Q&A of the Day – Is Florida in another real-estate bubble?

Q&A of the Day – Is Florida in another real-estate bubble?

Each day I feature a listener question sent by one of these methods.

Email: brianmudd@iheartmedia.com

Parler & Twitter: @brianmuddradio

Today’s entry: Brian, everyone I talk to in the industry defends the high prices that keep going higher for real-estate. It reminds me of the excuses made by the realtor’s association in the 90’s before the crash. Yeah, mortgage rates are low but look how many people are out of work...something doesn’t feel right. Do you think the current market is sustainable?

Bottom Line: The current circumstances are considerably different than what we experienced in the 90’s during the housing boom. Some of it’s worse, most of it is better. For the purpose of this breakdown, I’m going to specifically focus on Florida’s real-estate market. South Florida’s real-estate market officially peaked in May of 2006 – even though the bottom didn’t fall out until two years later. Here's what’s worse today in Florida today compared to the first half of 2006.

  • Unemployment rate 1st Quarter 2006: 3.3%, current: 6.1%

For this reason, I’ve had concerns regarding moratoriums being lifted on properties and what might happen if we have a flood of foreclosures. This is my biggest concern currently and we have seen an increase in foreclosure activity since November, however overall foreclosure rates have declined year over year. This could change if/when lenders become more aggressive. For now, the current foreclosure rate in Florida stands at 1 home out of every 6240 according to RealtyTrac. How does that compare to the housing bubble? By July of 2006 one in every 244 homes in Florida was in some state of the foreclosure process. Simply put, there’s no comparison as of now. So, to answer that part of your conversation it’s on my radar but it’s far from problematic. The key will be whether people can get back to work prior to benefits running dry. Thankfully Florida has been making steady progress and sports a below average unemployment rate.

That takes me to all the aspects which are better today:

  • Percentage of buyers paying with all cash (approx. 35% compared to 10% in 2006)
  • Mortgage rates (2.75% compared to 6.3% in 2006)
  • Florida household income adjusted for inflation is $1,399 above 2006 levels

Those are all powerful positive catalysts for a sustainable real-estate market. And that leads me to the big picture. The average annual rate of appreciation for real-estate in the US is 3.9%. That largely tracks with gains in income and population over time. Since your concern is whether the current market is sustainable, I thought it’d be helpful to take a longer-range view of Florida’s real-estate market. Starting with the pre-housing boom market. Florida’s average annual appreciation for real-estate over the past twenty years – 2000 through 2020, has been 4.6%. While it’s been a wild ride on the path to that 4.6% annual rate of return, Florida’s long-range real-estate market looks sustainable and healthy. With the national average producing a 3.9% rate of return, it’s natural that the state gaining the 2nd most population during that twenty-year window would be on the upper end of the curve. The bottom line is that on balance, with a long-range view, Florida’s real-estate market looks healthy and sustainable and is world’s away from where it was when it was about to crash.

Photo Credit: Getty Images

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