Ten years ago, as the local and national economies re-ignited following the “great recession,” the number of houses available for sale constricted sharply and prices began to climb. The change was moderate at first, but then came the pandemic years and moderation went out the window.
By 2016, it was obvious that an imbalance existed between the forces of supply and demand — the most basic economic principle that drives prices. In this case, “demand” is the number of buyers. That factor is primarily influenced by the economy, including interest rates, which had their first increase by the Federal Reserve in December 2015 from the near-zero rates of the previous seven years. The number of buyers was expected to rise continuously with population growth by about 1% per year based on recent trends from census data.
“Supply” is how many houses are available for sale. Two significant variables worth diving into are 1) the number of new properties added to the inventory each year and 2) the number of existing houses listed by sellers. The latter has also been heavily influenced by the rise in interest rates from the historically lower rates of the previous decade. Nearly 60% of all existing home mortgages are at or below a 4% interest rate. Potential sellers have been very reluctant to give those up to purchase a new home with prevailing rates closer to 6% — thereby heavily restricting both supply and demand.
In an effort to inform the community and its decision makers of this imbalance and its impacts, Lexington-Fayette Urban County Government, Fayette Alliance, Lexington-Bluegrass Realtors, Home Builders of Central Kentucky, Fayette County PVA and Downtown Development Authority pooled resources, and in 2016 commissioned an eye-opening study on the city’s and the region’s housing needs, looking across the coming decade to the year 2025.
The group voiced the obvious questions, the same questions that always dominate Lexington’s land use and growth policies — whether to, when to, and how to expand the urban service boundary. Land, along with lending and labor, is always a controlling factor in when, where and how homes are built.
Well, now that 2025 is in the rearview mirror, it’s interesting to measure as prognosticators: How have we done in terms of housing needs and pricing, and where are we now?
The recession exposed significant failures within the housing industry — largely within the mortgage and lending sectors. Lenders were far too lenient with unqualified mortgage applicants, appraisals were inflated, and junk mortgages were bundled and sold to investors with unsound investment ratings. Eventually the house of cards collapsed and with it, significant declines in property values and home sales in general.
When the mood shifted back to optimism in the housing market, consumer confidence was bolstered by more responsible lending practices, forced by new regulations and unprecedented low interest rates courtesy of an extraordinarily favorable monetary policy from the Fed.
In spite of a rosy outlook and favorable conditions, new home construction has not resumed. The economy had been particularly hard on builders, so a lag wasn’t surprising, but it was expected that construction would resume soon. Surely. Wanting to best facilitate getting more inventory back into the local real estate market, several interested groups came together to try to understand the local demand for housing. What did we actually need?
The final report was enlightening in several areas, including a better understanding of where the Lexington-Fayette County workforce actually lives and commutes from. As it turns out, it’s further away from the city center than many of us had previously understood. Nearly one third of Lexington’s workforce is commuting from more than one county away. So, it stands to reason, if Lexington’s housing supply cannot accommodate its current number of residents, much less most annual growth, demand will shift to the neighboring communities where supply is less stagnant.
The lack of new housing starts is not unique to Lexington and Central Kentucky. It was and remains a national issue. Take a look at the graph below of the number of homes built before, during and after recessions dating back to the housing boom of the early 2000s.
National statistics proved that stalled construction was not unique to the local market. However, the urban service boundary was unarguably a self-inflicted limit on the supply of land. It was designed to preserve the rural character and control sprawl. To that end it has been quite successful, but based on median sale prices in surrounding counties compared to Fayette County, it appears the sprawl we prevented here resulted in stronger supply and demand in surrounding counties.
Three of the five immediately contiguous counties — Scott, Woodford and Jessamine — posted median sale prices comparable to or higher than Fayette, and Madison County is not far behind.
But the primary purpose of the housing demand study was to understand how many additional units of houses would be needed in Fayette County to meet the anticipated demand based on population growth.
The 2016 study deemed that approximately 22,000 more units would be needed by 2025, with 13,000 coming from new houses, condos and townhouses and the remaining coming mostly from multi-family or apartments. Based on the numbers of housing units that existed at the time of the study, and modest population growth from recent census data, that worked out to just over 1,200 new units per year. Fast forward to 2025, the year on which the study focused its projections. How many single-family residences did we actually add to our inventory? The answer: 4,835 — a far cry from 22,000.
Over the past several years, Lexington population growth has fallen a bit short of the projected 1% annually as we had seen historically. Actual growth has been closer to ¾ of a percent, likely due at least in part to the fact we did not have the housing inventory to facilitate new Lexingtonians. Many of those would-be transplants have landed in the surrounding counties instead, evidenced by the sales and price increases in those counties. Even considering the downward adjustment to the projected 2025 population, at less than 500 new homes per year we didn’t come within half of what was determined we needed.
Short of a significant economic event, which obviously nobody wants, I do not see anything on the horizon that will lower property values or sale prices or anything that could even stymie the continuous increases any time soon. We continue to have significant pent-up demand for housing. Any movement in interest rates will either open the flood gates of buyers and sellers, which will maintain robust pricing, or further limit supply, which will accelerate price increases.
For Fayette County specifically there is no surplus of developable land to suddenly add thousands of new homes. Even though a few thousand developable acres, capable of producing 20,000 or so homes, have been identified, there is no reason to believe any of them will materialize within the next five years.
View the breakdowns of Lexington residential statistics below.
