With developers building more apartments with amenities like yoga rooms and dog wash stations, Twin Cities rents are reaching dizzying highs — and that is pushing more renters to look for houses.
New data on Thursday underscored the influence of those forces on metro-area real estate.
The monthly report from the Minneapolis Area Association of Realtors showed that home sales rose a whopping 17 percent last month. Meanwhile, Zillow, a real estate website, reported that local renters spent 25.6 percent of their income on rent, a near-record and well above the 13.7 percent that homeowners are spending on mortgages.
During the past five years more than 13,000 apartments have been built in the metro, but rents have continued to rise to new highs.
"You would think with more inventory the rental prices would fall, yet it has shown to be the complete opposite," said Ryan Kempenich, a sales agent with Coldwell Banker Burnet.
That has sent people like Brian and Jenn Burke to look for alternatives. They bought a tidy stucco house in southwest Minneapolis last month that is twice the size of their former apartment but costs less.
Though they'll now have to mow their own grass, shovel their own sidewalk and fix their own leaky faucets, they were lured by the lowest mortgage rates in generations. "Looking back to when our parents bought their first houses with double-digit interest rates, the rates you can get on a mortgage today make owning a home much more affordable," Brian Burke said.
Kempenich said that about half of his buyers are former renters, many who are pressed by landlords to pay rent increases. The Burkes, for example, were facing a 9 percent rent increase for their 1,100-square-foot, two-bedroom, two-bath apartment, so they decided it was time to buy.
The mortgage, property taxes and homeowner's insurance payment on their 2,400-square-foot, four-bedroom house is only slightly more than their rent and renters insurance. When they factor in the benefit from their mortgage interest deduction, the net is $400 cheaper than the apartment.
"Of course, there are ancillary maintenance costs to owning a house that there aren't to an apartment, and utilities will probably be more," Burke said. "But just looking at rent/home payment costs, it's cheaper for us to own."
House prices in the Twin Cities are rising at a much more moderate pace than they did just before the 2008 crash and prices have yet to surpass peak levels. Last month, the median price of all closings increased 4.7 percent to $225,000, according to the Realtor group's report.
Historically, homeowners in the Twin Cities spent 19.8 percent of their income on their monthly mortgage payment, but that percentage has fallen to just shy of 14 percent.
"There are good reasons to rent temporarily — when you move to a new city, for example — but from an affordability perspective, rents are crazy right now," Svenja Gudell, Zillow's chief economist, said in a statement. "If you can possibly come up with a down payment, then it's a good time to buy a home."
Many first-time buyers are young adults who came out of the recession underemployed and with student loan debt, but some are finally in a position to buy. Zillow predicts that if mortgage rates reach 6 percent next year, buyers can expect to spend 17.5 percent of their monthly income on mortgage payments.
The problem for many buyers, especially first-timers, is that there's still a shortage of listings. There was a 0.4 percent decline in new listings last month and a big increase in pending sales, causing the overall number of listings to fall 11 percent.
The Burkes, for example, shopped for about six months before they found what they think is the perfect house.
"It was stressful and it a lot of work and we knew that it was going to happen fast," said Jenn Burke. "But we knew that we'd make the right choice."
Jim Buchta • 612-673-7376
