Supply Controls 2022

It is unarguable that the residential real estate market was on fire in 2021. Florida’s market saw scorching activity with median home value rising by almost 20% according to Florida Realtors, three of its cities, Tampa, Orlando, and Jacksonville, have been identified by Zillow as members of its 10 hottest markets for 2022, and it ranked as one of the top five inbound moving states in the country according to United Van Lines 45^th Annual Movers Study. Central Florida, specifically, saw record performance, a 40% increase in sales volume year-over-year, a 20% increase in transaction activity, and an almost 17% increase in median home value (see Schmidt Report). These combined elements would surely be an indicator to a continued soaring in 2022. Or will they?  

The Inventory & Value Conundrum                          

In the context of residential real estate over the past few years, supply, demand, and pricing principals are easy to understand. We have a surplus of buyers with very little product to sell. Accordingly, prices are quickly rising. In June 2021, Rosen Consulting Group published for the National Association of Realtors a report outlining the social and economic benefits of building more housing. The principal finding was the U.S. undersupply of housing has led to a once in a generation problem with housing affordability. We are so behind in new construction, +/- 5.5 million units, lack of available inventory is a seemingly insurmountable problem. Accounting for current projected absorption, the U.S. would need to produce between 500,000 and 700,000 additional units annually above the current 1.5-million-unit annual average to reach a +/- 2-million-unit production pace and sustain that production for the next 10 years in order to reach an equilibrium state. Coupled with ongoing COVID-19 fears, resale inventory has taken an equally significant hit as many homeowners who would be in the upsizing or downsizing market are simply remaining on the sidelines until they feel comfortable allowing members of the public in their home.   

Being Priced in or out of the Market?

As mentioned previously and largely spurred by national political turmoil, Florida, Central Florida in particular, has garnered a position as a top moving destination, which, for our local housing markets, only exacerbates this inventory and value issue. Central Florida is down to only a single month of inventory. Within areas of extreme demand such as Winter Garden and Lake Nona, there exists only two or three weeks of available inventory. The associated value surge to this inventory crunch is pricing many out of the market on both the buying and selling front. Unless moving out of market, many homeowners simply do not possess either the equity or income to move.

Buyers also are reaching a tipping point of their own. In many areas, the median value is approaching inaccessibility to a conventional borrower and many are relying upon extremely high loan-to-value lending products pushing the ceiling of pricing limits with FHA loans and other low down payment options. Further, the Federal Housing Finance Agency (FHFA) raised its 2022 conforming limit by almost $100,000, the largest increase in its history, to $647,200, opening the mortgage backed security market to continued upward value and exposure to a larger segment of the market.

The Effects on Daily Business

All of these elements collectively have pushed the brokerage. Already a highly competitive business, the absence of inventory has cause multiple offer scenarios to become commonplace, waiver of appraisal contingencies normal, and above asking price purchases a part of daily life. Practitioner relationships within the industry are being stressed due to complex and tense transactions, practitioner relationships with clients are being stressed due to illogical market activity, and practitioner mental health is being stressed trying to manage unrealistic expectations from all fronts. So, what is to come of all of this?

We have not yet reached the tipping point, though 2022 may very well see its appearance or signals thereof. As the Federal Reserve begins its announced tightening and tapering policy into the end of Q1 and into Q2, the combination of increasing rates and slowing asset purchases coupled with current all-time-high valuation according to the Case Shiller National Home Price Index, we may very well see macro responses in the economy that force valuations downward across all asset classes, real estate included. Adjusted for inflation using the Federal Reserve Housing in U.S. City Average CPI, this index places current national inflation adjusted home prices above their position immediately prior to the 2008 financial and housing crisis. Alarming as this data point may be, it does not mean that we are headed towards a collapse of the real estate market as we experienced in the past.

Indices tend to show us big picture information but may neglect to include more nuanced data. Considering current mortgage interest rates, despite value at all-time highs, the nominal affordability of mortgage loans is comparably low if we are making a 2008 comparison. When mortgage rates peaked in late 2007 (+/-6.7%), a fixed $1,500 principal and interest payment would afford you a $232,000 loan. Today, that same payment at today’s rate, +/-3.1%, affords you a $351,000 loan. To match that loan amount at the higher rate, a payment would need to be increased to over $2,200. Today, that $2,200 payment will garner a loan exceeding $530,000. It is simply an apples to oranges comparison. Low rates have been an additional factor when considering surging demand. The stresses affordability tends to manifest are within segments the low to middle segments of the market. This is where our construction and resale gaps are most affected.

It is easy for us to become stuck in the context of the moment, but when we back up and look at where we are in an historic mortgage position, we are not in as bad a shape as some may believe. 

Optics and Outlook

To alleviate the general market’s affordability challenges, we must add low to meddle segment inventory, full stop. The lowest-hanging-fruit option is an increase in existing home sales. This is a challenging proposition from two fronts. First, sellers must feel comfortable with their market options and second, they must also feel comfortable with those who will be entering their home for showings. In some regard, the onus of messaging for the former is the obligation of the real estate practitioner. The latter messaging, unfortunately, has become the de facto responsibility of the government, though its provision of guidance is seemingly changing more rapidly than individuals and businesses are able to reasonably respond, a factor that may lead to more productive conversations addressing the latter concern.

On the new product front within the greater Central Florida area, we are beginning to see expansion in the outer rings of the region. For those consumers whose employers are in and around the handful of regional business hubs, the question will center around how far they are willing to travel for work and what type of employment will they be able to attain, in-person or remote.

Communication and messaging within the market is critical to the industry’s forward movement. Fear-based communication whether market related, health related, politically related, etc. will accomplish nothing but to foster apprehension, tension, and emotion. As brokers, we must clearly set differentiating expectations between what a person wants and what they need by providing all available information and rendering informed decisions rather than reactionary impulses. In a fast-paced market, it is easy for the client and practitioner alike to react rather than move with intent. If we are to effectively manage a chaotic environment, we must resist the urge to “go along to get along” and present our practice as balanced, informed, and intentional.

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