Second in an occasional series on the future of housing.
There are a lot of vacant lots in the central cities of our metro area, including three not far from my house, right on the Mississippi River. Edina Realty last week had the listing — two at $749,900 each and one at $650,000.
Across the river in Minneapolis there are three smaller lots for sale just south of Lowry Avenue N. in the Hawthorne neighborhood, about 3 miles north of downtown. They were listed on a city website for $3,600 each.
While it may seem hard to believe, those St. Paul lots are the better bargain, as $3,600 is an awful lot to ask for parcels that are simply worth nothing.
It would cost more to build a new house on one of those lots in Minneapolis than the house would then be worth in the market. So even free, the land is too costly.
That dynamic seems to suggest that something is fundamentally broken in the housing market. Sure, some neighborhoods are more desirable than others. Yet it’s hard to imagine having lots worth nothing in the heart of the metro area, not that far from other lots worth three-quarters of a million dollars.
“In a weird way, it’s not that complicated” to explain why those lots in Minneapolis are fairly valued at pretty much zero, said Chris Wilson, senior director of real estate development for the Minneapolis-based nonprofit Project for Pride in Living.
In recent years PPL has utilized a variety of subsidies to build houses on vacant lots in neighborhoods with a lot of them, including in the Hawthorne neighborhood. At about 1,500 square feet, the kind of house PPL typically builds is less than two-thirds the median size of the more than 600,000 new single-family houses sold in the country last year.
Yet they are undeniably nice places to live, with a porch, two-car garage and landscaped yards. Just the construction cost of a house like that is easily $250,000, maybe $275,000, Wilson explained. With architectural fees and other costs, the total investment could easily exceed $300,000.
“In your neighborhood, no problem, people will happily pay $300,000 for a nice house,” he said. “But up there, hold on, we won’t be able to sell it for that. We sell things for $180,000 or $200,000, that range. The production costs exceed what you can sell it for.”
As for how PPL can afford to sell a house for $180,000 that cost it $300,000 to build, Wilson replied that “anybody who seems inclined to give us money, we will ask them for it.”
PPL is a nonprofit with a long history in affordable housing — and one supported by my family — so it knows its way around government housing subsidy programs. In the recent past it’s assembled what Wilson described as the “subsidy stack” out of funds from the city of Minneapolis, Hennepin County, the Metropolitan Council and other sources including a Mississippi River watershed management agency.
Asked how many new or renovated houses it takes in a neighborhood to have the catalytic effect of raising housing values enough to let the market start to solve the vacant lot problem, Wilson replied that he can’t really say. He knows with certainty, though, how many blighted houses it takes, with boarded-up windows and yards overflowing with weeds, to really tank housing values.
It takes only one.
Wilson said the housing market is strengthening in places like Hawthorne, yet there still aren’t enough subsidy dollars to come close to fully meeting the need. That’s one reason PPL has been working on ways to spend less to build a new house. It’s proved to be anything but easy.
Part of the explanation for higher costs are construction quality standards required by city policy in Minneapolis and elsewhere.
A builder could spend less than $250,000 to put up a box with a few windows, the lowest-cost siding and floors, no porch, no bushes or trees and no garage. Cheap yes, but that kind of a house is only going help keep property values depressed in the neighborhood. City Hall is right to keep that from happening.
Another problem is that as the construction market in general has tightened, top-quality contractors willing to take on a relatively small house project are increasingly hard to find.
One idea PPL is now working with is to build houses that easily meet quality standards but just aren’t very big. Wilson’s talking about a house of about 800 square feet, or about one-third the size of a typical new house in the U.S. Other options to save money might be a basement big enough to only fit the furnace, or maybe a one-car garage.
Unfortunately, the cost of these smaller houses has started to creep up near $250,000 as well, Wilson said, because some of the things a new house needs — like utilities — cost about the same, no matter the size.
Keeping the cost of a new house down matters to any potential buyer, of course. Those 1,500-square-foot houses Wilson described were meant to be affordable and available to buyers who qualify as a household at up to 80 percent of area median income.
That math works out to be a household income of nearly $72,000, according to income limits most recently published by the Metropolitan Council. That’s not a poor family, as $72,000 exceeds the median household income for the whole state, according to Census Bureau figures.
What’s more interesting is what these guidelines suggest about affordability. Any house that’s affordable to a household of four that meets the 80 percent limit has to cost $234,500 or less. As we have already seen, PPL is struggling to build a very small house for that, even when the land is free.
That means, of course, that there’s no longer any such thing as an affordable new house in the market.