Higher mortgage rates have made buying a house more expensive, but builders haven't stopped building them.

Mortgage rates recently topped 7%, increasing borrowing costs and eroding affordability for all types of housing, with the average 30-year fixed-rate mortgage rising to 7.17% on Thursday, according to a weekly Freddie Mac survey. A year ago at this time, the 30-year averaged 6.43%. Yet builders still received 541 single-family home permits during April, 40% more than last year, according to a monthly report from the trade group Housing First Minnesota.

"Our market continues to be impacted by high interest rates," said Art Pratt, a Twin Cities builder and chair of Housing First Minnesota.

Despite the increase in rates, which have doubled in less than two years but are now at historical averages, homebuyers are adjusting. Last month, home sales were on par with last year at the same time, but pending sales were up significantly during the middle of April, according to the latest data from the Minneapolis Area Realtors. Last week, the U.S. Census Bureau said across the nation, sales of newly built homes during March posted the biggest increase since December 2022.

At a time when there's already a shortage of housing in many parts of the metro, apartment developers have been less resilient. Cities issued them enough permits to build only 115 apartments and other multifamily units, 55% fewer than last year as they face higher borrowing costs, more stringent underwriting guidelines and rising construction costs.

"It's all about financing," said Brian Woolsey, a principal and founder at Twin Cities-based Monarch, a commercial developer.

Woolsey said projects that would have been easy to finance a year or two ago are now far more difficult to launch. Many require more equity and more creative financing tools, including tax-increment financing and historic and low-income housing tax credits.

"Straight-up market-rate projects don't really pencil out with traditional financing alone," he said.

Monarch is partnering with Sentinel Management on a nearly 4-acre redevelopment project in Golden Valley that will include 303 rentals and a new Wells Fargo bank that opened recently on the former Park Nicollet site. Construction on the rentals should begin soon after the team closes on financing next month.

In total, builders and developers in the Twin Cities received 553 permits to build only 656 houses and apartments during April. That's only 23 units more than last year at the same time but less than a third of 2022′s total. So far this year, construction is down 366 units compared with last year but is down a couple of thousand units compared with the previous four years.

Though developers built a near-record number of apartments last year, the overall vacancy rate remained unchanged from the previous year at 5.3%, according to a 2023 report from Marquette Advisors. On average, rents increased 4.4% across the metro to $1,479.

Apartment deliveries this year will likely be down considerably but are forecast to fall by more than two-thirds next year, according to Maxfield Research. That puts upward pressure on rents in much of the metro.

"Multifamily deliveries are expected to be way down all due to mortgage rates," Woolsey said. "As a result of the limited supply coming, rental rates have spiked and are expected to accelerate."