• There were 1,778 new home starts during the second quarter, the highest amount reported in three years and an 13% increase year-over-year
  • Year-over-year, new home starts are up in 10 of the 13 counties surveyed in the Twin Cities market
  • The annual rate of closings (at 5,064 units) is up 3.8% year-over-year
  • Tightening lot supply in some markets is restricting demand and increasing prices at a time when prospective buyers are becoming more and more price sensitive
  • Static lot inventory, combined with rising new home starts has pushed the months of supply indicator to under 40 months for the first time since the last recession

Metrostudy’s second quarter survey of the Twin Cities housing market shows that 2Q16 new home starts numbered 1,778, the highest single quarter within the past three years and a 13% increase over 2Q15. During the most recent twelve-month period, there was a total of 6,117 new housing units started (including single-family detached attached for-sale homes), an increase of 12.9% compared to the 2Q15 annual rate. The annual rate of closings is at 5,604 units, up 3.8% compared to the 2Q15 annual rate of 5,397.

“Continued rising construction costs, development costs, and increased regulation could all negatively impact the potential growth in the local housing market,” said Mark Gianopulos, Regional Director of Metrostudy’s Twin Cities market. “Even in the face of positive job growth numbers, very low unemployment, and recent income growth, the amount of construction activity in the year ending 2Q16 is still modestly below 2013 levels, but the gap is closing. In many markets and submarkets, the gap in price between an existing home and a newly-constructed home continues to widen, ranging from $125,000 to $225,000.”

Year-over-Year Comparison of Annual Starts by County

County comparisons in terms of year-over-year starts activity is up in 10 of the 13 survey counties in the Twin Cities market. The two most active markets in the region saw significant gains in activity, with Hennepin and Dakota up again this quarter by 17.4% and 20% respectively. Larger gains were also seen in Washington and Wright. Other markets saw a decline in annual construction activity for the second quarter including Chisago, Carver, and Scott counties. However, combined, these three markets were only off by 69 units compared to the 12 months ending 2Q15.

The tightening levels of lot supply in some markets and submarkets are still having the impact of restricting demand and increasing prices at a time when prospective buyers are becoming more and more price sensitive.

Top Twin Cities Subdivisions - Ranked by Annual Housing Starts

With the 3.8% increase in sales activity in for the twelve-month period ending with 2Q16, finished inventory remains low. While the volume of finished and vacant inventory has trended higher since 2013, the month’s supply of these units remains low.

Since the volume of lot inventory peaked in 2007, inventory levels have dropped 45% to just over 19,500 VDL at the end of 2Q16. Over the past two years, the volume of lot inventory has remained relatively flat, as the months’ supply has trended lower. Static lot inventory combined with rising new home starts has pushed the months of supply indicator to under 40 months for the first time since the last recession. Builders and developers are still feeling the squeeze from a lack of quality lots in desirable locations, leading to more acquisition and development activity. Part of the pressure is due to a 33% decrease in new lot delivery from the first quarter of 2016, where there were a total of 1330 new lots delivered. Builders and developers brought only 887 new lots to the market in 2Q16, the single lowest quarter within the last year.

Starts vs. Lot Inventory - Annual Trend

The five most active market areas in the Twin Cities region are currently exhibiting a months supply near or at equilibrium levels (24 to 30 months). Hennepin County accounts for just over 20% of all construction activity in the Twin Cities market and currently has a 24.1-month supply of lot inventory available. Dakota County, the second most active market in the Twin Cities region, currently has a 23-month supply of lot inventory. While the overall market shows a slightly elevated supply of lots, lots in many of the most desirable locations remains tight.

“The fundamentals for a strong housing market remain in place, with job growth benefiting all aspects of the housing industry,” said Gianopulos. “Entering 2016, national apartment vacancy rates were reported at 7.0% compared to 4.8% in the metro area. Newly created households are looking for dwelling units either to rent or to own. The question for home builders remains as to how big a slice of the pie will the new home market be able to cut. During peak construction years, the Twin Cities market reached 18,000 new home starts, with 45% of the activity priced under $250k.”

Rising home prices due to increased construction costs, land and lot price increases, and rising development costs have forced new home prices higher, constraining absorption velocity in the metro area. To continue the growth, home builders will need to find a way to bring units to market priced under $250k.

Now into 2Q16, the potential for a strong 2016 is certain, with two solid housing quarters, strong economic growth, and dwindling existing home inventory. Second quarter new home growth is already 10.7% over 4Q15 figures. Higher prices of new homes, however, will keep the market from experiencing more significant growth. Metrostudy anticipates growth from 8% to 12% in 2016, equating to a range of 6,000 to 6,200 housing starts for the year.

For further analysis of the Twin Cities housing market contact Metrostudy regional director Mark Gianopulos: