Twin Cities homebuilders started the year with a bang.
During the first four weeks of the year, 358 permits were issued to build 1,059 units in the 13-county metro area, according to the Builders Association of the Twin Cities (BATC). That was a 15 percent increase in permits, a 51 percent increase in new units and the best January since the housing bust.
"BATC's members are hopeful that 2014 will be the year that marks a real recovery for the residential housing market," said Shawn Nelson, BATC's 2014 president.
Rental housing has driven the construction recovery and January was no exception. Several new apartment buildings were permitted this month, including the second phase of the Mill & Main Apartments across the Mississippi River from downtown Minneapolis, and two buildings in Golden Valley and Eagan. Those buildings represented 64 percent of all planned units during the month.
Construction of single-family houses also was up, with a 15 percent increase over last year. Most of those permits were issued in Lakeville, Prior Lake and Woodbury, where more than 100 new houses were planned.
But Nelson said the region is ready for even more housing. "A region our size should be able to support around 12,000 to 15,000 new homes just to keep up with household growth and replacement housing stock," he said. Last year, more than 10,000 houses and apartments were permitted — far below the average number of new homes built throughout the 1990s.
Still, there are signs that sales might not increase at the same pace as last year. This week, homebuilder confidence across the country slipped slightly during December, according to the National Association of Home Builders, and the U.S. Commerce Department said new home sales were below analysts' expectations.
And in a new end-of-year report, Ryan Jones, director of Metrostudy's Twin Cities Market, said a growing shortage of buildable lots, the possibility of higher mortgage rates and rising home prices could make it more difficult to sell houses.
"While our pace could slow a little in 2014, we expect continued growth in new home activity throughout the year," he said.
Jones said that with new home sales strongest in top-tier markets closest to the Twin Cities core, developable lots in these areas have become more scarce — and expensive. That's forcing builders and developers to expand their search for land across the metro into outlying communities, including Otsego in Wright County and Hudson over the border in Wisconsin.
Because homebuilders have limited the number of unsold homes they're keeping in inventory, new home buyers will continue to face fewer options. At the end of December there were 2,596 new houses in inventory, 154 fewer compared with the previous quarter.
At the current sales pace, those houses will last 5.5 months, slightly below what's considered equilibrium. But Jones predicts that as builders ramp up construction and new home sales moderate, buyers could have more choices.
Jones also said that as new home sales rise, the lot shortage will deepen. As that happens, builders will be tempted to raise prices, but they must do so cautiously, he said.
"Price increases may need to be adjusted if the economy weakens or rates change dramatically," Jones said. "Sales might not come as easy as 2013."