South Dakota Housing Costs Rising Faster than the Nation’s

While decades-high inflation has impacted almost every sector of the US economy, its most apparent effects are reflected in housing markets. South Dakota is no exception to this national trend in increased housing prices. In fact, over the last several years the SD housing market outpaced national trends in housing prices before and after accounting for these record inflation levels. In nominal terms (i.e. before accounting for inflation), the SD median home listing price soared 26.8% year-over-year from Q3 2021, compared to 13.9% at the national level. Adjusting for inflation figures, the SD housing market remained above national trends – growth of 17.1% in SD home listing prices compared to 6.4% at the national level, over the same period.

South Dakota and US Housing Costs

Inflation Adjusted Median List Price

Higher listing prices likely underestimate the reality of prices growth in the market though. Available housing data reports only initial listing prices and not final sale prices of properties. Given that new home listings in SD increased 1.7% year-over-year, but declined 5.2% from Q2 2022 to Q3 2022 while listing prices continued to increase (3.8%), illustrate the demand for housing in SD far outpaced supply. This shortage in the SD housing market likely resulted in bidding wars where the successful strategy hinges on an offering price significantly higher than the initial listing price.

Pandemic induced effects (e.g. increased need for housing space, increased remote work, etc.), fewer properties available, and increased prices in SD housing provided significant leverage to sellers in the market. To provide some relief to potential homebuyers, the state of SD authorized significant increases in construction permits beginning in 2020. Year-over-year increases in the number of building permits issued from 2020 and 2021 were 48.1% and 15.6%, respectively. Further yet, new, privately-owned housing units authorized in 2022 grew 60.5% from their Q2 2021 numbers. While the national level also saw a general increase in construction permits authorized (year-over-year 1.8% since Q2 2021), SD figures soared beyond national construction activity. As prices persisted, the Federal Reserve took a more aggressive approach to “correct” the current national housing market situation – sharply higher mortgage rates.

While the Fed does not directly control mortgage rates, or the cost of financing home, they do control the Federal Funds Rate, which indirectly influences mortgage rates. The average 30-year fixed mortgage rate achieved 6.7% at the end of Q3 2022, twice as high as the 2.96% average in 2021. As of writing, this same borrowing rate sits at 7.08%. The effects of this policy are twofold. The first, and immediate effect, is reduced affordability in monthly mortgage payments. The second, and longer-term effect, is reduced housing prices – as potential homebuyers evaluate financing costs associated with higher mortgage rates, the marginal homebuyer is driven out of the housing market. As demand falls, remaining sellers lose their high-priced leverage (i.e. seller’s market), and are required to negotiate lower prices with remaining buyers.

Housing Summary and Forecast

To illustrate the implications of significantly higher mortgage rates, focus on monthly costs – the average principal and interest payment on the median-priced home in SD, assuming a 20% down payment, increased 62.2% (47.0% in the US) in Q3 2022 year-over-year. To translate this further, the same median-priced house in SD (US) purchased in Q3 2022 instead of Q3 2021 would result in an increased principal and interest payment of $372 per month ($509 nationally). As the Fed is expected to increase and maintain high rates through the end of 2023, expect these figures to play a large role in purchasing real-estate in the next several years.

Overall while the national housing market has begun its “correction” as indicated by the Federal Reserve, expect the SD housing market to remain strong. Even as mortgage rates more than doubled throughout the first three quarters of 2022, year-over-year growth indicated that SD building permits issued continued to increase, new listings remained steady, and SD listing prices grew (3.8%) despite an opposing national trend (-1.6%) from Q2 to Q3 of 2022. While the supply-side of the housing market will adjust more slowly to increased financing costs, expect underlying demand to remain strong in the housing market. It appears that potential homebuyers are ready and waiting for homeownership opportunities in SD even in the face of declining affordability conditions.