There Just Aren’t Enough Minneapolis Duplexes or Houses

This morning I heard a stunning statistic I had to look up. There are less than 1 million houses for sale in the entire United States. I’m talking houses, not multifamily properties.

The speaker even went so far as to posit that lack of inventory was a greater problem in the housing market than interest rates.

Sure enough, according to the St Louis Federal Reserve, in January there were just 829,376 homes actively listed for sale in the United States. While this is a healthy increase from the 346,514 in 2022, it’s nowhere near normal. For comparison, in July of 2016, there were 1,463,025.

What do single-family houses have to do with duplexes?  Everything.

According to the National Association of Realtors (NAR), the median age of a first-time home buyer in the U.S. is 38. In the 1980’s, the average first-time home buyer was in their 20’s.

It’s estimated as a result of the Great Recession we are still about 4 million housing units short of where supply should be had building not come to a halt during that decade.

This housing shortage includes rental units. There are fewer places to rent, which means like everything where demand exceeds supply, rent has gone up. This makes it harder for tenants to save up for a down payment. And when they finally do, there isn’t enough inventory to choose from.

Many would-be first time home buyers consider buying a duplex, triplex or fourplex as an alternative. Here too, there is very little inventory.

In fact, as of today there are just 171 multifamily properties listed for sale in the 7 county area. For comparison in January of 2015, there were 445 for sale.

That scarcity, combined with owner pride have caused asking prices to go up. After all, if something’s rare, isn’t it worth more?

Yes, and no.

The Federal Reserve also tracks something called Owners Equivalent Rent (OER).  To calculate it, tally all the expenses involved in owning the property, and that’s theoretically the minimum amount of rent the owner would have to charge if they chose to rent it.

This is where many would-be duplex sellers stumble. Higher interest rates, property taxes, insurance, utility and maintenance costs often mean the monthly payment for an owner-occupant, even after collecting rent from the other unit, is more than they paid in rent.

Yes, there are other benefits to owning rental property like principal reduction, tax savings and appreciation. However, none of those can be realized unless the buyer can make the monthly mortgage and utility payments.

The housing shortage doesn’t look as if will end any time soon. And both higher rents and scarcity of multifamily inventory are great for current owners. However, when it comes time to sell, there is a limit to what people can pay; no matter how scare the commodity.