Florida Realtors economist: Cocktail parties – remember those? Once someone finds out you’re a Realtor, the conversation often turns to the current market. Here are suggested responses to a common question you’ll likely be asked at your next cocktail – or Zoom – party.
ORLANDO, Fla – Though it may be a distant memory, cocktail parties were once a staple of every professional’s social calendar. Since signs point to the return of these enjoyable networking opportunities very soon, dust off your fancy shoes and attire – you know, the stuff other than your yoga pants and slippers – and come up with a response to the question you will likely get asked as the best Realtor at the party.
Party guest question: Why can’t I find a house to buy? Seems really tough out there!
Your response: It’s the hold period, new construction and interest rates.
According to the 2020 Profile of Home Buyers and Sellers from the National Association of Realtors® (NAR), the hold period of the home – the amount of time a buyer expects to stay in the home they just purchased – has been shifting in recent years. Today’s homeowners typically live in their homes for longer periods of time than in the past.
According to NAR’s study, in recent years, the typical hold period of a home in the U.S. – which historically has been six to seven years – expanded to 10 years and it remained at this historic high in 2020. In Florida, the median hold period is only slightly less (9 years).
With people holding onto their properties several years longer than they previously did, there is less “churn” in the market, meaning, there are fewer existing homes going onto the market. This has a significant impact on the amount of available inventory for first-time homebuyers.
At the national level, there are more real estate agents working in the U.S. housing market than the number of homes for sale. At the end of February 2021, the U.S. had 1.03 million homes for sale, down 29.5% from a year earlier and the lowest on record going back to 1982, according to NAR. In Florida, inventory across all property types was 73,434, down 47.2% year-over year.
The obvious solution for a lack of homes going onto the market? New homes supplied by builders. But with output of new construction homes lagging behind delivery prior to the Great Financial Crisis, inventory continues to be limited here too. Since new construction has been relatively muted this cycle, it hasn’t helped offset the lower inventory of existing homes.
This wasn’t the case during the last cycle. During the 2000s, the supply spigot was wide open, and houses were going up at a breakneck pace. Normally a deluge of supply would drive prices down, as there is more on the market then there are buyers. But that wasn’t a normal time. Speculative buying, fueled in part by very lose lending practices, created an artificially high level of demand. The rampant demand quickly shut off as lending practices tightened, cheap money was elusive and people who lost their homes were now unable to qualify for new mortgages. With a smaller buying pool, there was a glut of market inventory from all that construction. Couple that with the wave of distressed properties that came on the market, and there was a lot of housing available.
This cycle, there hasn’t been nearly the same level of construction. Many builders didn’t survive the crash, and those who did were much more conservative. Some of this more muted approach is due to prudent investing decisions, but a lot of it is more practical: There is less land available, more regulations and less skilled labor.
Florida is also coming to terms with its age and history of rampant development – there are less wide-open spaces now than there were historically, so the pace may never be what it was before. This low supply creates a lot of competition among buyers for available homes.
Interest rates have been hitting historic lows over the past 12 months, and while they are expected to go back up going forward, we’re still dealing with a very low cost of borrowing money. That has fueled a lot of people getting into the market to take advantage of these low rates, which is great, right? Yes – for today. But there is a dark cloud on the horizon.
If you purchased or refinanced your home recently and are enjoying an enviably low interest rate, you have strong purchasing power and the cost to carry that debt is low. But what happens in 10 years when you want to trade up to a new property? All of a sudden you’re in a different interest rate environment, which likely will not be as low as it is today. You will lose the rate you are currently enjoying today, which may dampen your desire to make the deal. As a result, you’ll consider renovating your existing home and make it work longer, rather than take on more expensive debt.
Of course, this scenario would not work for or apply to everyone, but many economists are concerned about the unintended consequences the current low interest rate environment will have on the future market. There will likely be a lower supply of existing homes on the market, which will crunch inventory even more.
So, there you have it – the quick (and easy?) explanation you can give your friends and colleagues when they ask you about why they can’t find a house to buy.
Jennifer Quinn is a Florida Realtors economist and Director of Economic Development
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