The differences between last decade’s housing bubble and today’s remarkable market are stark. The underlying fundamentals today are not only abundant, but they will also be with us for a long time.
PALM COAST, FL – July 19, 2021 –It is hard to forget that Flagler County went from being the fastest-growing county in the country to have the highest unemployment rate in the state when the local housing bubble burst in 2005-2006. The median price of Flagler County homes dropped 61% by 2011. Like my parents’ generation who lived through the Great Depression, those of us who lived here fifteen years ago (and particularly those who bought at the peak) are forever scarred by the event.
Today, half the homes listed on the local MLS are under contract in fewer than ten days. Half are selling at or above the original list price. Month to date, July home selling prices are 24.9% above one year ago. Less than 1% of our housing stock is for sale. Builders cannot keep up with demand. Once burned, twice shy, it is only natural that many are asking if we are in a housing bubble again? When will it end? How big will the crash be?
The differences between last decade’s housing bubble and today’s remarkable market are stark. The underlying fundamentals for today’s market are not only abundant, but they will also be with us for a long time.
1. Buyer Profile
The bubble buyers were dominated by speculators, many of whom were new to and unfamiliar with the real estate market. Their only exit strategy was to close on a property, then turn around and sell it to the person waiting eagerly in line behind them. They had no concept of the intrinsic value of their purchase. They were the real estate equivalent of day traders. The market was based on the unrealistic assumption of an ever-rising market. When the music stopped, all the chairs were gone. Fully leveraged, they found themselves immediately underwater and unable to sell.
Today’s buyers are end-users. They are buying homes to live in or to put into a rental program.
2. Credit Profile
The housing bubble was rife with easy credit. One could obtain a “stated income” loan simply by claiming a high income without verification. Such loans were called “liar loans.” In the frenzy, many became overextended, financing 100% of the purchase price, and got caught in the downturn with no equity.
Today’s mortgage market is not the same. While record-low mortgage interest rates allow homebuyers to purchase more house on a given income, the credit standards are quite strict. Down payment requirements create immediate equity.
3. Low inventory
According to a recent Wall Street Journal report, the U.S. housing market needs 5.5 million more units. “The U.S. built on average 276,000 fewer homes per year between 2001 and 2020 compared to the period between 1968 and 2000,” according to the report. The vacant short-sale and foreclosure homes left by the Great Recession provided a buffer for demand, but such properties are gone, leaving new construction as the only way to satisfy home buyer demand. With supply and labor shortages, extended entitlement and permitting processes, and diminishing availability of prime land to develop, this problem will not ease soon.
In markets across the country, the supply of housing units available for sale is at record lows. Flagler’s MLS typically lists between 800 -1,000 single-family homes for sale. The Covid pandemic put a chill on the market as potential buyers feared venturing out and sellers withdrew their listing or delayed a listing because of fear of strangers entering their homes.
The number of listed homes dropped steadily to only 180 homes in April 2021. Many believed that the shortage was due to a continuing lack of willing sellers. While that may have been true at the beginning of the economic shutdown, a shortage of willing sellers is not the problem. The number of new listings per month year to date is higher than the average over the past two years.
The problem is high demand. New listings are converted to pending sales in a matter of days rather than months. The number of listings has climbed back above 300, but the median Days on Market (DOM) remains below 10 days. More telling is the severe drop in expired listings which are down 58% this year vs the previous two years. Listings expire only when they do not sell.
The slowdown lasted less than two months. Demand was simply too strong, and people figured out how to stage virtual listings and handle virtual closings. June 2020 marked the first month that the median price of single-family homes in Flagler County reached $260,000. It has risen steadily since.
4. Population Migration
Migration from typically high-tax states began after the Trump tax cuts a few years ago. This stream of new residents to low-tax states in the south and west accelerated as people took notice that the low-tax states tended also to have fewer Covid-related hospitalizations and deaths, and fewer riots. Economic wellbeing, health, and safety are visceral. They are elemental on Maslow’s hierarchy of needs. People foremost need first to feel safe and secure. Suddenly, self-actualization took a back seat.
To many, Florida represents a shining example of how to handle the pandemic. The state has become the prime beneficiary of the exodus from the Washington-Boston corridor. Once population shifts of this genesis gain momentum, they become self-sustaining and unstoppable in the short term.
5. Remote Working
The Covid shutdown and the widespread access to broadband made many workers and their employers realize that expensive urban offices and long commutes are less necessary, allowing workers to live anywhere there is reliable connectivity. Why not live and work where the weather is nice and outdoor activities can be enjoyed year-round?
6. Retirement and Mortality
Covid caused many people to contemplate their mortality. Some are choosing to retire sooner. Some are taking jobs for less pay in locations where they can enjoy a better lifestyle. Some are choosing their retirement location and buying their future retirement home now.
7. Normal, Not Abnormal
Home prices have risen at an increasing rate over the past year. For the first six months, sales of Flagler single-family homes have grown 42.6% over the same period one year ago. Median prices increased 17.1%. Such increases are unsustainable in the long term, but they are not due to speculative buying. They are simply a response to real and fundamental market conditions. We are not in a housing bubble. We are simply rediscovering housing’s intrinsic market value after years of a subdued recovery from a very deep recession. From the peak of the bubble 15 years ago, today’s median selling price represents only a 1.5% annual growth rate, less than the inflation rate of 1.93% over the same period.
It is also likely that the increase in median price is at least partially due to a shift in the mix of sales toward the high end of the market (see #9 below).
At the peak of the bubble, homeowners’ equity was tapped out. New buyers had typically bought with little or no down payment while others had cashed in their equity with home equity loans. In either case, they were too exposed to the market downturn. Even a small decline in market value put them underwater, unable to sell. The pool of potential buyers and sellers shrank dramatically, and the market tanked.
Today, higher down payment requirements and higher personal savings rates provide homeowners a cushion. Even with mortgage forbearance, mortgage delinquencies are surprisingly low. With the real demand for housing undiminished, those who default on their mortgage will likely be able to sell, albeit via a possible short sale, before foreclosure.
9. Wealth Migration
When a demographic shift begins, money leads the way. Those with financial strength need not wait to sell their current home first to move. They can simply reach into their deep pockets. This is evidenced by the increased number of million-dollar homes selling.
Year to date, 47 Flagler County homes have been sold for more than $1M with a median DOM of 20 days. 26 of them were sold for cash. That compares to the 45 homes that were sold for more than $1M in the entire year of 2020 (DOM = 69) and 29 sold during 2019 (DOM = 109).
By any comparison, Flagler’s astounding housing market is incredibly strong. But even more astounding is that it is not unique. Many of the factors above are playing out to varying degrees across the country, even in rural areas and small cities in high-tax states. The market will cool. The growth rate will slow, but making up for a shortage of 5.5 million housing units will take a long time.