How Housing Reform Cut Inflation In Minneapolis

Q: My wife and I have been saving for a down payment for a new home for quite some time. Now, mortgage rates are so high, we can’t afford any of the homes we had our eye on before. We should have bought before mortgage rates rose. What can be done to make housing more affordable? Keith, Winfield, NJ

A: Mortgage rates are much higher than they were in the recent past and that does certainly reduce how much you can pay when you buy a home. The Federal Reserve has been actively trying to tame inflation for some time. Since March 2022, the central bank has increased its benchmark interest rate more than 10 times. The most recent inflation numbers show that the Fed’s effort is bearing fruit because the US inflation rate is down to 3.2%. However, while the Fed plays a big role in influencing mortgage interest rates, there are other factors and steps that can be taken to lower inflation. Minneapolis is one city that has enacted zoning reform that have substantially lowered inflation.

The Minneapolis-St. Paul metro area’s inflation rate dropped below 2% in May of this year and by July, it had dropped to 1%, which is the lowest of all major metros in the U.S. Local housing reform was key to the dramatic reduction in inflation. Since housing accounts for a third of the overall consumer price index, higher mortgage rates and rising home prices have played a big role in the recent rise in inflation.

Back in 2018, Minneapolis eliminated single-family zoning in 70% of the city’s residential land which led to an explosion of new development and more dense housing units which is what current home buyers want and can actually afford. The additional housing supply helped lower housing cost growth—both for buyers and renters.

Minneapolis’ rent price growth since 2017 is only 1%. Throughout the rest of the US, rent growth was more than 30% over that same time period!

Other cities should study and where feasible replicate Minneapolis’ housing reforms to make housing more affordable to both renters and home buyers. Thanks for your question, Keith.

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