March 18, 2016
We’re taking a deep dive into key drivers of the Sunshine State’s real estate market. And, from that my thoughts on where Florida is headed. It’s all about the inventory…or is it?
Tight inventory, heavy competition, and rapidly rising property prices have some real estate investors suffering from paranoia. There is real fear some major markets may be topping out again. These same factors, plus rising rents, and interest rates are simultaneously igniting buyer activity. How long will the bull run last long before it stops...or implodes?
Like a canary in a mine, Florida is an indicator state. It was in Florida that the last housing bust began back in 2005. The rest of the nation and world really didn’t catch on until 2008. It is a key market for the world to watch. It’s the first domino.
While it is great that not everyone has forgotten the lessons of the past, the National Association of Realtors and others have called the current market “a return to normal.” So what are the facts?
Should investors be cautiously peering through the curtains, with legitimate paranoia that they are about to experience a flashback to their worst trip ever? Or do you put on the oversized shades and party like it’s “Spring Break forever,” until the money runs out and the hangover kicks in? Let’s dig into the facts, market trends and see where we land.
According to the Florida Association of Realtors in early 2016:
4.5 months’ single family home inventory
5.9 months’ condo and townhouse properties
Sales for <$150,000 properties dropped 17% y-o-y in Jan 2016
Sales for $150,000+ properties rose 14%
Single family home prices rose 13.7% in 2015, almost 6% above national average
January 2016 was the 50th month in a row for rising FL property prices
Across the Sunshine State local Realtors in major metros are reporting similar data trends. Tight inventory levels are pushing up property prices and rental rates, but are squashing sales, with one big exception..
As of January 2016:
Median prices were up 14%
Sales were down 18%
Inventory stood at 6 months
Scary fact: The Orlando affordability index topped 177% in January, meaning housing costs are almost double what the median income earner can afford.
The Real Deal recently tore Miami to shreds with damning data that refutes much of what local sales people have to say…
Q4 2015 saw SFR sales down 14%, and condo sales down 16.1%
In Miami Beach inventory is up 37%
Miami Beach inventory now stands at 17.7 months for condos, 24.6% for homes
In the heart of Southwest Florida between Naples and Fort Myers is Bonita Springs. This is currently a ‘warm’ market according to Zillow, suggesting it represents an average snapshot of local real estate in the state.
0% of homes have delinquent mortgages
0% of homes have negative equity
Homes have regained around 50% of equity lost since 2006
Monthly rents average $3,100 per month, more than double the national average (Trulia)
Naples & Ft. Myers - Hot & Cold:
Naples, FL has been pegged as one of the hottest markets for appreciation with prices expected to rise 40% over the next few years.
Meanwhile the Ft. Myers neighborhood of Lehigh Acres continues to be saturated with vacant lots which still haven’t sold since the last boom.
Inventory is almost average in most markets, yet is beginning to show signs of overbuilding in hot international metros. The most desirable properties continue to be snapped up with strong demand, while others have languished on the market for extended periods of time. What few are saying is that it may actually be affordability which is cramping sales and prices, not inventory.
1. New Construction
3. Interest Rates
4. Overall Affordability
5. Stock Market Performance & The Economy
6. The AirBnB Effect
7. 2016 Presidential Election
8. Real Estate Fraud
Future inventory levels depend on the rate of construction. Where the construction happens will dictate if high housing costs are alleviated, and if markets are saturated with over supply. The Airbnb Effect has compounded rental rate increases, with 50% or higher hikes over the last few years.
This makes it too tempting for investors and landlords to push out annual tenants in favor of higher paying short term tenants. The election may set the tone for wages and interest rates over the coming years, yet the best intentions may be derailed by a stock market crash and an economic recession in 2016. Harry S. Dent who called previous crashes predicts the Dow Jones will fall to just 6,000, from over 16,000 in early 2016.
This typically directs more capital to the ‘safety’ of real estate. In turn this artificial and temporary demand has previously then led to a correction in the property markets.
Then there is real estate fraud. Along with NYC, Miami was one of only two US cities to recently be targeted by the feds for monitoring cash buyers and money laundering activity. Florida has the most mortgage fraud of any state according the Miami Herald, which highlights the recent jailing of a local mayor for an $11M real estate scheme.
It may be one of the few places a public figure will get on the phone and argue if you won’t help them commit fraud – because they are “in a room of 12 other people who just got away with it.” Or did they? On the bright side; if you’re a politician with a rap sheet or are under investigation it may be considered a badge of street cred down here. Worth noting that Miami is currently working on bringing back a Sheriff, after this position was abolished in 1966, due to corruption.
Like Manhattan and London, Florida relies more on external cash to fuel its property market than the local job market. Plus the weather is better, and real estate prices in Florida are dirt cheap compared to similar properties in the UK, New York, and California. People won’t stop moving to FL.
Trulia reports the average price per square foot in Miami in March 2016 was just $175. In Manhattan buyers can easily expect to pay $1,500 to over $3,000 per foot. In London prime real estate has topped $10,000 per foot.
It may be tempting to sit on the sidelines and watch some Realtors scream “it is different this time,” and swear “it’s not a bubble, it’s not a bubble,” until…pop! And, they’ve got real estate marketing gum all over their faces. Yet, when you live in South Florida and there is no shortage of sun, sea, beaches, after hours parties, and adult entertainment venues; who’s worried about paper losses on the crib you barely spend any time in anyway? As long as you can keep the AC on, and stay cool, there will be another party starting soon. You can bank on that.
Consider that southwest Florida oceanfront properties that were passed on at $90k a lot a few decades ago are now selling in the $10M range (and no – they still aren’t underwater).
The bottom line is that while Florida may still actually be in relatively balanced market territory today, a correction in the near future appears inevitable. That may be 12 months or 10 years from now depending on a variety of other factors. Those with the biggest potential to direct the course of the Sunshine State may actually be the wider economy and affordability. Yet, for those that can afford it Florida real estate is still an insanely great bargain, with good weather to boot.
Few may have the guts to just put on the blinders to the media and other markets, and just go along for the ride, as Warren Buffett suggests. Yet, all should be honing in on Buffett’s number one rule; that is making decisions based on the individual opportunities themselves. Do they make sense? What is their income production potential? Would you happily hold this property for at least 10 years?
This applies to lenders, investors, business owners, regular buyers, and real estate professionals that want to best intelligently advise their clients.
To skillfully navigate this market there is a glaring need for deep data, but also experienced interpretation of that data. Weigh big picture facts and local market factors not everyone is aware of, against the promise of individual opportunities on their own merit.
Florida real estate may offer a white knuckle moments in the ride ahead, but with a sunny finish for those that know their numbers, and trends…