The economic impact of the COVID-19-induced recession has been felt around the world, with areas that are financially dependent on tourism and hospitality being particularly hard hit. While Southwest Florida is no exception to this outcome, the region’s housing market remains healthy. This is in sharp contrast to the region’s experience during the previous recession, when housing prices dropped dramatically as the economy tanked.
The explanation for this difference in performance starts with the underlying cause for the two economic downturns. The previous recession was the result of a speculative bubble in real estate that was fueled by excessive use of debt and lax lending standards. The current recession was induced by the government in an attempt to control the spread of the coronavirus. Prior to the shutdown, the overall economy was quite robust, and the biggest challenge facing most firms in Southwest Florida and across the country was the tight labor market that was restricting their ability to take advantage of growth opportunities.
The reaction of market participants to the economic slowdown has also played a significant role in what we are observing in real estate markets across the country and here in Southwest Florida. As a result of the uncertainty surrounding the economy, many potential buyers and sellers have remained on the sidelines—choosing not to enter the real estate market until health concerns related to the coronavirus subside and the economy recovers. The result has been a simultaneous reduction in supply of, and demand for, housing. The subsequent price effect that we have seen in our coastal counties has been positive, with Charlotte, Lee and Collier counties experiencing price increases from June 2019 to June 2020.
The price outcome described above was helped by the relative health of our housing market going into the recession. While homebuilders were adding supply across our market, supply was expanding at a sustainable rate. In fact, the provision of affordable housing was quickly becoming a major concern in our coastal counties. Looking forward, the trend of sustainable expansion seems poised to continue based on the number of building permits currently being pulled across the region.
Mortgage rates have declined at a fairly steady rate throughout the current crisis, providing additional support to the housing market as they reached historically low levels. This decline in rates has been so strong that many lending institutions have faced situations in which they simply did not have the capacity to keep up with loan demand, particularly in terms of refinancing activity. However, borrowers who were willing to look beyond local mortgage providers have been able to take full advantage of the favorable interest rate environment. Based on the depth of the recession and the latest guidance from the Federal Reserve, it is likely that the low interest rate environment will continue to be a supporting factor for housing markets for the foreseeable future.
A final contributing factor that can’t be overlooked is that our region offers an exceptional quality of life. This is true even in a quarantine situation. Imagine individuals forced to quarantine in cramped urban settings, and compare this scene to one of a family enjoying time aboard their boat off the beach or lounging poolside in Southwest Florida. Unlike our local residents, many of the individuals in those cramped urban settings also face high state and local tax burdens. As a result, it is likely that their experience during the pandemic has only served to motivate many of them to consider more strongly relocating to our region when the current crisis has passed.
H. Shelton Weeks, Ph.D., is the Lucas Professor of Real Estate and the chair of the Economics and Finance Department in the Lutgert College of Business at Florida Gulf Coast University.