Despite Minnesotans’ tradition of high homeownership, Minnesota’s homeownership rate has actually declined during the current decade, both in absolute terms and relative to other states.
From 2000 to 2002, the Minnesota and total U.S. homeownership rate increased modestly. From 2002 to 2008, the rate of homeownership in Minnesota has fallen significantly, dropping by over four percent; over the same period, the U.S. homeownership rate has stayed relatively flat.
As defined by the U.S. Census Bureau, the homeownership rate is the percentage of occupied housing units that are occupied by the owner of the unit.
Minnesota’s homeownership has gone from 9.4 percent above the national average in 2002 to just 5.3 percent above in 2008. From 2002 to 2008, Minnesota’s rank among the fifty states in the rate of homeownership has gone from 2nd highest to 14th highest.
These findings are based on information [Exel file] from the U.S. Census Bureau. This information is based on annual surveys, not a complete analysis of all housing units. More accurate homeownership rate information will be available when data from the 2010 census becomes available.
Data from the Minnesota Department of Revenue indicates there has been a decline in the number of “homestead” (i.e., owner-occupied) properties in parts of the state. For example, in four of five largest cities in the state, the number of homesteads has declined over the course of the decade, despite relatively flat populations.*
The bursting of the housing bubble undoubtedly had an effect of the homeownership rate, but it does not explain why Minnesota’s homeownership rate has declined more rapidly than the U.S. average. There are at least three factors that could explain the more rapid decline in the homeownership rate in Minnesota.
First, Minnesota’s per capita personal income has declined by 8.3 percent above the U.S. average in 2002 to 7.0 percent above in 2008. Over the same period, Minnesota has gone from 14.6 percent above the national average in median household income to just 10.1 percent above. Of the two income measures, median household income is probably a better measure of income for the typical household because it is based on the median instead of the average and thus is not skewed by large income growth among the highest income households.
The rate of homeownership is strongly correlated with the level of income. As the income of Minnesota’s households declines relative to the U.S. average, it is not surprising that the state’s rate of homeownership would also decline.
Second, homeowner property taxes have shot up significantly since 2002. The increase was the result of (1) a large reduction in revenue that state government shares with local government since 2002, which compelled local government to rely more heavily on property taxes to pay for local services and infrastructure, and (2) changes to the property tax system enacted by the legislature in 2001. These changes gave significant property tax relief to all classes of property in 2002, but shifted a larger share of total property taxes on to homeowners in subsequent years. Both of these trends are described in a 2009 Minnesota 2020 report.
The property tax relief received by homeowners in 2002 has been entirely wiped out by subsequent property tax increases. Even after adjusting for inflation in government purchases, the average homestead property tax in Minnesota is over 30 percent higher in 2009 than it was in 2002, despite a decline in real per capita local government revenue. In aggregate, the homeowner property tax increases since 2002 are the result of changes in state policy.
Combined with the decline in household income, the increase in homeowner property taxes could make homeownership less attainable for some families, thereby contributing to the decline in Minnesota’s rate of homeownership.
A third factor that could explain the relative decline in the rate of homeownership was the property tax relief granted to residential rental properties since 2000. From 2000 to 2009, the tax on a homestead property increased nearly two to three times more rapidly than that of a comparably valued single unit rental property. By virtue of the homestead market value credit program, homeowners still enjoy some preferential tax treatment relative to single unit rental properties, although the difference in taxes between the two classes has decreased significantly since the beginning of the decade.
As the tax on rental properties decreases relative to that of owner-occupied properties, rental properties become more attractive as speculative investments. This in turn can result in a conversion of owner-occupied housing units into rental units and a decline in the homeownership rate.
In addition to a reduction in the rate of taxation on 1 to 3 unit rental properties, the legislature has allowed properties to receive preferential homestead property tax treatment if the property is occupied by a relative of the owner. For purposes of the “relative homestead” law, a “relative” includes a parent, stepparent, child, stepchild, grandparent, grandchild, brother, sister, uncle, aunt, nephew, or niece. The relationship may be by blood or marriage.
While there is no data on the impact of the “relative homestead” law, there is anecdotal evidence that it has contributed to the conversion of owner-occupied properties into non-owner occupied “relative homesteads,” particularly in neighborhoods adjacent to colleges and universities, as parents purchase housing units to be occupied by their college-age children and other renters. The conversion of a regular homestead to a “relative homestead” would reduce the homeownership rate, since the owner no longer occupies the unit.
The importance of homeownership as a means of improving individual households’ and society’s standard of living has long been recognized. An Urban Coalition report concluded “Homeownership provides important financial security and also contributes to family independence, security and self-dignity.”** The report further notes homeownership is associated with reduced crime rates, higher education levels, and increased wealth. In addition, common sense would suggest that owner-occupied properties are typically better maintained than rental properties.
It’s time for state policymakers to consider changes that will halt or at least slow the declining rate of homeownership in Minnesota.
*Of the five largest cities in the state (Bloomington, Duluth, Minneapolis, Saint Paul, and Rochester), only Rochester had an increase in the number of homestead properties from pay 2000 to pay 2009 based on data from the Minnesota Department of Revenue. (Rochester experienced significant population growth over this period.) The largest decline in the number of homesteads among these five cities was in Saint Paul, which saw a drop of 6.7 percent.
** “A Dream Deferred: The 50/30 Housing Research Initiative Final Report,” The Urban Coalition, p. v., July 1999.