Big prices drive interest in small homes, but lot-size rules stand in the way

Rob Poeppel wants to build illegal houses.

Or at least they would be illegal if he hadn’t gotten a waiver from the Rapid City Council.

The 165 houses the Rapid City developer and real estate agent hopes to build and sell aren’t designed for drug dealers or meant to be used for otherwise unscrupulous activity, though.

The trouble is that they’re too small.

Minimum lot sizes

Minimum lot size requirements in residential developments in South Dakota’s 10 largest cities, listed in square feet, with lower numbers for areas deemed high-density residential and higher numbers representing standard residential zones:

*Denotes cities with “planned unit development” zoning designations, which allow for smaller-than-average lots and mixed use in new developments.

In Rapid City – like any larger city in South Dakota – developers are required to adhere to minimum lot size rules. Those rules make it all but impossible to build the kinds of starter homes that typified neighborhoods built in the years immediately after World War II.

Many of those older homes are between 600 to 800 square feet in size – larger than trendy “tiny homes” but about a third smaller than the smallest modern “starter homes” on the market today.

Poeppel and his wife, Jami, have sold dozens of those smaller, older homes to first-time homebuyers in Rapid City, where a hot housing market and high interest rates have made new homes unattainable for many younger buyers.

All the interest in those older homes left the Poeppels with a question.

“Why can’t we do this again?” Rob Poeppel said.

In early October, after months of planning and several showcases of a small model home built to prove the concept, the Poeppels got a tentative endorsement from the Rapid City Council to move forward and firm up their plans for a little-house neighborhood.

Poeppel still needs to finish and submit detailed neighborhood plans for review by the Planning Department before the work can proceed.

The homes, which would be fitted with solar panels, would sell for far less than the $200,000-plus floor price for the most affordable newer homes on the market in Rapid.

“Our goal is to be $150,000 to $180,000 per lot, all included,” said Poeppel, who said he already has a waiting list of buyers. “If they would say ‘go’ today, we could build them for that.”

The city council’s vote of confidence was a relief for the 52-year-old developer, who told South Dakota Searchlight he wants to spend his last years at work helping people escape high apartment rents and become homeowners.

It was also a surprise. In his experience, it’s difficult to convince authorities to step away from zoning norms as entrenched as minimum lot sizes.

“It feels good. I’m actually shocked,” Poeppel said. “It never would have passed last year, or even at any time in the past 10 years.”

Zoning norms beget conventional wisdom

The general thinking behind zoning rules, according to Rapid City Planning Director Vicki Fisher, is about orderly and safe development.

Fisher is a supporter of the Poeppels’ smaller home concept, she said, and of innovative approaches to housing in general. She toured a model home the couple had placed on the lot of a home destroyed by fire, and came away thinking it was small, but not unworkable.

“We like diversified housing within one neighborhood,” she said. “That truly forms that sense of community that keeps Rapid City special.”

But Fisher’s office oversees a baseline requirement that all single-family home lots be 6,500 square feet or more, one of many zoning standards in place for decades.

In that capacity, Fisher said the general zoning rules that Poeppel saw as barriers to his project are based on legitimate community needs.

Minimum lot sizes in areas zoned for single-family homes are often meant to make sure communities don’t get too dense for comfort, Fisher said, or too dense for cities to manage.

Cities also need to manage future growth, she said. Water and sewer plans tend to stretch decades into the future and are based on the number of people likely to live in a city. The number of homes, and people, living in a city is an extension of minimum lot size requirements.

Smaller lots could mean more people, which means a need for larger water and sewer lines.

“They size all of those things based on a formula that’s currently in place,” Fisher said.

There’s also parking to consider. Lots need to be large enough to accommodate at least one vehicle parked on the street, which is something the city and Poeppel will need to work through as plans are finalized.

There are ways to work a greater variety in housing into existing zoning standards without upending the goals of planners, and Fisher said the city is open to considering them.

On the other side of the state, Sioux Falls planners require lots to be 5,000 square feet – smaller than Rapid City and most cities in the surrounding area.

Lot size requirements place restrictions on developers, according to Jason Bieber, a planner for the city of Sioux Falls. But Bieber sees consumer expectations and developer norms as additional factors in modern home sizes.

Since 2014, Sioux Falls zoning rules have included a designation called “residential cluster planned development,” which essentially allows developers to build out neighborhoods as they see fit.

Smaller lot sizes for smaller homes, homes intermingling with apartments or space for small businesses are all acceptable under that designation, Bieber said, provided the developer appears with a feasible plan that meets safety and environmental standards.

“You can do pretty much anything within reason,” he said.

The city is also ahead of the market. Thus far, just one developer has tried to use the flexibility to design a neighborhood.

“Everybody wants to see that two- or three-car garage out front,” Bieber said.

But those larger houses are so expensive in light of inflation and high interest rates, he said, that young people who’d have bought a home 10 years ago are leasing one of the hundreds of rental units built each year in Sioux Falls.

According to a recent issue of the Dakota Institute’s “Dakota Outlook,” the median home price in South Dakota is $349,869. The median household income from 2017-2021 for South Dakota was $63,920 a year, according to the U.S. Census Bureau.

“Your first-time homebuyers are living in twin homes and apartments to save up money for that down payment,” Bieber said. “You can see all the apartments we’ve built, and they’re more than 90% occupied.”

Shift in thinking

The “build bigger” mindset is common, according to Daniel Herriges of Strong Towns, an organization based in the Twin Cities that advocates for less rigidity in city planning and more incremental, flexible development.

Even as people like Poeppel sell smaller homes and line up customers for new ones, generations of city dwellers, city planners and financiers have grown accustomed to the notion that small won’t sell.

Even with encouragement from planning departments for innovative approaches, Herriges said, multimillion-dollar investments in neighborhoods with unproven potential don’t have built-in support from loan officers and investors.

“Nobody wants to be first,” said Herriges, who edits the Strong Towns newsletter and was a recent guest of an urban planning conference in Sioux Falls.

But Herriges also sees zoning as more impactful to development in the long-term than cultural expectations. Plenty of apartments in Minneapolis are now built without parking, he said, and people still rent them.

Other cities have helped spur changes to neighborhoods with zoning updates, he said. In 1999, Houston lowered its minimum lot sizes from 5,000 square feet to 1,400 in some areas.

“What’s happened in the 20 years since then is that there are several neighborhoods of inner Houston, two or three miles outside of downtown, that have really dramatically redeveloped with skinny townhouses,” Herriges said. “It’s become kind of a hallmark Houston development form.”

A significant share of the zoning rules modern cities and residents take for granted – minimum lot sizes or parking space requirements, for example – were put in place without a great deal of forethought, he said.

Herriges said he’s not familiar with the specifics of the rules for any South Dakota cities, but said “the majority of zoning text in America was copy-pasted from one city to another.”

“I am sure there are cases where there are legitimate infrastructure concerns about, for example, the capacity of the water and sewer pipes,” Herriges said. “I’m not going to say that it’s never a real issue. But I usually encounter it raised as a red herring by opponents of development in the community.”

Next steps

Poeppel still has work to do to plan out his development and hit the regulatory marks needed to build in Rapid City, but he’s hopeful about the prospects.

He’s looking forward to connecting first-time homebuyers to property and building a neighborhood on the eastern edge of Rapid City in the Rapid Valley area. The homes will include covenants to ensure they cannot be used as rental properties, he said.

He also sees the neighborhood as a potential aid to other buyers. About 400 people came to an open house for his spec home, Poeppel said, and about a third were empty nesters with bedrooms to spare who were interested in downsizing.

That’s one reason Fisher, the Rapid City planner, is wishing the Poeppels well. If real estate agents sell a small home to a couple who’s moving out of a bigger one, she said, “that opens up that five-bedroom house to the young family that wants to move in.”

“I’m excited to see this one come forward,” Fisher said. “We’re making some fairly large concessions, and we’re doing so on an experimental basis, but I think we can do it.”