Photo / Courtesy of NBT Bank
Kenneth J. Entenmann, NBT Bank.
June 12, 2023
Commentary: Unraveling Maine's housing challenges
By Kenneth J. Entenmann, NBT Bank
There is a housing shortage in Maine and across the country. It is estimated that there is a shortage of more than 4 million single-family homes nationwide and an estimated 15,000 in Maine. There are no easy fixes to this problem, which has been caused by a myriad of issues dating back many years, and it will take years to fix.
The housing markets have faced two major macroeconomic events in the last 12 years. The great financial crisis of 2008-09 was housing centric. Unprecedented loose lending standards led to a massive overbuild. Remember “no money down, no documentation, interest only” mortgages? Leveraged investments in derivative mortgage-backed securities led to the demise of Wall Street titans Bear Sterns and Lehman Brothers. The economy fell into a deep recession that lasted two years. But the crisis had a long-lasting impact on housing and new construction. Credit and lending requirements stiffened, and housing construction stalled and has never really recovered.
The second crisis was COVID. Maine, in particular southern Maine, was dramatically affected by COVID. The remote work trend created a migration out of big and expensive metro markets into smaller and less expensive communities. It was a Boston-to-Portland trend. While this increase in population would seem to be a good thing for Portland, it only exacerbated an already limited housing supply. Basic economics dictate that when supply is inadequate, prices increase. Indeed, home prices increased dramatically since 2010, and spiked during the COVID migration. While prices have declined meaningfully in “hot” markets like Charlotte, N.C., Miami and Austin, Texas, they have only declined modestly in Portland. Interestingly, on a national level, home prices increased last month.
The biggest factor affecting the housing market is the dramatic increase in interest rates over the last year; housing is the most interest rate-sensitive economic sector. COVID brought the return of inflation, something that the economy had not seen since the 1982. The return of inflation put an end to an era of low-interest rates. To combat high and sticky inflation, the Federal Reserve Bank, beginning in March 2022, has raised the Federal Funds rate from 0% to 5%. That record-fast increase shocked the mortgage market. The rate on a 30-year, fixed-rate mortgage was below 3% at the end of 2021; today it is hovering around 7%.
The combination of higher home prices and mortgage rates has made “affordability” very difficult, particularly for younger, first-time buyers. Imagine a young couple that is starting a family. They are looking to move out of an apartment and into an entry-level 2- or 3-bedroom house. “Affordability” is historically bad and there is a severe shortage in this space. Making matters worse for the young, entry-level buyer, they face new competition from retiring baby boomers that are selling their big houses and taking the equity to pay cash for their new “downsized” home, i.e., that same entry-level house the young couple is hoping to buy. Youngster vs. retiring Baby Boomer with cash equity. The Baby Boomer wins, as they have great financial flexibility, and they are paying cash!
In addition, mortgage rates are impacting the housing market in another way. Anyone who purchased a home or condominium in the last few years probably has a very attractive mortgage rate. This makes it very difficult to relinquish that low rate and move up the housing food chain. Once again, imagine a young family that successfully moved out of the apartment and purchased a 2- or 3-bedroom house in 2021. They have a growing family and are looking to expand to a bigger house. The “downsizing” Baby Boomers’ house is for sale, but at much higher prices. However, significantly higher mortgage rates make that a challenging proposition.
Increasing the principal on the house by $100,000 to $200,000 and adding 2 to 3 points in interest costs could tack $1,000 a month onto a mortgage. Ouch! Unfortunately, that keeps many potential buyers on the sidelines, hoping for mortgage rates to decline again. And, it keeps the entry level home off the market as well. The result is a significant decline in homes for sale inventory.
Build, build, build
Of course, 15 years of inadequate home building cannot be fixed quickly. However, the fastest way to solve this dilemma is to build, build, build and increase the overall supply of housing across the financial spectrum. Indeed, that is what is happening already. Nationally, new home construction typically accounts for 10-20% of new home sales; today it is over 30%. But building out of this shortage is challenging as well.
First, commodity costs are likely to remain problematic. While it is true that most commodities prices have fallen from the supply scarcity peaks of COVID, they remain significantly higher than pre-COVID levels. In addition, the dramatic increase in climate-related infrastructure spending is providing competition for those commodities. Building a new home is and will continue to be expensive.
Second, there is a labyrinth of government rules, restrictions and regulations that make new building a challenge. While most of these regulations have good intentions, in aggregate, they are an expensive labyrinth to navigate. They are often one-size fits all on the federal and state level — something that does not work well when considering the needs of the Portland Peninsula vs. the rest of Maine.
The expense of navigating the labyrinth, combined with a healthy dose of NIMBYism (not in my backyard!), too often restricts new development. Our government representatives need to provide much-needed flexibility and incentives to spur on new construction, not restrict it.
Maine’s housing shortage was not created overnight and it will take time to fix it. Hopefully, inflation will continue to ebb allowing interest rates to decline in the near-term. That will help. Maine will need to build its way out of this housing shortage. We need our governments to help make it easier to happen.
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