SIOUX FALLS — Average first-time homebuyers can expect to spend about two-fifths of their pre-tax income on a monthly payment for a house in South Dakota.
“This situation is unheard of,” said Dakota Institute CEO Jared McEntaffer.
He addressed the Governor’s Conference on Economic Development on Wednesday at the Sioux Falls Convention Center.
McEntaffer called home prices one of the biggest economic issues the state faces. His analysis highlighted the decoupling of housing costs from incomes, posing a challenge for attracting new workers.
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He said the median home listing price increased by an inflation-adjusted 26% from the second quarter of 2020 to the first quarter of 2024 in South Dakota, compared to a national average of 11%. The median listing price in South Dakota increased by $75,000 over that period, with the median home price in the state peaking in February 2023 at approximately $375,000.
The impact on potential homebuyers, especially first-timers, is profound.
McEntaffer said a buyer capable of putting down 3% on a median-priced home in 2017 would have faced a monthly mortgage payment of $1,270. By 2023, due to rising interest rates and home prices, that figure soared to $2,325; with private mortgage insurance and home insurance included, the total monthly cost climbs to $3,271. McEntaffer noted that housing can be more affordable in some rural communities.
Homebuyers earning the state’s median income can expect to spend about 43% of their monthly pre-tax income purchasing a median-priced house if they put 3% down. Even for those able to afford a 20% down payment, housing costs consume about 32% of their income.
McEntaffer said when additional expenses such as student loans and child care are considered, the total of those expenses and housing costs becomes worrisome.
“This is infeasible. This is not sustainable,” McEntaffer said.
He said some of the COVID-19 stimulus funds issued by the federal government were unnecessary for South Dakota, and they flowed into the housing market, which fueled the home-buying surge and exacerbated price increases.
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To weather these challenges, McEntaffer advocated for a two-pronged approach: ensuring that wages keep pace with inflation and increasing the construction of multifamily housing units.
However, he cautioned that resolving these problems will take time, partly due to the Federal Reserve’s cautious approach toward cutting interest rates, which would further exacerbate inflation.
“This is going to take years, many years — a decade,” he said.
McEntaffer also shared some positive news. He said employment since quarter one of 2014 is up nearly 11% in South Dakota, compared to about 7.3% in Minnesota and negative 3% in North Dakota.
McEntaffer added that while South Dakota has had one of the fastest-growing labor markets in the region, the state’s small population means Minnesota’s 7.3% growth equates to almost five times more jobs than South Dakota added.
South Dakota’s population has grown by 26% since 2001 to more than 900,000, compared to Minnesota’s 5.8 million people.
“We’re going to break a million soon,” McEntaffer said.
The slides from McEntaffer’s presentation:
McEntaffer Presentation DLR_GOED 2024 (4-10-2024).pptx
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