Restoring the churn to rural housing markets

By Marnie Werner, VP Research

I’ve been talking a lot about child care in the last month, and in those presentations, I’ve been telling people how the two biggest barriers to attracting workers in rural areas is a lack of child care and a lack of housing. This week, instead of child care, I thought I’d just go back and revisit the issue of housing, too.

What’s up with housing in rural areas?

As we described in our 2018 report on the workforce housing shortage, many communities in Greater Minnesota are facing a workforce shortage with well-paying jobs going unfilled. The biggest barriers to attracting workers in to fill these jobs, workforce experts tell us, are a lack of child care and a lack of available housing.

But why is there a housing shortage in rural communities? The population is shrinking in rural counties, right? Shouldn’t there then be a lot of housing standing around empty?

Well, I think (or would like to think) we’ve established pretty firmly by now that the old narrative that rural places are dying off and disappearing is just not true. Yes, some of our smallest communities and our most rural counties do continue to lose population, but they are the exception, not the rule.

Most counties in Greater Minnesota are growing in population thanks to the in-migration of immigrants looking for jobs and urban and suburban residents looking for more space and a slower pace of life. Hence, an increasing demand for housing in many parts of the state.

But even in places where the population is shrinking, there is still a housing shortage. Seems counterintuitive, but it’s true, because like the rest of the nation, households in rural Minnesota are getting smaller. Even where the population goes down, the number of households are going up (Table 1), because households themselves are getting smaller. The Census has been reporting for a while now on the growing number of one- and two-person households as more and more people decide to live on their own and/or choose to have fewer children or no children at all. These decisions about children can lead to a smaller population, but also more households. 

Adding to the demand for housing is a trend of middle-age householders (30- to 49-year-olds) moving to rural areas in search of more affordable housing or, after 2020, in search of more space.

Table 1: Percent change from 1970 to 2016 for each county group.

A malfunctioning market

So the solution is to help communities build more workforce housing, right?

Not necessarily. The growing demand is only half the story. In a properly functioning market, if the demand for housing goes up, what people are willing to pay for said housing should go up, too, attracting in more builders. But in rural communities, the amount of new housing being built is well below the need, and while rural incomes are rising (Table 2), housing prices are rising just as fast or faster. But still, developers are building far fewer homes in rural areas now than they were in the early 2000s, when the differences between rural and urban incomes were a lot wider.

Table 2: Percent change of median household incomes, median home sale price, contract rent, and mortgage and homeowner costs reveal that the largest increases have been outside of our most urban counties. (Data: Decennial Census & ACS 5-year, Minnesota REALTORS)

The housing professionals we talked to in 2018 told us that building costs increased 60% to 90% between 2000 and 2018, rising much faster across the state than incomes. Some of the reasons:

• The increasing cost of materials;
• The increasing price of land;
• The increasing cost to prep building sites with water, sewer, and other infrastructure;
• Fewer home building companies since the Great Recession, forcing up their prices;
• A much more competitive retail construction market in larger communities that can pay more for projects, making them more attractive to builders;
• Labor shortages in the trades industries pushing wages higher; and
• The increasing number and complexity of building codes.

“In the late 1990s and early 2000s, we could work with small communities to develop new housing that cost a little over $100,000 [per unit]. Now, you can barely build that same house for $200,000,” said the late Rick Goodeman, former director of the Southwest Minnesota Housing Authority in Slayton.

In a small town, a newly built home priced at $200,000 could cost up to twice the price of the existing homes around it. And even if a family could afford that price, its future selling price would be based on a comparison of the surrounding homes’ sale prices (“comparables”), meaning it would sell for much less than what the home owner paid for it in the first place. An environment like this suffocates the demand from families looking for newly built starter homes and makes it challenging for builders, even in areas where there might be high demand.

Restoring the churn.

So what about existing housing? Why can’t families just buy those?

The problem with this is that in small communities, unlike in larger cities, there isn’t a diversity of housing to allow for what’s called “churn.” 

The life cycle, or natural “churn,” of a healthy housing market works like a gear that keeps people moving along through their individual life stages. In a functional housing market, young families move into a small starter home, then transition up into a larger home as their family grows. When the parents become empty nesters, they often choose to transition to a small home, maybe one on a single level in a development where yard work is taken care of. After that, they may move on to an assisted living community, then a nursing home and so on.

Few rural communities, though, have the kind of housing designed for aging homeowners to transition into, and therefore they stay in their homes as they age. Without any senior housing options, the local housing supply is like that gear but missing a cog. The gear malfunctions, everything grinds to a halt, and people get stuck where they are. No one can move forward to the next stage.

That’s why the fix for the housing shortage in rural towns isn’t necessarily to build more housing for the young families moving into a region, or “workforce housing.” What may be more important is to build transitional housing for seniors that helps them move along out of the homes they raised their families in, freeing up those houses for younger families. Essentially, restoring the “churn.”

Pioneer Public Television in Appleton, MN, just released a video last week that describes really well the issue and one community’s crack at a solution. “One way to address the housing shortage in rural Minnesota: Create your own housing churn” looks at the city of Dawson and how investors there figured out a way to keep their housing supply churning along. They didn’t intend for this modest housing development to start out as retirement housing, but that’s where it’s heading. They’re smaller houses, which keeps down the expense, and the folks moving into these new houses on the edge of town are freeing up their houses in town for new families.

It’s this diversity of options in housing supply that helps keep the housing market healthy in a community. Restoring the natural churn of a healthy housing market may seem daunting, but the folks in Dawson figured out how to make it work: They took a small step to build housing that seniors would want so they can free up their houses for someone else. And thus the housing supply begins to churn.