When Homeowners Make Money by Blocking New Housing

When Homeowners Make Money by Blocking New Housing

Real estate developers: people aren’t wild about them. They’re making money, which is bad, and why you don’t see it in other types of businesses.

I’ve found that as a Planning Commissioner, it’s actually a little bit refreshing that it’s always clear what a developer’s motives are. All of their decisions are going to be through that same nakedly financial lens. Some maybe approach it from a slightly different angle, but ultimately, that a developer wants to use a higher quality building material or what have you will come back to the rents or sale prices they think they can get for what they’re building. So in that sense, they can be easy to talk to and make demands from.

One thing that no one talks about, though, is another group that’s making money off of our hot real estate market—folks who own houses already.

In the middle of last year, I became a homeowner. A condo, to be precise. It’s fine. In fact, based on sales of similar units in the building and area, the City Assessor’s Office estimates it’s already worth $25,000 more than I paid for it five months ago. That’s probably a bit aggressive, but the point is generally correct—people want to live downtown, and there isn't a whole lot of condo inventory downtown, and they’re getting more expensive. So in theory, I’ve already made tens of thousands of dollars by virtue of having been able to purchase some property.

Downtown is a useful example because it’s small enough that you can talk about it in a way that makes sense to everyone. “People who want to live downtown” are kind of a specific pool of buyers, and there are only so many thousand condo units. Looks like there are 32 two bedroom condos available downtown right now. Why not list yours for $5,000 higher than you think you could get and see what happens?

And the same thing applies across the whole city on a larger scale. People want to live in Minneapolis, a nice place, and there are only so many housing units. Some people also have certain preferences on top of just wanting to live in Minneapolis—maybe they want to live within walking distance of some shops, or near transit, or the lakes, or in a certain school attendance area.

Some potential buyers have more money than other potential buyers, and so the housing units that exist are able to fetch more on the market, and those other people are then priced out. Like developers—which we know are bad—individual home sellers generally do not sell their houses for less than their market value. 

So who’s accumulating a lot of wealth from their houses? Well, I asked local Internet user Scott Shaffer to throw together a map that shows the difference between the estimated market value of houses in Minneapolis and their last purchase price. Kind of a rough way of estimating how much equity people have on top of whatever they’ve paid down on their mortgages. Get a load of this:

Pinch to zoom

Pinch to zoom

Lot of dark blue in certain areas! The dark blue means the houses are at least $250,000 more expensive now than when they were purchased. This is the 2018 market value, so not the estimates the county recently mailed for 2019.

As with all data, there’s noise in there—people selling below market to their kids, etc, which is a whole other, not entirely unrelated topic—but you get the idea. Keep in mind, this is not just “housing prices.” Obviously a mansion on Lake of the Isles is going to cost a lot of money. This map shows how much more expensive housing has gotten since the housing was purchased.

There are other things to consider here, like how in America we often consider our houses to be a big part of our retirement plans. To an extent, this is not all bad, like the part about paying down a mortgage and building equity. But that many, many people will never be able to save tens of thousands (over a hundred grand in some areas!) for a down payment, and the uneven nature of the gains between areas should really make you think twice about this system.

While housing across the city has gotten more expensive, some homeowners are well into the six figures. And it’s not evenly distributed across the city.

The parts of Minneapolis you think about as being more expensive and exclusive have accumulated quite a bit of wealth in their houses, and it’s largely because of the second part there: it’s exclusive. Restrictive zoning, which we luckily dealt a big blow to last month, has kept the number of housing units artificially low. More housing would exist in much of the city today if we had not downzoned it in the last century, and housing would be cheaper overall.

In places like the San Francisco Bay Area, this effect is even stronger, exacerbated there by a bananas thing in California where they can’t really raise property taxes. People bought ramblers for $150,000 in San Jose and they’re now worth $2.5 million because the Bay Area is completely insane and won’t let anyone build anywhere near enough new housing as it continues to add jobs and population.

You may say: Nick. This is dumb. You can’t link the sale price of houses to the availability of newly built studio apartments.

Well, you kind of can though. It’s all one, interrelated, regional housing market. Just because people who are looking for houses and studio apartments are generally different doesn’t mean the availability of both doesn’t effect the other. The market is a little murky; there are people on the fence about getting a one or two bedroom, or buying or selling, or deciding between Lyndale or Whittier, or even picking Richfield or Minneapolis. The supply part is that way too—if an area is in demand and there isn’t enough housing and prices go up a lot, priced out propspective buyers tend to look nearby, then driving up costs in those areas.

Also, people who are leaving one type of housing (making it available) are often going to another type—I left my one bedroom rental apartment to buy a two bedroom condo. Over the summer, I came across a story that I swear to God I wasn’t even fishing for, where Linden Hills empty nesters had been looking to sell their big old house and were interested in a multi-family building in the neighborhood. That building was shrunken after local opposition, making it more expensive, and it priced it out of reach for them.

This has been a theme for a long time in Minneapolis and basically all other American cities—homeowners with All Are Welcome lawn signs, secure in their housing already, opposing the construction of new housing, and driving up the value of their asset.

So I think this is something we should all talk about more often: there are winners and losers in a constrained housing market. There are ups and downs in the market, but the long-term trend is very clear. Areas with lots of amenities and good access to jobs and services are in demand, and market values have been driven up by low supply. Intentionally or not, there are people who are making hundreds of thousands of dollars by keeping new housing out of their neighborhoods.

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