Inventory and Affordability

MA: Keller Williams’ latest market report showed the national inventory in July was at about 4.7-months supply. That’s about 2 months below what is necessary for a balanced market. Experts say there needs to be more building in the lower end of the market to satisfy demand, but builders have largely shifted to working in the higher end, and indications are they won’t be able to return anytime soon because of labor costs, premium lot shortages, regulations, etc. What do you think needs to happen to get our housing inventory up, and what could be the ramifications if we don’t?

CH: I absolutely agree. A couple of weeks ago I was at this housing summit put on by Zelman & Associates in Boston. It was primarily attended by big national builders and analysts from the homebuilding sector. The conversations were all along those lines. I absolutely believe that there needs to be more inventory in the lower price ranges. And there is some truth to the builders’ talking about the cost of labor and the cost of materials.

I also believe builders moved to the high end because they could, and there’s demand for and bigger margins on that product. I do not fault them for building in nicer communities at a higher price point. They’re in the more desirable areas. Anyone running that business would do the same. Maybe now they’re realizing that there’s another market that they can capitalize on; however, there’s always a lag time. Sometimes it’s as much as 24 months or more before builders say, “Ok, this is what we’re going to do.” Then we see the effect of it. Just like, when we were in the downturn, building essentially stopped. Even after the market started to recover, it was a couple years before we saw any new home sales really start to impact the marketplace.

CA: Have builders’ decision to stay in the higher end of the market impacted the affordability crisis we’re having?

CH: I don’t know that that’s impacted the affordability issue. The affordability issue is supply and demand, and the builders were filling a gap for the demand that existed. So they weren’t the cause or the impetus of that. They were more the beneficiaries of it. When you have prices going up, whether it’s a new construction or a resale home, every time that there’s a percentage increase in price, that impacts the affordability index and some of the ability to purchase the home. Each percentage point knocks another buyer out. Yeah, there’s a limit, and at some point that affordability issue hurts the demand; and that’s when you see things start to soften up.

MA: What needs to happen for the market to solve the affordability problem?

CH: The economy is still such that people are able to buy homes, and while there have not been as many first-time buyers as we’d like, there’s still a strong contingent of them in the market. So, if we want to get bring back more affordable housing, a few things need to happen:

• One is we need interest rates to remain low – and they are extremely low right now. We’re hopeful that there’s not going to be a lot of change for that.
• Two, there definitely needs to be more inventory in the lower prices ranges. There’s still a pretty significant appreciation in the lower price point because demand is higher than supply. That impacts affordability. When there’s more supply, that balances the market better and slows appreciation, which helps with affordability.
• Another issue is student debt, which is pushing Millennials’ ability to buy and their decision to buy farther into the future. If there was something that could be done to alleviate some of that debt, I think you’d see more of that generation buying sooner.

MA: In Miami’s condo market, we have about a year’s supply on the market right now and there’s something like 20,000 units set to become available over the next few years. Sales have been down for nearly a year. Prices are now dropping. I’m wondering, what’s going on in the market? Are we in a bubble? Is this going to be another downturn, at least in terms of that particular sector of the market?

CH: Probably Miami and Southport, more than any other part of the country, came back from the last downturn with a real vengeance. It was obviously a function of the amount of money that was flowing into the region, a lot of it being foreign investment. But it was amazing how quickly it happened. However, whenever you have a big swing like that, in either direction, the pendulum is eventually going to go the other way.

Miami’s housing market is on a bit of a rollercoaster. I truly believe there’s been overdevelopment. I’ve seen it happen so many times over the last 30 years, but our industry people tend to have very short memories. They don’t remember the last market that they were in. If they see things going well for two or three years, all of a sudden they forget that things don’t always go that way – and then they make decisions with that mindset. Some of it is just builders and investors being opportunistic, and that always happens. There’s nothing wrong with that. But I think we always have to understand that if things go up too high too fast, the market will, at some point always say, “Ok, this is not sustainable.”