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As economy expands, housing market struggles to recover

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With U.S. housing starts plunging 12 percent in June to a nine-month low while the economy continues to expand, there is clear evidence the housing market is on its own cycle. A review of the indicators points to this reality: Prices of publicly traded equities are high relative to earnings, unemployment rates hover near historic lows, and consumer confidence is strong.

The new housing market, however, is struggling just to sustain moderate levels of production nearly a decade after the last recession. The number of housing starts in the United States, including both single and multifamily housing units, has averaged about 1.5 million annually over the last 50 years. In the trough of the recession, this number plummeted to just over 500,000 and only recently approached 1.17 million units as of June. This trend also holds true in South Florida, where according to MetroStudy’s 1Q18 survey, annual starts decreased 1 percent to 7,962 from the annual starts rate observed in the first quarter of 2017. The survey includes, Miami-Dade, Broward, Palm Beach, Indian River, St. Lucie and Martin counties.

Miami-Dade and Broward saw the most significant year-over-year declines. Palm Beach saw a 22 percent year-over-year increase. This is why BTI Partners is bullish in that market, where we are currently developing Arbor Parc in Riviera Beach. The gated community will encompass 500 single-family lakefront homes and townhomes, which start in the high $200,000s..

Unfortunately, the overall downward trend of housing starts is coupled with continued population growth and creation of new households — with the latter projected to increase by as much as 1.8 million a year for the next several years. If the delivery of new supply fails to keep pace, there will be even more pressure on current housing inventories.

This prolonged reduction in starts and the resulting pressure on the existing housing stock has caused home values to skyrocket.

Prudent developers continue to build residential communities at this later stage of the economic cycle but are more selective in the markets in which they build. Texas, Florida and California accounted for approximately 35 percent of new housing permits in 2017. These markets, along with several other major Metropolitan Statistical Areas (MSAs) in the Sun Belt, are experiencing exceptional population and job growth — key fundamentals of housing demand. The millennial and baby-boomer generations account for about half of the U.S. population and are major consumers of housing, especially in the markets that provide the best employment opportunities and have relatively affordable product.

In Florida, there are a few markets that are experiencing strong growth, like Orlando and Tampa. But despite several years of sustained population increases in Tampa and Orlando, housing starts statewide are still below 2001 levels, and more housing will be needed to meet current and future demand. The availability of developable land is also making these markets attractive to numerous developers.

Other markets like South Florida, which historically has attracted the most domestic and foreign capital for large real estate developments and luxury condo high-rises, are slowing down in terms of housing starts. One reason is the shortage of developable land. Another reason: South Florida may start seeing an increase in the number of canceled or postponed condo projects, with development sites being sold to well-capitalized investors who will be able to carry land until the next cycle.

The current economic cycle may be nearing completion, but the housing market still needs to pick up the pace, especially in certain markets with strong fundamentals. Investors who understand this the best and have access to capital have a chance to do well, even if it is late in the game.

Noah Breakstone is managing principal of Fort Lauderdale-based BTI Partners, a real estate development and investment firm.

▪ This is an opinion piece written for Business Monday’s “My View” space in the Miami Herald. The views expressed do not necessarily reflect those of the newspaper.

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