Residential construction has actually slowed. Permits for new single family homes have averaged just a 3,060-unit pace over the past 10 months, which is 25 percent below the pre-Ivan pace. Construction of apartments and townhouses has also been lacking. The net result has been a steep rise in the median price of existing homes, which have jumped 32 percent over the past year. While that pace will not likely be sustained, the lack of new residential development combined with the losses from Hurricane Dennis will likely put some additional pressure on existing home prices through the end of this year. Moreover, evacuees from Hurricane Katrina will create additional strains on the region's already tight housing market.
Fort Walton Beach-Crestview-Destin
Fort Walton Beach is enjoying some of the strongest job growth in the Panhandle. Nonfarm employment has increased 4.3% over the past year, reflecting double-digit gains in construction and robust growth in the tourism sector. The unemployment rate has fallen to just 3.0%. Population growth has ramped up considerably in recent years, with the region adding a total of 14,000 new residents and 5,500 new households.
All this growth has set off a wave of new residential development, with 7,000 new single- family homes built in the past five years and 2,500 new condominiums and apartments completed. Demand has been running slightly ahead of that pace, however, which has led to a sharp run-up in existing home prices. The median price of an existing home has surged 98 percent over the past five years, including a 38 percent rise in the last year. Sales of existing homes have slowed recently, however, as competition from new homes has increased.
Demand for condominiums along the coast may also be cooling off. Sales have surged in recent years, but appear to have been driven by a great deal of speculation. Seventy-one percent of the mortgages issued in 2004 were interest-only mortgages, up from less than 2 percent in 2001. Rising short-term interest rates have likely reduced the attractiveness of interest-only loans and also raise the carrying cost for speculators. With the economy slowing, some of these properties may come back on the market.
Supply Is Finally Beginning To Catch Up With Demand
While considerable constraints still exist in many markets, the supply of single-family homes is now moving back in line with demand. Permits for new single-family homes have soared 10.1% over the past year, to a record 190,000-unit annual rate. Construction of apartments, townhouses, and condominiums has also picked up, with 70,700 units currently under construction. We estimate that demand for new homes of all types will total 273,000 units this year, which is still slightly above the current build rate.
Demand for homes in Florida is being driven by continued strong in-migration, low mortgage rates, a growing trend of homeownership, an influx of buyers from overseas and strong demand for second homes and vacation properties. Demand has also been bolstered by replacement needs from last fall's four hurricanes.
Are these forces sustainable. Our analysis shows that most are, although the influence of all will likely diminish over the balance of the decade. After adding close to 400,000 residents in 2004 and 380,000 this year, population growth is expected to average 370,000 per year through the end of the decade. Mortgage rates are expected to remain relatively low, but should climb modestly over the next few years. Moreover, interest rates on adjustable rate mortgages have already increased, as have rates on interest-only loans.
The growing trend of homeownership is also likely to persist. Homeownership is largely tied to age. With the bulk of the baby boomers moving into their peak homeownership years, Florida's homeownership rate should continue to inch up through the end of the decade.
The strong demand for second homes and vacation properties from overseas buyers is also likely to remain strong for some time to come. The euro and British pound remain strong relative to the dollar, while U.S. property prices remain considerably lower than comparable properties in Europe. With economic growth slowing in Europe and the U.S., and housing values rising less rapidly in the U.K., demand may cool off slightly over the next few years.
Demand for second homes from U.S. home buyers will also likely cool off a bit. Rising short-term interest rates and slower economic growth will likely cause sales to pull back a bit. The demographic case for second homes, however, will remain strong through at least the end of the decade.
Barring any further storms, replacement demand should also diminish in coming years. The four hurricanes that hit Florida last year, along with hurricanes Dennis and Katrina, which impacted the panhandle and southern portion of the state this year, have left a considerable number of damaged homes around the state. Most of these homes will be repaired and re-occupied.
For all the talk about speculation being the primary driver behind current Florida's building boom, the data do not seem to support that contention. Miami and Fort Walton Beach are the only markets that have consistently had a large proportion of investment buyers. Investors, however, are clearly present in nearly every market throughout the state. Moreover, the absolute level of condominium construction still pales in comparison to the early 1970s boom, which occurred when the state's population was nearly two-thirds smaller than it is today.
Forecast
We expect Florida's housing markets to move into better balance in coming years. More land has been put into production around the state, which should allow single-family starts to rise to a record 195,000 units this year. Construction of condominiums, townhouses and apartments has also picked up, yet this year's expected total of 75,000 units is still only three-quarters the level reached back in the mid 1980s. Total residential construction should come close to meeting demand by the end of this year, which will slow the rate of housing price appreciation.
While supply is increasing, demand for homes is expected to cool off slightly. Overall sales will remain strong through the end of the decade, but the exceptionally strong demand that we have seen in recent years is expect to subside. Rising short-term interest rates and an increased supply of condominiums are expected to curb some of the investor demand for homes in the state. Sales of single-family homes will also be slowed by the rapid run-up in home prices, which has cut into affordability. Fourteen of the 20 Florida metropolitan areas that we have data for currently have a median home price above the national median of $210,500. Ten years ago, only three Florida areas had a median home price above the nation.
Higher home prices will not snuff out Florida's housing boom. Prices are still significantly lower in most Florida markets than they are in the Northeast United States, where many of Florida's in-migrants come from. In addition, several Florida markets, including Jacksonville, Ocala, Gainesville, and Pensacola still have housing costs well below the national median, while the Tampa/St. Petersburg area is essentially even with the national measure.
Demand will also remain strong, in our view. The weak dollar should continue to attract scores of buyers from Europe, and high commodity prices, stronger economic growth, and a strong Brazilian real will continue to stoke demand from Latin America. Interest rates are also expected to remain relatively low over the next few years, which will keep demand for second homes and vacation properties strong. Finally, demographics should remain favorable for Florida's housing markets through at least the end of the decade, with more people reaching their peak homeownership years and more retirees and working-age adults moving to the state.
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