Higher interest rates typically slow down a hot housing market. But in Sioux Falls and Rapid City, those factors are not affecting the market yet.
Since last April, the median sale price of a house in Sioux Falls has gone up by almost 28% — to more than $290,000.
Amid that market, Kyle and Ashley Brooks have now achieved their goal — to sell their townhome and build a new house.
Kyle Brooks knew the move would be stressful.
“It was a pretty complex process. We just closed and got everything moved in. Yeah, so I'm definitely happy it's over.”
While the two anticipated that looming deadlines would cause a headache, the rise in interest rates has amplified the pressure.
“I remember a couple of credit unions saying, ‘I don't think we'll get to 4 percent until December,’ and I was like, ‘From what I'm understanding, in terms of the research I'm doing, I don't believe that's the case.’”
Brooks was right.
So in March, they locked in on a mortgage at 3.8% during a rate drop.
By April, average monthly mortgage rates were more than 5%. And the Federal Reserve recently raised interest rates by 0.75%.
The Fed is using interest rate hikes to combat inflation.
That makes buying things on credit more expensive. As a result, people typically buy less and the supply catches up to the demand. That helps slow inflation.
However, in Rapid City and Sioux Falls, home prices have continued to climb to new records and housing supply has remained low.
Joe Santos is a macroeconomist at South Dakota State University. He says rising interest rates typically do lower demand for homes, and in turn, lower prices.
“But then when you add in all these other factors that are not equal — like low inventories and maybe zoning issues that do not permit growth — when you add those in, those create upward pressures on prices,” says Santos.
There are different market pressures from city to city. Stuart Martin is president of the Black Hills Association of Realtors. He says zoning is the biggest issue for the Black Hills housing market.
“The problem that we're currently seeing, and really, what we've been seeing for the last few years, is the lack of available lots to build on,” says Martin. “Which, that has increased the price of the lots, which in turn, increases the price of the purchaser's house."
Martin says continuing shortages and supply chain issues are also taking their toll on developers and contractors.
“Back in the day, you could build a house in 60 to 90 days. And now, we're looking at 180 – six months to seven months to get houses built because you can't do windows for 26 weeks, or you can't get cabinets.”
Those supply chain issues are part of the job for Zak Fick. He’s a supervisor with Paul Fick custom homes in Sioux Falls. He says delays in construction materials are just one factor that prevents the supply of homes from catching up with demand.
“We had 12-inch soffit that we were looking for, and luckily, just this morning we were able to find some on previous jobs and bring it over to the job we need. But then we're running around town to other houses that we have leftovers at just to survive another house.”
Population growth is another factor for parts of the state.
Lincoln County, just south of Sioux Falls, gained more than 20,000 residents from 2010 to 2020 — a 45% increase, which is the largest of any county in the state.
Sioux Falls is growing so fast, some experts say it’s time for the city to consider zoning some areas to include more multi-family housing.
Brittany McKnight teaches law and real estate at South Dakota State University. She says that potential change should not concern homeowners in those parts of the city.
“I've looked at studies, I've researched this. And as far as property values are concerned, there is no evidence that having an apartment near your home decreases your property value — that's a really common misconception.”
Some potential home buyers are already priced out of the Rapid City and Sioux Falls housing markets. As a result, nearly all of the new housing development will continue to happen in rural areas on the outskirts of South Dakota’s two largest cities.
