High land prices pose threat to homebuilders

It's a common complaint among Twin Cities-area developers: New homes in the Twin Cities cost a lot because of high land, labor and permitting fees.

Metrostudy's fourth-quarter survey of the Twin Cities housing market confirms it. The national real estate research group said the median price of a new house in the area was $406,000, the highest median single-family home in the Midwest.

The group attributes that to higher land prices, shaped by demand in areas where there's a shortage of land that can be developed.

Mark Gianopulos, regional director of Metrostudy, said in a statement that there's a lot to like in the Twin Cities residential market but that the upward trend of house prices could constrict growth.

The pressure will be the greatest at the bottom of the market. "Increasing land, development and construction costs continue to force new-home prices above levels that could maximize absorption, which will make it difficult for the new-home market to reach what could be the largest pool of potential buyers, first-time and millennial buyers," he said.

In addition to rising land prices, the prospect of higher mortgage interest rates creates another headwind. Gianopulos said that the "inevitable convergence of events" will force many buyers to seek out new, attached, townhouse-style construction.

The group said that by the end of last year, construction started on 6,257 new units, boosting annual starts 13.1 percent compared with 2015 and making it the highest annual level of the past three years.

The number of finished and vacant houses in builder inventory by the end of 2016 was flat in a trend that started at the end of 2012.

By the end of the year, there were 716 finished and vacant housing units, mostly single-family houses, in builder inventory, which translates to a 1.8-month supply.

For this year, an estimated 6,800 to 7,100 housing starts are expected, a 10 to 13 percent increase from 2016.

With construction and sales expected to rise about the same pace this year, the number of finished and vacant homes in inventory are expected to remain constant.

In the most active markets, sales have been the strongest and inventory levels the tightest in Dakota and Washington counties. The supply of lots was less than two years compared with a 24.2-month supply in Carver County.