From 2021 through 2024, the number of homes sold in the Twin Cities metropolitan area that were affordable to low- and moderate-income buyers dropped 61 percent. During the same time period, cash buyers captured an increasing share of such affordable homes. Looking at all single-family residential properties, regardless of affordability, investors’ share of the Twin Cities area market increased from 4.2 percent to 4.7 percent.¹

These findings, from an analysis to better understand the inventory of affordable homes, are part of the work that the Community Development and Engagement division at the Federal Reserve Bank of Minneapolis does to advance the economic well-being of low- and moderate-income households.

This analysis is informed by feedback from community development practitioners in our region. We frequently hear that home-buying conditions have deteriorated for low- and moderate-income home buyers. For example, we recently interviewed practitioners from community organizations in the Twin Cities area that serve such buyers. Several told us that the hardest part for their clients was finding—and successfully bidding on—a home. “It takes us about five months to get our clients into a home,” one of them said. “It has a lot less to do with the downpayment assistance or getting [their loan processed] than it does with just finding a property. We’ve got a huge lack of inventory.”

Our analysis uses data to examine how rapid changes in the housing market played out for low- and moderate-income households in the largest population center in the Ninth Federal Reserve District. The better we understand the effects of dynamics like these, the better we can pursue the Minneapolis Fed’s overall mission to pursue a growing economy and stable financial system that work for all of us.

Multiple factors decreased the number of for-sale homes that are affordable

Beginning in 2022, increases in mortgage rates and changes in the supply of homes for sale contributed to a steep decline in the number of for-sale homes that are affordable to households earning 80 percent of area median income (AMI) in the core, seven-county Twin Cities metro area. For our analysis, “affordable” means a household’s total housing costs would equal 28 percent or less of that income level. (See the appendix below for more on this.) Applying our affordability definition to property transaction and assessor data compiled by CoreLogic, we find that annual sales of such homes fluctuated between about 19,400 and 23,500 from 2012 to 2021. The number of affordable homes sold then dropped. It fell to 13,800 in 2022, 8,800 in 2023, and 9,300 in 2024. That’s a 61 percent decline over a three-year period. (See Figure 1.) The number of homes for sale overall also dropped. However, the decline in sales of affordable homes was more than four times the 14 percent decline in sales of homes priced above our affordability threshold.

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In 2022, households earning 80 percent of AMI could afford most homes costing $310,000 or less. In 2024, households at this income level could afford most homes costing $280,000 or less. We say “most” here because there is no single metro-wide or annual affordability threshold in our method. That’s because we incorporate property taxes, which vary according to city and county rate schedules, and consider mortgage rates on a monthly basis. (See the appendix below for more on this.)

Rising mortgage rates explain much of the decline in affordability. In January 2021, the average 30-year-fixed mortgage rate bottomed out at 2.65 percent. A year later, it began to climb steeply. By October 2023, the rate had reached a peak of 7.79 percent. It remained above 6 percent through the end of 2024.

The changes drastically lowered the price threshold for buyers who use financing to purchase a home. Based on AMI data from the U.S. Department of Housing and Urban Development, the hypothetical, moderate-income Twin Cities area household we use as the model for our analysis earned $97,800 in 2024. At a 2.7 percent interest rate, this household could afford a home priced at about $354,000 or less. At an interest rate of 6.5 percent, they could acquire a home priced at $265,000 or less. In 2024, this change in mortgage rates, holding everything else constant, would have decreased the number of affordable homes sold in the Twin Cities area by 51 percent.

Other market forces could counteract mortgage rate increases. For example, earnings could increase, raising the income of our model household. Also, home price increases could slow. Both of these things did occur as mortgage rates rose from 2021 through late 2023. But on balance, the income growth and the slowdown in home price appreciation weren’t enough to significantly counteract the increased cost of credit.

In the longer term, changes in income and housing price levels worked against affordability. From 2012 through 2024, home prices rose faster than income. On average, Twin Cities area home prices rose 38.6 percent during this period, while AMI rose 11.5 percent. (See Figure 2.)

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Finally, growth in other inputs to homeownership costs, such as property taxes and property insurance, also contributed to reduced affordability. According to county property tax records for the Twin Cities area, from 2012 through 2024 the median monthly property tax payment rose from $172 to $381. The average property insurance payment increased from $177 to $235.

Gauging competition from investors and cash buyers

Thus far, we’ve discussed the supply of affordable homes on the market, not the types of buyers who are purchasing them. Through our engagement work in the Ninth District, we often hear concerns that households with lower incomes lose out to other groups in bidding wars for affordable homes. These concerns typically mention two groups of buyers that are doing the outbidding: purchasers with a lot of cash and investors that will use single-family homes as long-term rentals.

Cash buyers generally have an edge over shoppers who use a mortgage. Cash sales close quickly. There’s less risk involved for the seller. Research has shown that sellers will generally choose cash offers even if they are lower than other offers, accepting a price 11 percent lower on average if the buyer uses cash.

Since 2021, cash buyers have acquired fewer homes in the Twin Cities metro area. But their share of affordable home purchases has simultaneously increased. (See Figure 3.) In 2023 and 2024, cash buyers bought 20 percent of higher-priced homes and 38 percent of affordable homes.

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Not all cash purchasers are high-income buyers or investors. Nationally, about one in five people buying their primary residence uses cash. Older households are far more likely to purchase a home with cash. While only 7 percent of purchases by households headed by people under 42 use all-cash, over half of home purchases by households headed by people 68 and older do. As the share of older households continues to rise, we expect a rising share of cash purchases.

In other words, while the data show that cash purchases have captured an increasing share of the region’s affordable homes, this information alone doesn’t capture the full story of who is behind those purchases. To supplement the analysis of cash purchases, we look to data from our newly updated Investor Ownership of Twin Cities Residential Properties dashboard.

This tool, which is built on a dataset that compiles tax and real estate information from county assessors’ offices, tracks the overall market share of investors in the Twin Cities area housing market. It shows that investors that own at least two properties in the Twin Cities area increased their ownership share of the market from 1.8 percent in 2006 to 3.9 percent in 2015. Through 2022, their share held fairly constant at around 4 percent of residential properties. It climbed to 4.6 percent in 2023 and 4.7 percent in 2024. The net increase from 2022 to 2024 represents more than 5,000 additional homes in their inventory.

The story of investor ownership varies considerably by neighborhood. On the one hand, investor ownership tends to be higher in lower-income neighborhoods. (See Figure 4). Investors own more than 10 percent of the single-family homes in many census tracts in North Minneapolis and the Frogtown area of St. Paul, for example.

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On the other hand, investors’ ownership share in such neighborhoods has generally been on the decline. (See Figure 5.) Neighborhoods with the largest share of investor ownership in 2019 tended to see declining rates of investor ownership even as investors increased their ownership share of homes metro-wide.

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Taken together, data on cash purchases and investor ownership suggest that lower-income households seeking to finance a home are seeing relatively greater competition from cash buyers and investors today than they were a few years ago.

Better times on the horizon, or choppier waters ahead?

Using our definition of affordability, the number of affordable homes purchased fell from 23,500 in 2021 to 9,300 in 2024, a decline of 61 percent. There aren’t many signs that moderate-income home buyers may find more options in the near future. Home prices are still going up. Other costs of ownership increased, too.

Community stakeholders’ concerns about the competition low- and moderate-income buyers face as they shop for lower-priced homes likely reflect the higher share of such homes captured by cash buyers and investors. On the one hand, the number of cash buyers has declined. On the other hand, their share of home purchases has increased.

Broader trends are likely playing a role, too. People are moving less. Many home-owning households feel “locked in” to their historically low mortgage rates. And fewer homes are being built. These trends reduce the number of homes on the market. 

Also, relatively low rent growth may have encouraged more renters to renew their leases instead of pursuing homeownership. Rising prices and mortgage rates could have discouraged still more would-be homeowners. This means that buyers with cash on hand, like wealthier owner-occupants or investors, are likely to represent a higher share of shoppers.

While the causes of today’s housing challenges are varied, one approach to address them is straightforward. Research generally shows that making it easier to build homes doesn’t just give shoppers more options. It also moderates price growth, keeping more of the existing housing stock affordable. That’s true in both the homeownership and rental markets.

Supply-boosting approaches are likely to succeed despite short-term market conditions. That’s especially important at a time when, as one loan counselor put it, “the low-income home-buying market has all the struggles you could think of. In this world right now, you almost have to show people that there is still an advantage to becoming a homeowner.”

Appendix: Defining a measure of affordability that tracks households in the market

Data on home sales and property tax payments are derived from the CoreLogic deed transfer and property assessor datasets. Our affordability calculations are based on a model buyer who earns 80 percent of the seven-county Twin Cities metropolitans area’s AMI for a household of four. This equaled $97,800 in 2024.² We chose this income level to line up with many public programs aimed at supporting homeownership for low- to moderate-income families. Our goal is to provide an indicator of housing market options for moderate-income shoppers with sufficient savings and good credit who are interested in purchasing a home.

Our affordability threshold is based on expected monthly homeownership costs for every home sold in the core, seven-county Twin Cities area. (Of the seven counties—Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, and Washington—we exclude Washington from the analysis for data-availability reasons.)

The largest part of these monthly costs consists of a principal and interest payment on a mortgage. To calculate the mortgage payment, we assume our “model” home buyer has access to a 3.5 percent downpayment.³ We also assume they qualify for an average-rate, 30-year fixed mortgage in the month the property sold.

Private mortgage insurance, property taxes, and property insurance make up the rest of the monthly homeownership costs. Assessed property taxes are observed for most homes. For homes with missing property tax values, we assume annual property taxes are equal to 1.5 percent of the home value. We calculate private mortgage insurance as 0.55 percent of the outstanding mortgage balance. The annual property insurance payment is set as 0.64 percent of the home value based on the average reported costs in the U.S. Census Bureau’s 2023 American Community Survey.

Mirroring the assumptions used by the Metropolitan Council, homes where this expected monthly cost is at or below 28 percent of the household’s monthly income are deemed affordable.

Endnotes