Spring could be a turning point in Minnesota housing market

Until recently, a lack of suitable options thwarted Andrea Cegielski's attempts to buy a rental house throughout the past few years. Many needed too much work, she said, and those that didn't sold quickly and for more than the asking price.

"The market was too insane," she said. "There were too many bidding wars, and it was too hard to hire a contractor, so we threw in the towel."

Earlier this year, she started shopping again with her son, who had just graduated from college and was looking for a townhouse. This time around, she found deals that were too good to pass up, including an abundance of newly built houses and builders who were eager to make a sale.

Her son didn't buy, but she and her husband did. They bought a new, three-bedroom townhouse in Oakdale they plan to use as a rental property. They snagged it for nearly $25,000 off the asking price, and the builder was even willing to pay about $10,000 in closing costs.

"You have to be willing to take the inventory that's out there," Cegielski said. "But it felt like we ended up with a good deal."

Higher mortgage rates have put the brakes on new home sales in the metro, leaving builders with far more houses than buyers. So for the first time in more than a decade, many builders are offering discounts and deals ranging from price reductions to appliance upgrades, putting new home buyers in the driver's seat in the midst of what is otherwise still a seller's market.

One of the most popular incentives is called a mortgage rate buy-down, which enables some new home buyers to buy their home with a rate that's a percentage point or two below the going rate. The average 30-year fixed-rate mortgage in the metro last week was 6.39%.

"We didn't pull back soon enough, and so we're whittling through the inventory," said Joe Flynn, division president at David Weekley Homes. "Right now is the time to buy."

Discounts and incentives are popping up sporadically even within the same development, builders said. But generally, the best deals are going to be outside the most-coveted school districts, on the fringe of the metro and in areas that have seen an abundance of home-building in the past year.

In Corcoran, where several large developments have opened during the past couple of years, M/I Homes is offering a discounted mortgage rate of 4.87% on its $399,900 twin homes.

And in Lakeville, which for the past couple of years has been one of the busiest cities for homebuilding in the metro, several builders are offering price discounts. That includes a $57,560 reduction of the $569,550 price of a one-level house by Lennar, the metro's largest builder.

This week, the National Association of Home Builders said discounts and incentives appear to be working. This month, 30% of their members reduced prices and 59% offered special incentives to woo buyers. Those figures are down slightly from December.

Julie Desrochers, a Twin Cities sales agent, said such deals are providing relief to buyers frustrated by the lack of existing home listings. She said with house listings on the decline, houses in good condition and priced competitively are still selling quickly and with more than one offer.

So even though the median price of a newly built single-family home in the Twin Cities was $539,460 last month — $160,000 more than a previously owned house — some of her clients are buying new homes instead of existing ones.

"We're telling people to look at new construction because it's a good option," she said.

For now, one of the most popular — and enticing — options, builders said, are those rate buy-downs, which provide a short-term or permanent reduction in mortgage interest rate and payment. One popular scenario requires a builder to contribute 5% to 6% of the purchase price of the home, a reduction in the price that enables buyers to receive a 2- or 2-percentage point reduction in their mortgage rate.

"That has become a differentiator and a game changer for new construction versus resale homes," said Derek Schairer, general manager of homebuilder partnerships for Opendoor, a national real estate platform that's created a program tailored to new home buyers who want an instant offer on their current home.

By the end of last year, nearly three-quarters of all large national homebuilders in the Midwest offered a rate buy-down, according to John Burns Research and Consulting.

"Most consumers are very payment-conscious, and that gives them a lot more purchasing power," Schairer said. "And that allows builders to sell a more expensive home that's brand new for a lower payment than a resale home."

Tom Wiener of Cardinal Realty Homebuilders and Remodeling said larger production builders are offering most of the discounts after trying to capitalize on strong demand during the first half of the year by stockpiling inventory.

Much of that happened in early 2022, when mortgage rates were still near historic lows and builders couldn't keep pace with demand. After rates doubled, demand slowed dramatically, leaving builders with more homes than they could sell and causing building permits in the metro to plummet.

Wiener, who has not yet had to do major discounts, said one local builder was sitting on 24 spec houses at the start of the interest rate increases last year. Many builders, he said, were also trying to beat future increases in construction costs.

"A lot of builders were building specs in the hot market, and also because of the rising costs, this was the only way to cover yourself on pricing," he said. "Now it might be coming back to bite them."

Amanda Craft and her husband started shopping for a house early last year and had to carefully negotiate changing market conditions. Rather than buy a newly built house, they wanted to buy a lot and build their own.

Even though there were very few deals/discounts happening at that time — and there was very little, if any, room for negotiation in the asking price for homes — their builder still offered them a credit they could use toward closing costs if they decided to use the builder's in-house lender.

They signed their purchase agreement in April 2022 and were still able to earn a small credit for being a first responder. But the couple decided not to go with the builder's lender because their own lender was offering a 12-month rate lock, which was more important to them given the uncertainty in mortgage rates that would occur through the next nine-plus months.

"Over the last several months, I have seen our builder offering additional incentives as we've seen shifts in the housing market and volatility in mortgage rates," Craft said.

Flynn cautioned those deals aren't likely to last forever, as home builders burn through inventory.

"It's a very good time to buy," he said. "But it's going to be a different landscape a year from now."

At the end of March, there were enough new houses for sale in the Twin Cities to last about half a year, according to a rolling 12-month average from the Minneapolis Area Realtors. That was nearly twice as long as a year earlier at the same time and more than six times longer than for previously owned homes.

Still, that's down from the middle of 2022, when there was an eight-month supply of new homes on the market, Flynn said.

"The builders are pivoting right now," he said. "And concessions are going to disappear because builders are moving through inventory."