Florida Real Estate’s Mortal Enemy: Excess Inventories
House prices have been continuously falling for the first time in 70 years, and South Florida homeowners should expect the trend to continue.
A surplus inventory of houses caused by Florida foreclosures and short sales is the mortal enemy of home prices. Lower prices are needed to sell off excess inventories of residential properties, and in turn lower prices encourage more inventories from anxious sellers.
So how big are excess inventories and how long will it take for the real estate market to absorb them?
According to Economic Consultant Gary Shilling, we are currently facing a surplus of up to 2.5 million excess house inventories in the United States, a number that is subject to rise with further foreclosures and falling home prices.
To forecast the length of time to work off this excess inventory and have the market return to more favorable inventory and price conditions, Shilling developed projections of supply and demand for residential units.
Household formation averaged about 900,000 per year over the past decade as measured by the Census Bureau. Shilling uses this number as a reasonable estimate of yearly housing demand. However, with many college students moving back with their parents after graduation, household formation is not happening as fast as it once did.
New construction of single family homes and apartment units is running about 700,000 per year, and about 300,000 U.S. homes are torn down, converted or removed from housing stock each year. Based on these numbers, Shilling calculates new housing supply to be about 400,000.
So if demand is averaging 900,000 per year, while new housing supply is averaging 400,000, about 500,000 of the excess housing inventory will be absorbed per year. This means it will take 4 or 5 years for the market to absorb the 2 million to 2.5 million excess inventories that Shilling believes exist at a minimum.
So what does this mean for South Florida homeowners?
- First, there is no quick fix to this mess. No amount of federal mandates can make up for the enormous excess inventory of houses in this country.
- Second, homeowners should not be surprised if home prices continue to fall. In fact, estimates still show that prices could fall at least another 20% to return to their long-run trends.
- Finally, the market will eventually correct itself. Inevitably, supply and demand will even out. As this happens, prices stabilize and in turn can begin to rise again.
Everyone wants to know if the end of the real estate crisis is coming soon. Based on these numbers, we still have a way to go. Whichever end of the real estate crisis you are on, the Offices of Oppenheim Law and Weston Title are here to help.
From The Trenches,