As Orlando’s hot housing market begins to cool, construction of new homes and apartments has slowed, which is bad news for the critically short supply of housing.
Nationally, single-family housing starts were down 10% in July from June, according to the Census Bureau. A survey from the National Association of HomeBuilders showed that more than half of U.S. builders believe market conditions for new construction are poor.
For the first three months of 2022, construction in metro Orlando was booming, fueled by unprecedented demand in the region and skyrocketing home prices. From January through March, permitting for both homes and multifamily housing was up 37% compared with the same time last year, according to Winter Park-based real estate analysts RCLCO.
But permits have been trending downward since April, when 30-year mortgage interest rates hit 5% for the first time in more than a decade. Rates have since risen above 6%, according to Freddie Mac.
Single-family permits from April through July were down 10% from the previous year. Multifamily permitting dropped 80% in July year-over-year, RCLCO reported.
Higher interest rates are a double whammy on the market. They increase the cost of capital for builders and drive down demand for homes, said Ken H. Johnson, real estate economist at Florida Atlantic University.
“Builders are loathe to put product in the ground … because they don’t think the buyers are going to be there,” he said.
Orlando’s housing market, with home prices rising more than 50% in two years, has felt the drop in demand. The median home price, which rose uninterrupted for 18 months straight to a record $387,000, fell in July and August, according to the Orlando Regional Realtor Association.
“We’re at the end of that double-digit appreciation,” Johnson said.
However, Johnson says home and rent prices will remain high as long as construction lags behind the number of people moving to the area. The Census estimates Orlando’s population will grow by 22% over the next decade.
“That number work out into a need for 20,491 units per year,” Johnson said. With an average of about 6,500 new units annually for the past 11 years, “You’re roughly 14,000 units per year short.”
Experts aren’t predicting that the hot housing market will end in a crash that drops home prices dramatically like what happened during the Great Recession of 2008.
“Without the crash, the pain for Orlando … is going to be this long period of unaffordable housing. It’s like the sore that just won’t heal,” Johnson said.
Johnson says developers and cities should be thinking about adding more apartments.
“If we catch up in the construction of multifamily units, you’ll see rent prices come down,” he said. “It’s a way to let the air out of the balloon slowly.”
Rents in Orlando have also spiked this year to an average of nearly $2,000 for a one-bedroom apartment, up 44% from the start of the pandemic, according to rent tracker Zumper.
Johnson says a small rise or dip in construction in Orlando is unlikely to make any difference until the region catches up on its missing housing supply.
“We’re just critically short of housing,” he said.