Building of new houses dipped in Minnesota in 2022, but apartment construction jumped

Home building in the Twin Cities went from hot to not during 2022.

But apartment building posted a big jump.

Last year was a tale of two halves, according to a year-end report from Housing First Minnesota. Orders for new houses soared during the first six months, but as mortgage rates climbed in the back half of the year, new home sales tanked.

"The steep jump in interest rates earlier this year sent homebuyers to the sidelines," John Quinlivan, 2022 board chair of Housing First Minnesota, said in a statement. "We're optimistic that as interest rates level out, homebuyers will find opportunities that were not there last year and return to the market."

During the year, builders were issued enough permits to build 5,463 single-family homes throughout the 13-county metro area, a 26% decline from 2021 and the fewest since 2016.

Apartment builders fared much better. Developers were issued enough permits to build 11,001 units, a 43% increase compared to the previous year.

During the early months of 2022, demand for new houses was so strong that many builders limited sales and kept wait lists. But as mortgage rates rose to the highest level in two decades, demand slid.

On Thursday, Freddie Mac said the 30-year fixed rate mortgage averaged 6.48% for the week ending Jan. 5, up from 6.42% the week prior. That's double the average rate a year ago and reverses recent slight declines in rates.

For the last eight months of the year, single-family permits failed to outpace 2021, with the losses accelerating as the year wore on.

During December alone, builders were issued 295 single-family permits, about half as many as last year, according to data collected by the Keystone Report for Housing First Minnesota. That was the lowest December figure since 2012.

All the fundamentals that have been a drag on home sales have been a boon to apartment developers, who saw growing demand from renters. In December alone builders were issued enough permits to build 524 multi-family units, mostly market-rate rentals. That was almost double the number issued in December 2021.

During the first nine months of 2022 renters occupied an additional 6,600-plus rentals across the metro area, according to Marquette Advisors. That was a 12% increase in the number of occupied rental units compared to 2021.

Altogether, builders were issued 5,835 permits to build 16,464 units last year in the Twin Cities.

Nationwide, sales of new single-family houses defied expectations during November (the latest data available), rising 5.8% from the previous month but down 15.3% compared with the same time last year.

In the Twin Cities metro area, sales of new houses were down slightly more, falling 16.6% compared with the previous year, according to November sales data from the Minneapolis Area Realtors. The median price of those sales was $494,990, a nearly 13% increase over the previous year.

Quinlivan, a custom home builder and remodeler, said the bulk of the declines in new home sales were concentrated among entry-level and move-up buyers who are most likely to be affected by the increase in mortgage rates.

Most upper-bracket buyers — those spending more than $1 million — have been less likely to delay their decision to build a house. They're more likely to pay with cash or have enough income to absorb higher borrowing costs.

Quinlivan attributes much of the downturn to what he considers temporary uncertainty over November's election, the Fed's rate increases and concerns about the economy. Despite it all, he said the mood among builders is generally positive.

Quinlivan builds about eight to 10 new houses and takes on about a half-dozen big remodeling projects every year. Revenue at his company during 2022 exceeded the year before, and he already has enough orders this year to exceed 2022.

"We've been through this before," he said. "Buyers don't go away; they might be on the sidelines for a couple months or half a year, but they don't go away."

In the end-of-year report, James Vagle, chief executive of Housing First Minnesota, repeated a common refrain about the home-building decline.

"The Twin Cities housing market was already a tough landscape for first-time homebuyers," he said. "This year's rising interest rates and slowdown in construction has only made it more challenging. We need more starter homes in our market to preserve homeownership for future generations."

Minneapolis was by far the busiest city in Minnesota for housing construction last year, in large part because of strong demand for rentals. Builders in that city were issued enough permits for 3,557 units, followed by Edina with 985 units. Minnetonka came next with 914 permitted units, and St. Louis Park had 884.