As the U.S. Federal Reserve raises interest rates to combat high inflation, our local real estate market has been impacted in several ways. Some shifts are less prevalent than others but are by no means less impactful. This blog highlights one of those changes that may have otherwise gone unnoticed. Successful agents like you know the importance of market research, particularly in times of market shifts. Join us on a journey of discovering a shift in the Twin Cities townhome market.

Beginning in March 2023, Minneapolis Area REALTORS® discovered that townhomes were comprising a larger share of closed sales than compared to their historical average. Over the past 20 years townhomes averaged 17.7 percent of monthly closed sales. In April of 2023, townhomes were 21.3 percent of all closed sales (Figure No.1). Townhomes haven’t made up this large a share of sales in over 15 years. The last few months have exceeded the upper limits of what’s considered normal for this segment of the market, shown as the dotted green line in Figure No. 1. At the same time, single family market share is shrinking, currently at 70.7 percent of April sales, lower than the average of 75.6 percent since 2003. Given this information, there’s reason to believe that buyers are showing some preference for townhomes compared to single family homes, at least in some cases. But it’s important to test this theory. So, we did what any good researchers would do and asked ourselves, “are there alternative explanations for this market shift”?

The growing share of townhomes could be reflecting a shift in buyer preferences that is unique to townhomes and not mirrored in segments of the single family market that share characteristics with townhomes. Initially, we might think that there’s a preference towards townhomes because there is less competition for buyers seeking that property type, but that is not the case. Both single family and townhomes have stood at roughly 1.5 month’s supply of inventory since the beginning of the year. We might also assume that single family homes with a similar square footage and price point to townhomes would mimic that increased demand, but that’s also not supported by the data. First, single family homes under 2,000 square feet aren’t outperforming their historic trends like townhomes. Second, the number of single family home sales priced under $250,000 has steadily declined in recent years, partly due to the fact that homes at that price are disappearing from our inventory. So, it’s clear that something unique is happening with townhome sales, but the exciting part of this discovery is understanding where this activity is occurring in the Twin Cities.

Looking at the share of townhomes in our urban core (Minneapolis & St. Paul), Figure No. 2 shows that there is no recent increase in the share of townhome sales. One reason that could explain this is that townhomes are relatively scarce in our core cities compared to the greater metro. Minneapolis & St. Paul predominantly have single family homes in less dense neighborhoods and condominiums in areas with the most density. But what may be surprising is that first-ring suburbs had the same anticipated performance relative to historical averages. As seen in Figure No. 3, the share of townhomes sold in the first-ring suburbs has increased since the start of the year, but hasn’t increased beyond our upper bound of expectations based on historic averages. It’s important to understand that this increased preference for townhomes isn’t happening everywhere, at least not in more fully developed residential areas. Part of the reason why we aren’t seeing this shift in the central cities is because they are, for the most part, fully developed and have been for quite some time. Newly constructed homes in cities adjacent to the core would require a lot of capital to redevelop a property lot (more likely many lots) from a single family home into townhomes. Economically, this wouldn’t make sense for developers to build homes at a noticeably lower price point than the single family units currently established in those neighborhoods, even if there is a net gain in the number of housing units on the plot. That’s before accounting for neighborhood resistance that’s become all too typical of densification efforts. And while demand for more affordable housing remains strong throughout the Twin Cities, the central cities lack the developable land to build townhomes and are faced with significant barriers to redevelopment. That’s pushed the development of this important product type a bit further out into the metro periphery.

There is a “sweet spot” of sorts where the public desire for more affordable townhomes within a reasonable distance to the metro’s center meets areas with room within their cities to build. The sudden rise in the share of townhome sales is happening in our second and third-ring suburbs. These outer ring suburbs feature a higher share of townhomes in their neighborhoods than in the urban core and those townhomes have comprised a higher share of closed sales since the start of the year. Normally, townhomes in these outer suburbs make up 17.7 percent of monthly sales (the same share as the overall Twin Cities). Yet only this portion of the metro has seen a surge in share of demand for townhomes. Figure No. 4 shows that townhomes were 21.3 percent of last month’s closed sales. This finding demonstrates that the outer suburbs are the location where townhome sales and market share is outperforming.

But why is this the case? Now, identifying the underlying trends—particularly changing consumer behavior—driving market activity is difficult, but existing research along with certain anecdotes can start to paint a picture. We already know about the greater likelihood of outer suburbs to develop because they’re communities are not fully built out. So, let’s look at the share of sales for newly constructed townhomes within these suburbs to see if the spike is evident there as well. Figure No. 5 shows sales of newly constructed townhomes compared to the whole new construction market. New townhome sales were 29.9 percent of the new construction market. The orange line clearly peaked in recent months to heights not seen in the outer suburbs since 2007. Meanwhile in the previously owned segment, townhomes are still seeing a small spike, but not to the extent seen in new construction. This suggests buyers are seeking out newly built townhomes in the outer suburbs.

Why? Maybe because these units are being sold at more affordable price points than newly built single family homes, or buyers are willing to make compromises in order to live in a home with few to no renovations needed, or it might simply reflect an increasing preference for the style of living a townhome provides—especially among baby boomers looking to downsize. As mentioned, some of this is speculation, but each of these dynamics are true to some extent. We’re also confident in saying that this shift is part of a long transition in favor of townhomes in the Twin Cities housing market. The share of townhomes listed on the market has steadily increased over the past five years, particularly for these outer suburbs. Figure No. 6 indicates that the share of townhomes listed has grown to 30.0 percent of monthly (new/active) listings while single family listings have slowly dipped to 68.1 percent. Keep this long-term trend in mind. Driven by an aging population, a mismatch between our current inventory and buyer preferences, a housing shortage and rising housing costs, we could be seeing the beginnings of a generational shift towards closer living.