The Elephant in the Housing Market – Knox County VillageSoup
Housing affordability is a burning issue in Maine. Here in Midcoast the problem is acute and the rise in house prices has been extraordinary. The median sale price in Knox County for the first three months of 2022 is up 31% from a year ago. It wasn’t the highest in the state, far from it. Washington County’s median sale price increased 59%.
There are a multitude of causes, including interest rates, fiscal policy (eg PPP loans), labor shortages (due to Covid) and supply chain issues due to shutdowns pandemic. But I want to talk about the elephant in the room here in Midcoast, which is out-of-state buyers.
Housing markets go up and down, but generally go up over the long term. For those of us who remember the so-called Great Recession of 2008-2009 and the wild price hike a year or two before, this year’s market may seem familiar. In 2007, soaring house prices were fueled by low interest rates. The rise from 2005 to 2008 exceeded long-term income and GDP growth, and it is not surprising that the housing market needed several years of negative or flat growth to return to equilibrium with the income from the region.
What’s so different this time around is that the fall in interest rates has coincided with what can only be described as a big decoupling between work and where people might live. Offices closed indefinitely, white-collar government and service workers ‘stepping out’ as fears of a pandemic made cities uncomfortable for many.
What happened as a result was not so much mass migration as a massive expansion in household formation and the purchase of second homes. Many urban professionals, armed with high incomes and the sudden mobility to work anywhere, have focused on normal “trading” activity in places like Boston, New York and Washington D.C., to buy pits. bolts in small towns and rural areas. . It is estimated that approximately 30% of Maine buyers come from out of state. According to a recent article, 10% of Ogunquit residents have moved there in the past year alone. The figure for Orono is a remarkable 15%.
There is a lot of talk in coastal towns about the resulting accessibility crisis. New debates are taking place on Airbnb/Short Term Rentals, inclusive zoning, smaller lot sizes, land trusts, and any other ways cities can increase affordable housing. However, I want to be clear on one thing – no amount of tinkering with short-term rentals or minor zoning adjustments can make a difference while this tidal wave of out-of-state buyers continues.
Small towns with small inventories of homes for sale are simply overwhelmed, and the part-time nature of pandemic second home ownership means that populations are not growing and in fact large numbers of homes are vacant. It’s not really new. A study conducted by Rockland a few years ago identified over 500 vacant homes. A review of voters lists will show the same. At any time there is a large number of vacant homes.
I think the second home market will eventually cool down. Not so much because the overall housing market or the economy will cool down. Rather, I predict that as pandemic restrictions end and in-person work (in offices) resumes, urban professionals will return to commerce in large urban metros. These buyers will spend more time in the office, walk to work and generally enjoy city living and less time browsing Zillow for vacation homes. As their attention shifts, their shopping habits will also change.
If and when the surge of out-of-state buyers recedes to a more manageable level, we may see a bit more balance and better buying opportunities for locals. However, midpoint price levels can be “sticky”. For example, homes in the South Rockland neighborhood that were renovated during the pandemic years will remain renovated. Newly built houses will remain new houses. Thus, the “renovated stock” of housing in many coastal municipalities will settle at a higher price level than before the pandemic, in relative terms.
We’re going to see some market easing this year and next. The latest data shows that nationwide mortgage applications for buying a home in April fell 12% from a year ago, and building permits in Maine fell 17% over last year. I still don’t see many opportunities for first-time buyers as mortgage rates will continue to rise. Even if house prices drop 10%, payments will be 30-50% higher, so you’ll feel like you’re swimming against the tide.
As for local authorities, unfortunately they cannot do much about this distorted market. I think allowing more accessory units is the most effective affordability initiative for Midcoast communities because accessory units are affordable in nature both by sharing infrastructure (with the main house) and by being smaller. There are other strategies cities can try that will be covered in a future article.
Michael Mullins holds an MBA from the University of Chicago and a Masters in Real Estate Development from MIT. His company, Cranesport LLC is based in Camden and he lives in Rockland.
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