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Rising mortgage rates exacerbate housing challenges across South Dakota

Mortgage rates have spiked more than three percentage points since the beginning of the year, increasing issues of affordability across the country. In South Dakota, the cost increases are making it even more difficult for municipalities to address workforce issues through housing development.

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Shown here is the roughly 8-acre piece of land where a Corsica home building company is seeking to bring a 22-lot housing development near the north side of Lake Mitchell.
Sam Fosness / Republic
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SIOUX FALLS, S.D. — As of Oct. 6, the average 30-year fixed mortgage rate in the United States has risen to 6.6%, a marked climb from the 3% or lower rates that had become the norm for consumers throughout 2020 and 2021.

For a house with a market price of $340,000 — the cutoff for the first-time homebuyer program in South Dakota — the rise means an increase in monthly payments of nearly $800.

“You had a number of people that were all excited, had been looking at houses, just never pulled the trigger, and maybe the right one didn't show up,” Tony Bachman, a realtor with expertise in Sioux Falls and the surrounding areas, told Forum News Service. “And now all of a sudden, they have to lower their expectations to keep the same payment.”

The rising cost of homebuying adds another layer to long-term trends that have put communities across South Dakota in a bind in addressing the intertwined issues of workforce and housing development.

“What I am hearing from some of our communities is that they cannot retain or even encourage people to come because the housing is not there,” said Lori Moen, the chief operating officer of GROW South Dakota, a non-profit focused on housing assistance and small business development statewide.

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Difficulties in developing supply make some municipalities get creative

In Mitchell, Geri Beck, head of the Mitchell Area Development Corporation, says delays in construction have hampered efforts by the city to build affordable housing and grow the workforce.

Beck works closely with Mitchell Area Housing Incorporated, a non-profit in the city that purchases less-expensive lots to build smaller, more affordable houses tailored to younger, single adults. To keep costs down, the organization decided to buy Governor’s Houses, which are produced on a larger scale in a way that can meet MAHI’s goal of building homes for under $250,000.

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Geri Beck, the Mitchell Area Chamber of Commerce and Mitchell Area Development Corporation Director, speaks during Dakota Wesleyan University's School of Business, Innovation and Leadership dedication ceremony on Thursday morning on DWU's campus. (Matt Gade / Republic)
Matt Gade

“When we ordered them during the first quarter of this year and, at that time, they said it was a year,” Beck said. “Everything has slowed down a bit for the same reasons that everybody has mentioned, increases in inflation and workforce and all those kinds of things, so they're saying now that those are three years out, which is just very discouraging.”

Another notable trend that continues to impact demand was the movement of people into South Dakota as work-from-home options went mainstream in 2020 and 2021. According to the 2021 National Movers Study from moving company United Van Lines, South Dakota was second in the nation for rate of inbound movement.

Among those moving into the state in 2021, more than half reported earnings of $100,000 or more. Jeremy Kahler, a realtor in Rapid City, saw firsthand the effect that those moving from higher-cost cities into the Black Hills had on the housing market.

“What we would think of as, ‘That house was overpriced, let's negotiate or maybe keep looking,’ they came in and went, ‘Oh my gosh, this is cheap,’ and they just go pay whatever price,” Kahler said. “So that had a huge effect, there was a while where we were seeing that push prices, especially stuff in the hills, extremely fast.”

While Moen says the rural communities she works with are not opposed to remote workers or seasonal inhabitants purchasing homes, these groups come with their own challenges.

“While they encourage the remote workers to come and travelers to come, they're also looking at long-term sustainability for their community, and how do we keep them here?” Moen said, adding that attracting people for local jobs and families that can populate local schools are top-of-mind in rural areas.

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These trends, which impact municipalities across the state to different degrees, have led to several creative approaches to housing development on the local level. In Chamberlain, the city is giving out free lots in the newly developed Smokey Groves neighborhood , on the condition that a house of at least 1,500 square feet is built on that land within one year.

“We did the math on it and figured out we could sell these lots or we could give them away,” Chamberlain’s City Administrator Mike Lauritsen said. “If you sell the lots, it slows down the process of building, and the lots look a lot more appealing if they're free.”

Advocates say more state help needed in buttressing development

When it passed during the legislative session earlier this year, House Bill 1033 , which made $200 million available for communities to purchase land and build housing infrastructure like storm sewers and sidewalks, was heralded as an important step by the state in helping to develop new housing.

However, $150 million of these grants and loans now sit in limbo, as the South Dakota Housing Development Authority waits for “ further clarification ” from the legislature in the rules governing the dispersal of these funds.

“It's sad because, with inflation going up and interest rates going up, everything's going to be more expensive than it is right now,” Beck said about the delay to the 2023 legislative session.

Lauritsen says the grant portion of the money, in particular, would greatly spur development in less populated areas.

“In rural communities, there's only so much debt service that we can support. So, if they put that money out as grants, it's really a tool in our toolbox,” Lauritsen said. “While another loan isn't necessarily something that can help a lot of small communities.”

On top of releasing infrastructure funding that can help underpin new housing developments, Moen thinks more work can be done in addressing needs for repair or rehabilitation in already-built housing. While the SDHDA already offers a rehabilitation grant , Moen sees an opportunity for expanding eligibility and funding to fast-track housing stock without the need for entirely new construction.

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“We need to be thinking about removing that risk of putting in all that cost into rehabilitating the house and not getting it back out because of the appraisal,” Moen said.

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Jason Harward is a Report for America corps reporter who writes about state politics in South Dakota. Contact him at 605-301-0496 or jharward@forumcomm.com.

Jason Harward covers South Dakota news for Forum News Service. Email him at jharward@forumcomm.com.
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