Housing construction in the Twin Cities soared last month, but only because of a double-digit increase in permits to build entry-level, for-sale townhouses and rental apartments.
Permits to build single-family houses, however, were down sharply compared with last year, suggesting that rising construction costs and higher mortgage rates are eroding demand for more-expensive move-up new houses.
"The rise in townhouse construction undoubtedly reflects builders' efforts to reach the largest share of the market," said Tom Wiener, president of Housing First Minnesota, in a statement. "Even as we saw more homes hit the market these past few months, we are still far below the levels of housing inventory we need."
During September homebuilders were issued 482 permits to build 1,277 units, according to a monthly report by the Keystone Report for Housing First Minnesota.
That was a 15 percent decline in total permits, but a 69 percent increase in planned units from a year ago. (A single permit can be issued to build more than one unit.)
Only 444 of those permits were to build single-family houses, 19 percent fewer than last year, and permits to build townhouses increased 60 percent. Six permits were issued to build 674 units, mostly upscale rentals.
The biggest planned projects for the month were in Minneapolis where Frana was issued two permits to build 192 units; in Ramsey, Eagle Builders was issued one permit to build 174 units.
David Siegel, executive director of Housing First Minnesota, said in a statement that a combination of an increase in interest rates and tariffs, and workforce shortage are an ongoing challenge for the industry.
"The drop in single-family housing is concerning as we know builders are facing increasing headwinds," he said.
Builders have said they expect tariffs on steel, aluminum and Canadian lumber to increase the cost of building materials.
So far this year, permit issuance is neck-in-neck with 2017, but construction activity is lagging. During the first nine months of the year builders have been issued 4,641 permits to build 9,201 units. That was about the same number of permits compared with last year, but a 2.2 percent decline in total units.
Nationwide, new home sales increased 3.5 percent during August, but that was below expectations and part of a long-term slowdown in sales. Economists and builders blame higher mortgage rates in part to the decline.
Mortgage interest rates have been on the rise during the past several months, making houses less affordable. The average 30-year fixed-rate mortgage was 4.72 percent, a high not seen in more than seven years.
For the month, Minneapolis was the busiest city with 335 planned units followed by Ramsey (189) and Maple Grove (143).