With residential real estate finally back above pre-recession levels, demand for new construction builds
By Susan Gosselin
Though it came neither fast nor easy, Kentucky’s residential real estate sector has recovered from the steep losses of the Great Recession, and the past two years is breaking new ground for sales, according to recent numbers by the Kentucky Association of Realtors.
After a record-breaking 2015, 2016 achieved the distinction of the highest number of total home sales ever recorded in the state, at 52,123. Prices are rising and days on the market are shrinking as inventory decreases.
It’s good news for Kentucky’s economy because residential real estate demand is an engine that drives major industries and services – white collar, blue collar, wholesale and retail – which in turn pump dollars into industries such as construction, materials, supplies, retail
Following the bust of the Great Recession, Kentucky’s real estate industry had nowhere to go but up. With a weak recovery, reluctant developers and federal banking reforms that made it tougher to qualify borrowers, the climb back was slow. Over the five-year period of 2012 to 2016, though, KAR reports home sales compared to a year earlier increased in 53 of those 60 months.
The total volume spend in 2016 on homes sold in Kentucky broke the $9 billion mark for the first time, at $9.17 billion, nearly a billion more than the $8.21 billion sold in 2015. June is always the top month for sales, and last June sales topped $1 billion for the month for the first time ever. In an indication of overall housing market momentum, November was the best month in terms of sales compared to a year earlier, with homes sold up 26.9 percent over November 2015.
As strong as 2016 sales numbers were, housing experts predict 2017 to get better. And so far they are right. For the first time ever, January home sales were above 3,000 units, and the median price was up 2.5 percent to $116,946 statewide.
Commonwealth Realtors and brokers saw brisk, increasingly rapid sales continue, especially in March.
“I’m very optimistic about 2017,” said Steve Stevens, CEO of the Kentucky Association Realtors. “I think we will break another record. Our population is going up. Our unemployment rate is going down. There’s been a little inflation on price but not too much. And demand is so high, we have officially moved into a sellers’ market. If we can continue to expand inventory, we’ll be on track for a great year.”
Brian Miller, executive VP for the Home Builders Association of Northern Kentucky, concurs, but points to several structural issues that need to be solved before the market can meet its full potential.
“We’re seeing a lot of demand out there for new housing. Millennials are coming on strong for home ownership, and there are not enough existing homes being sold to fill the need,” Miller said. “But financing is still really tight for new homebuilders, new lots are scarce, and regulatory burdens are high. Don’t forget, during the recession we had a lot of (home builders) who just quit or retired. The demand is up, but the industry is still trying to find its equilibrium,” he said.
Kentucky tracks national trends
Though it may yet have challenges ahead, Kentucky is, overall, keeping pace or even outstripping the national growth in home sales. According to figures released at the 2016 Realtors Conference, existing home sales ended the year at 5.4 million units sold across the U.S., a small increase from 2015, and the organization’s economists predict sales should grow to 5.5 million units in 2017, and 5.7 million in 2018.
That puts Kentucky’s recent record-breaking sales above national norms. With rising sales come rising home prices; however, they remain modest ones. The KAR reports home prices in the state increased to a median of $122,125 for the year, the highest annual median price recorded in the state, exceeding the record of $120,460 for 2015 by 1.4 percent. But even with these record-breaking price highs, homes in Kentucky are still astonishingly affordable compared to national standards, which show a national median home price of $221,500 for 2016.
In spite of these record-breaking numbers, Kentucky’s low inventory is hobbling the expansion of the real estate markets. The Kentucky Association of Realtors reports housing inventory across Kentucky was down 25 percent from 2015, with 4.6 months of inventory on hand to close out 2016, compared to 6.1 months in 2015. Days on market, which is used by the industry as a marker for consumer demand, fell 5.7 percent to 131.9 days in 2016. Kentucky’s larger cities like Lexington and Louisville are experiencing even tighter demand, with days on market down into the range of two to three months.
Though inventory is low, it’s important to remember that statistics can be deceiving, said Dave Parks, president elect of the Greater Louisville Association of Realtors and owner of Berkshire Hathaway Home Services/Parks & Weisberg Realtors.
“Inventory is low, that’s for certain. But it’s low because the market is cycling through houses much faster,” Parks said. “It could be that on any given month, or day, inventory is historically low. But the overall number of houses sold is high, which says we have more houses on the market than ever. More people are selling, and they are selling much faster.”
The pressure on inventory in new construction is particularly acute nationally. Given current population and economic growth trends, the National Association of Realtors estimates new housing starts should be in the range of 1.5 million to 1.6 million completions. Yet starts are currently stuck at near recessionary levels, at about half what it should be. And nationally, total housing inventory was at the lowest level since the NAR began tracking supply 18 years ago.
The struggle to build inventory
Market demand has rebounded well since the recession, Miller said. But the recession’s effects, even after eight years of expansion, are still felt acutely by Kentucky homebuilders.
“Right now, in our (Northern Kentucky) area, 65 percent of permits are for the biggest builders, like Drees (Homes) and Fischer (Homes). Before the recession, our small builders were each building 15 to 20 homes a year. Today, they are lucky to build five or six or seven.”
Financing is often the biggest reason small builders struggle, said Steve Cline, 2018 president-elect for the Kentucky Association of Realtors and a realtor for Berkshire Hathaway HomeServices Partners Realty in Bowling Green.
“Even the best, most creditworthy small builders are still experiencing financing issues,” Cline said. “The banks require them to have contracts on the homes before they break ground. Or if they do build spec homes, they give them financing for just two; then when they are finished and sold, they give them financing for the next two. When you consider that it takes three months to build a house, that means they can only get a handful of houses built every year.”
Miller said the high cost of developable land is another structural barrier to more building, especially for first-time buyers who may want a new home.
“It’s hard for a developer to find land that’s affordable, and when you do have the lots, everything costs more; the materials cost more, and labor is hard to find and costs more. It makes it very, very hard for builders to create a competitively priced home for the first-time buyer.”
Parks concurred, noting that many cities, like Louisville, have infrastructure issues that are creating barriers to expansion. Developers not only have to find land that is flat and properly zoned, he said, but has the sewer and roadway capacity to handle a new development. Once development costs are factored in, a builder’s lot could run $45,000 … or much, much more. Land costs are hemming builders into building bigger, more profitable homes on those lots to make up for the extra up-front expenses, Parks said.
Next generation of buyers
Fortunately for the real estate industry, interest rates are likely to stay relatively low. The March meeting of the Federal Reserve produced a quarter-point rate hike, from 0.75 percent to 1 percent. Further increases are expected later this year, but rates remain far, far below historic norms. According to the economists at the National Association of Realtors, rates are likely to stay reasonable. They forecast mortgage rates to rise in 2017 to 4.1 percent, then rising to 4.5 percent soon after, which is still in historically low territory.
The difference they are seeing in buyers today, however, is that many of them don’t want to repeat the mistakes that led up to the Great Recession, namely, buying too large a home, financing without a significant down-payment, and using home equity loans to pay for other needs.
“There’s a market for every category, of course,” Stevens said. “But in general, buyers just aren’t that interested in buying or building those large, 5,000-s.f. homes anymore. The market is softer for homes over $500,000. That said, we’re seeing a big interest in entry level homes in the $150-250,000 range for first-time home buyers, and we’re seeing a big interest in those ‘move-up’ homes in the $250,000 to $400,000 range.”
Homebuilders in Northern Kentucky, Miller said, are seeing the most sales among homes in the $300,000 to $400,000 range. However, he has hope some of the structural issues making it difficult for builders to build entry-level homes will be lessened under Republican political leadership.
“Right-to-work legislation and prevailing wage laws make it easier for our industry to manage our labor. But it will also be a boon to development for the region as a whole as more companies see how affordable it is to do business here (in Kentucky). We’re already starting to see the expansions planned at Toyota and Amazon in our area, and we expect to see a lot more,” Miller said. “If banking regulations are relaxed in the future that means financing will be easier to get for our builders, and it will be easier for them to build more properties. We think there is a better equilibrium ahead, between consumer protection and ease of financing. So even though there are headwinds in our industry, we’re hopeful about our future.”
Multiple offers above asking price
All the realtors contacted for this story agreed that homes in a desirable location and priced for those two bottom tiers are not only selling quickly but often getting multiple offers at or above their asking price.
According to the National Association of Realtors, a big part of the boost in home sales is due to the millennial generation getting old enough to settle into home buying. For the third straight year, the largest group of recent buyers were millennials, who comprised 35 percent of all buyers – beating out Generation X, at 26 percent; Boomers, at 31 percent; and the silent generation, at 9 percent. This generation, which has been billed as serial renters who want to stay in the city, is showing in NAR surveys that a majority want to own a home and are willing to consider suburban areas.
And the smaller homes millennials are looking for are often the same kind of homes that downsizing boomers and Gen Xers are looking for, as well.
“People today in every demographic are looking for a smaller footprint for their houses, and nicer, high-end finishes,” Parks said. “You’re seeing a lot more people interested in neighborhoods like Norton Commons here in Louisville, where the community takes care of the mowing, and you can walk to restaurants, and there’s a YMCA and doctor’s offices right in the neighborhood.
“And because inventory is down overall, we’re seeing a lot more people who are interested in taking an old house, gutting it and making it like new again. That’s given rise to the popularity of old, centrally located neighborhoods like Crescent Hill and Germantown in Louisville.
“But, really, we’re expecting demand to increase in the whole area, because these new (Ohio River) bridges are a really big deal. We have more commercial land, pad ready, than any place in the country. We’re poised for amazing things,” Parks said.
In his position at the KAR, Stevens has his hand on Kentucky’s real estate statistics every day. He says he feels great about where the future is headed in the state.
“Overall, it’s a great market in Kentucky, especially in our major cities, and the next tier cities down. In smaller towns in Eastern and Western Kentucky, it’s not quite the boom it is in other places. But I think there’s one important indicator that really sums it up: There were 1,100 new people signing up to be realtors statewide last year, and over 10,000 who have made the effort to be in our association. That says to me that people see an opportunity in real estate in Kentucky. I do, too.” ■
Susan Gosselin is a correspondent for The Lane Report. She can be reached at [email protected]
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