Activity and pricing both experienced significant gains in most of our markets around the country in 2013, leaving many feeling optimistic about 2014 and 2015. Metrostudy is projecting increases in new home starts in our Florida markets through 2017, with home prices trending up as well. This is generally positive news, but may present some affordability issues in the first-time buyer segment.

I was consulting on a community last month in the Sarasota market and found that the share of affordable new homes is shrinking significantly. The Target Market Area (TMA) for this particular analysis contained much of northern Sarasota County and southern Manatee County, including the large master-planned community Lakewood Ranch. We created an affordability index using income levels, ad valorem tax rates, interest rates, and insurance premiums in the TMA to determine buying power at different income levels.

The current estimated median household income in the Sarasota-Bradenton MSA, utilizing Census based data, is $46,899. By this estimate, households with 100% of the median income could purchase a home priced around $185,000. Those earning 120% of the median income ($58,206) could purchase a home priced around $220,000. In 2013, roughly 19% of all new homes sold in the TMA were priced under $220,000, and Metrostudy expects this share to shrink to 8% by 2020.

An affordability analysis using median income isn’t always the best measure for markets like Sarasota with a large population of retirees. The TMA, however, is made up of many family neighborhoods in Manatee County, and it does provide valuable insight into the affordability for traditional family buyers.

As the Baby Boomers are beginning to retire, creating a wave of active-adult demand, land and home values across the Sarasota market are increasing. In communities like Lakewood Ranch, the percentage of active-adult buyers has grown significantly recently. Some builders are reporting that as many as 70% of their buyers are active adults. Builders are catering to this demand by offering plans, amenities, and subsequently pricing that is focused on this active-adult segment more than the family buyer. These price increases and growing sales numbers are driving up land values in all areas of the Sarasota MSA. Undeveloped land in Sarasota County is currently trading between $25,000 and $35,000 per entitled single-family unit in many areas. You can see that once you add development costs it’s almost impossible to sell a new home for less than $250,000 in the current market.

Another major factor influencing the first-time buyer market, both in Sarasota and nationally, is the new FHA loan limits that went into effect on January 1, 2014. Manatee and Sarasota Counties had some of the biggest loan limit declines. In 2013, the FHA loan limit in both counties for single-family homes was $442,500, and in 2014 it dropped 36% to $285,200. With increased lending requirements following the bust, FHA insured loans have been valuable to first-time buyers with other debt and limited credit history. Rising home prices in the market are leaving few options for first-time buyers needing to finance their new home with an FHA insured mortgage. Other markets in Florida are suffering from these changes as well, including Orlando and Jacksonville, which had $80,000 decreases from 2013 limits.

With Baby Boomers driving demand and pricing for the foreseeable future, FHA loan limits decreasing, and interest rates continuing to rise, it appears that first-time demand will remain depressed in the Sarasota MSA. I believe that some of this demand will move to inland areas with cheaper land, which can already be seen in the strong closings numbers in the under $200,000 price segment in both Polk and Lake Counties in 2013. But does this mean it will just shift among markets, or are we experiencing a fundamental reduction in the first-time buyer market? Since these trends appear to be happening nationally, I think we could see this depressed first-time demand over the next few years in many markets beside Sarasota. The National Association of Realtors reported that first-time buyers made up only 27% of all home sales in December 2013, down from the 30-year average of 40%. However, I believe there will always be demand for first-time homes, and I expect this demand to return to more normal levels once economic indicators like consumer confidence and employment growth show sustained improvement.

Learn more about markets featured in this article: Bradenton, FL, Orlando, FL, Lakeland, FL.