Manage Supply With Demand
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This month, we feature two of the most popular markets for GIANTS: Orange County, Calif., and Tampa, Fla. Although Orange County is only the 52nd largest single-family housing market in the country, 14 of the top 20 builders build in Orange County, which is a number exceeded only by Phoenix. Tampa is the 10th largest market in the country.
Featured Major Market: Tampa, Fla.
With more than 16,000 jobs created in the last year, an unemployment rate of only 3.8% and a median detached resale home price of only $147,000, demand for housing in the Tampa market should remain strong for many years to come. The question for builders, however, is whether or not the market is oversupplied.
The demand for housing in Tampa is no secret to home builders, who have recorded 20,519 single-family building permits in the last 12 months (Figure 1). Thirteen of the nation's top 20 GIANTS build in the Tampa metropolitan area.
But is there too much supply? With single-family construction at an all-time high, we believe the answer is "yes." However, we also believe the level of oversupply is so minimal that builders should continue to experience good times through the end of 2004 if they are building quality homes in the right locations and at the right prices.
Our outlook is based on the following analysis. Tampa's housing demand comes from job growth, which has slowed in the last four years, and population growth, which has remained strong and should continue to remain strong (Figure 2).
From 1993 through 2000, Tampa experienced phenomenal housing demand that could not be met by builders. Then, from 2001 through 2003, builders satisfied much of the pent-up demand from the 1990s. With assistance from declining mortgage rates, home prices doubled from 1993 through 2004.
Now, with 16,000 jobs created in the last 12 months, which is slightly more than 50% of total construction activity, and pent-up demand largely satisfied, Tampa's housing market is probably slightly oversupplied. As evidence of a very slight oversupply, the median home price declined slightly in the fourth quarter of last year.
Our advice: Let your consumers tell you where to buy land and what to build on it, and avoid the outskirts where new home competition is significant. A little consumer research can go a long way in a competitive environment.
Featured Up and Coming Market: Orange County, Calif.
With only 6,277 single-family permits and less than 3,000 multifamily permits issued in the last year, Orange County builders are constructing 63% fewer housing units than they did in the late 1980s (Figure 3). Clearly, this new lack of supply has contributed to the phenomenal home price appreciation that has occurred. Since the end of 1996, home prices have appreciated 148% to a median detached resale home price of $527,000. Orange County is the most expensive metropolitan housing market in the country.
While the 14 GIANTS who build in Orange County are not building too many homes, the percentage of the company balance sheet devoted to Orange County is fairly significant. Land prices frequently exceed $3 million per acre, and most builders have started urban infill divisions to pursue small opportunities throughout the county.
Lack of supply has driven prices to astronomical levels, yet low supply does not assure builders that price appreciation will continue or that current pricing even can be maintained. Almost all of the builders have established strategies for a price decline, and many have ventured into more affordable areas in adjacent counties to soften the blow of a price decline in Orange County.
With growth of 14,000 jobs per year, and an unemployment rate of only 3.5%, immediate price declines do not seem imminent. However, with 69% of the median household income needed to purchase the median-priced home, which is a comparable level to 1989, builders wonder just how much more expensive housing can get. Our advice: Monitor housing market conditions, especially days on the resale market, carefully, and keep your cash balances high.
John Burns, of John Burns Real Estate Consulting, publishes three free Building Market Intelligence e-mails each month: U.S., Local and Strategic. He helps real estate executives develop and execute strategic plans, conduct market research and maximize profitability.