s partly because the plots are big. Zoning rules in the suburbs often prefer putting new homes on larger lots.
In Blaine, the minimum size for a lot is one-third of an acre. In West Lakeland Township, lots can’t be smaller than 2.5 acres.
Even a tiny house on a big plot of land is going to be expensive, notes Bob Clark, president of the St. Paul Area Association of Realtors.
When you consider the land price of those bigger lots, “it’s difficult to build a starter home,” Clark said.
SOME LINES YOU CAN’T CROSS
The “MUSA” line, short for “Metropolitan Urban Services Area Line,” is an invisible boundary that zigzags around the metro area. The Metropolitan Council, in consultation with cities, draws it to determine which areas will be developed. And which won’t.
Property inside the line will be first to get streets, transit, sewers and homes. Property outside the line will have to wait.
But when you designate an area for development, its value goes up.
Along Dale Road in Woodbury, farmland to the north is worth an average of $27,000 an acre, according to the Washington County Assessor’s records.
Land just across the road to the south — outside the MUSA line — is $11,000 per acre.
Len Pratt, owner of Pratt Homes, builds homes in Washington County, where a one-third-acre lot inside that MUSA line can sell for as much as $100,000.
In most metro areas nationwide, there are no such regional lines. Builders chose from among thousands of landowners, wherever they are, and negotiate the best deal they can. They pay less for the land, and homebuyers pay less for their houses.
But the line helps orchestrate the projects of the 182 cities in the seven-county metro area, said Council Manager of Local Planning Assistance Libby Starling.
“We don’t have any roads to nowhere,” Starling said. “Imagine the inefficiency if cities all had their own sewage systems.”
Such planning saves about 40 percent of costs on road construction, the council estimates.
The variety of factors affecting Minnesota’s housing prices are the responsibility of a labyrinth of entities. Cities, the state, the Metropolitan Council — and to a lesser extent, the Legislature, which is called upon to rehash rules only after the fact. This session, for instance, they’re attempting to redefine the rules on twin homes so they don’t need sprinklers.
But the culture remains and will continue to keep housing costs high, said Bob McDonald, owner of McDonald Construction Inc. of Apple Valley.
Remi Stone, vice president of the Builders Association of Minnesota Stone, is matter of fact about how things currently stand in Minnesota.
“We are a high-regulation, high-housing-cost state. That is our preference, and if you don’t like it you can move to Canada or Texas.