As home affordability reaches 33-year low, buyers rethink strategies

Housing affordability in the Sioux Falls area has reached a 33-year low, according to the latest data released from the Realtors Association of the Sioux Empire.

The median sales price on homes so far this year is $300,000 — a 32.4 percent increase from a median sales price of $226,600 at this time in 2020.

In 2020, the housing affordability index for Sioux Falls sat at 163. Now, it’s 97, which is well below the high of 250 in 2012. A value of 100 means that a family with the median income has exactly the income to qualify for a mortgage based on a 20-percent down payment on a median-priced home. An index higher than 100 means they have more than enough money.

All of this means that potential buyers are being priced out of the market or are being forced to make strategic choices on what they want in a home because of the rising expenses of homebuying in the Sioux Falls area created by a continued competitive market, appreciation and interest.

“Seeing that 33-year low isn’t a red flag not to buy a home but to strategize how to purchase a home and take a fresh look at what you’re looking for,” said Anne Ferrell, president of RASE. “People think they can time the market, but that’s like trying to time the stock market. Do what’s best for you and your family right now. Create a strategy, and go for it.”

The current market was created by a “perfect storm” of low interest rates during the pandemic, more affluent millennials coming into the market and baby boomers looking to downsize or buy multiple homes, Ferrell said.

“When you put all that together, you had quite the frenzy,” she said. “While prices might be higher than before, we’re starting to see some shifting and stabilizing.”

The affordability issue isn’t just with traditional homes but new construction as well.

The cost to build a “starter home” with four bedrooms and a finished basement would be $400,000, estimates Jon Beatch, president of the Home Builders Association of the Sioux Empire. And that’s on a less-expensive lot on the northern side of Sioux Falls, he added.

For a home that’s under 1,200 square feet that has a two-stall garage with an unfinished basement, it would still cost about $335,000 to build, he said. And it’s not just starter homes that are more expensive — there are about 40 homes over $1 million on the market in the Sioux Falls area, compared to 12 homes being sold in that range in 2018.

To help battle inflation, mortgage interest rates across the country reached 6.25 percent in September, which is the highest they’ve been since October 2008.

“Not only are houses more expensive than anyone has seen, but those interest rates are reducing your buying power,” Beatch said.

“Let’s say you borrowed a loan for a $600,000 home in 2020 when interest rates were 2.5 percent,” Beatch added. “At an interest rate of 6.5 percent, you can only borrow $375,000 to have the same mortgage payment as the $600,000 borrower. That’s going to slow the process of buying that new home.”

While high interest rates play a part in the increased costs of home, it’s also a combination of inflation, especially regarding supplies such as lumber, which is still 46 percent more expensive than pre-pandemic levels, increased cost of labor, the demand on tradesmen and the demand to build more homes within the market.

“It’s across the board. Everything is seeing an increase now,” Beatch said.

Houses in general are taking two to three months longer to complete because of the trades and supply shortages, which increases the price for a new home, he said. Compared with last year, the city is short about 90 new homes based on permits issued through August.

It’s evident that many people in the Sioux Falls area are choosing to forgo buying homes altogether or are waiting for the market to cool off for a few years.

In 2021, about 1,500 apartment units were built within the city. So far this year, there are 3,255 apartment units built or being built. The number of permits for new houses has declined over the past few years.

“I don’t know if it’s a changing lifestyle or what,” Beatch said. “There’s a lot of people moving into town settling into apartments before buying. … This market is still hot for sure, but we’re still building less single-family homes than before.”

Along that same vein, more people are choosing to remodel their homes instead of moving because of the current market.

“It doesn’t matter if you’re the guy building starter homes or million-dollar houses,” Beatch said. “The cost per square foot seems about $100 more expensive than three or four years ago.”

But that shouldn’t discourage potential homebuyers from entering the housing market, Ferrell said. While prices might be high now, it’s possible to refinance mortgages once the interest rates cool off.

Houses aren’t going to lose their value, either, Ferrell said. While there have been significant jumps in value over the past few years, those houses will continue to appreciate over time, whether that’s 15 percent in the current market or a range of 3 percent to 5 percent in a traditional market.

The difference is how those homebuyers will strategize, whether that’s looking for housing outside of Sioux Falls, buying a home in need of updating or cutting the number of rooms they’re looking for.

“Houses are going to appreciate because we still don’t have enough houses in this market,” Ferrell said. “We’re still going to see a demand for homeownership. There are still going to be buyers out there.”