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Construction continues in Plymouth at the Steeple Hill development by builder D.R. Horton. Thursday, August 2, 2012.

Glen Stubbe, Star Tribune

Squeezing into the suburbs

  • Article by: JIM BUCHTA
  • Star Tribune
  • August 11, 2012 - 1:38 PM

Twin Cities home builders are having their busiest season in five years, suggesting that their backhoes and pickup trucks are once again making tracks on vast undeveloped swaths of land throughout the metro.

Far from it.

Only a handful of suburbs are seeing new construction, and those areas have a limited supply of land. With demand for new houses rising, builders are predicting shortages of buildable lots and higher prices for new homes. The average base price already has jumped close to 8 percent in some areas, according to Metrostudy, a research company that tracks for-sale housing.

"We'll hit a wall very quickly ... that could push buyers back into the existing-home market," said Bill Burgess, president of Lennar Corp., the state's largest home builder.

While construction activity in the Twin Cities has improved dramatically, it remains near historic lows. Last year, permits were issued for 6,000 units, well below the 12,000- to 22,000-unit range that is considered normal. With an expected increase of 18,000 new households this decade, there are concerns that a housing shortage could be in the offing.

For now, the bulk of new construction is happening in the seven-county metro area, where homes in cities like Woodbury, Maple Grove and Blaine are in high demand. Lot supplies in those communities are being stretched thin and homes under construction are often snapped up quickly because transportation, shopping and jobs are nearby. In Plymouth, new home sales have doubled so far this year, and the city has the tightest supply of buildable lots in the metro.

"Right now it all revolves around gas prices," said Jacob Fick of Tradition Development, noting that buyers want to be close to jobs, schools and stores.

Oleg Lidukhover and his wife, Yuliya, weren't even looking for a house when they chose to move to Plymouth late last year. On a walk near their Maple Grove community, they noticed a massive subdivision going up in neighboring Plymouth. They loved the wooded location and its proximity to Arbor Lakes, where shops, trails and restaurants are tucked into a colossal housing development.

Building a home wasn't high on their to-do list, but when they started weighing the benefits, they took the plunge. The lots weren't as expensive as they thought, and Pulte Homes offered a $25,000 discount on the lot. "We weren't in the market, but this was an opportunity that was hard to pass," Oleg Lidukhover said.

Marv McDaris, Minnesota division president for Pulte, said business has been brisk. At Elm Creek Highlands, the builder quickly sold 26 homes at prices averaging in the mid-$400,000s. And in the Willows, where the Lidukhovers built their six-bedroom, six-bathroom house, Pulte has sold 11 homes priced in the upper $500,000s. Pulte already is planning to develop 40 homesites on a nearby parcel.

The demand in Plymouth is more than anecdotal. Based on the current sales pace, there's only a 12-month supply of vacant developed lots. Because it takes so long to turn raw land into buildable lots, there's a risk that developers could run out of lots.

Across the metro, nearly 1,500 new lots were brought to market over the past 12 months, the highest pace since 2009, according to Metrostudy. Still, supplies are at the lowest since 2008, and the situation isn't expected to improve soon. Lennar's Burgess plans to increase output by 25 percent in the next two years, all of it within the seven-county metro, to meet intense demand.

But Jacob Fick, project manager with Tradition Development, said the tight lending environment has made it tough for developers to finance big, expensive acquisitions. The suburbs are appealing because they offer smaller parcels for more modest projects. Still, Fick and other developers aren't aggressively pursuing new development opportunities until they're sure the market really is on the mend.

"The days of multiple offers on land have come and gone," said Fick. "We want to make sure this isn't just a blip on the screen."

It's quiet farther out

And despite dwindling lot supplies, Fick and others say that it'll be years before developers take a risk on new projects in the farthest reaches of the metro. In Buffalo, only one house has been built, and there are hundreds of unsold lots. The Metropolitan Council said construction activity in developing suburbs has been declining steadily since 2008, while growing in the more established suburbs closer to Minneapolis and St. Paul.

Such disparities are a reflection of both a growing interest in urban living and unprecedented affordability in communities that once were financially out of reach for many buyers.

"Folks are still not driving to affordability," Fick said.

The intense focus on building within the seven-county metro is putting pressure on prices of new and existing homes. In Blaine, the average price per square foot for new construction during July was up 20 percent compared with the previous year, according to the Minneapolis Area Association of Realtors. The previous year prices had fallen 10 percent.

Burgess and other developers say rising prices and low lot inventories could help the broader housing markets in those communities as buyers who couldn't buy new are forced to consider existing homes.

Already, the average per-square-foot sale price of existing homes is on the rise in Plymouth, Blaine and Maple Grove, but has fallen in Buffalo and several other outlying communities. McDaris and other developers think the trend will continue.

"Any limits to supply, including new home supply, will push pricing upward," he said.

Jim Buchta • 612-673-7376

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