Q&A of the Day – Are South Florida’s Homes Really “Overvalued”?
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Today’s Entry: Hi Brian, I have a question about the local housing market for the Q&A. If home prices are significantly overvalued, would it make sense to sell now, rent for a while and maybe buy again in a year or two when prices come down?
Bottom Line: If we really knew that the local real estate market was to playout that way – then yes, that would potentially make sense. Although even in that instance consider what would need to happen for that to work out financially. You’d have to find a rental at a reasonable price to accommodate your needs while you wait out the period of the decline and the decline in price would need to be more than your expenses associated with selling your home and moving into and out of your rental. In this story I’ll provide you with the likelihood of that being the case. Here’s a hint – it's not good. But the bigger issue which I want to address in today’s Q&A is the perception that Florida’s housing markets are significantly overvalued and what the implications going forward may be.
This is a topic of conversation because of an FAU/FIU study with the headline provided by the researchers being: Homebuyers Facing Overvalued Markets Despite Prices Moderating. The study isn’t anything new. The schools of business at those two schools produce their list of the 100 most overvalued metro areas monthly. What’s different is the extent to which many Florida markets are “overvalued” and how “overvalued” those markets are reported to be. All of Florida’s major metros are among the 14 most “overvalued” housing markets in the country right now according to the analysis. And all of the listed Florida markets are at least 38% overvalued according to the study, which might sound a bit alarming. With so many South Floridians having suffered with home price declines of greater than 30% during the housing crisis and Great Recession of a couple decades ago, hearing that our local housing market is theoretically significantly overvalued may conjure thoughts of a potential repeat scenario. I’ll explain why that’s not going to be the case.
First and most importantly, what determines the value of a home, or anything for that matter? It’s not a Zestimate. It’s not a study from a couple of colleges. It’s what someone is willing to pay at that moment in time. And the fact of the matter is that demand relative to properties listed represents a balanced market which still favors sellers. The average property listed in the Palm Beaches is selling in 56 days for 97% of the listing price. That's what the current condition and real value of what local real estate currently is. But back to the study for a moment.
According to the Florida Realtors Association the median single family home price for the Miami-Fort Lauderdale-West Palm Beach metro is $610,000. Factoring in all property types the average price is $455,000. According to the FAU/FIU study our housing market is 39% overvalued. Were that to be true, that’d mean the average buyer of a property in South Florida right now would be overpaying by a massive $127,000. But here’s what the study really measures...a long-term pricing trend. The study measures the average rate of real-estate appreciation in a market going back to January of 1996. So, what the “overvalued” metric represents is how much higher the current price of real-estate is relative to the average performance of local real-estate over the past 27.5 years. For comparison's sake, during the peak of the housing bubble in 2006, the FAU/FIU study showed our metro as being 79.9% overvalued. As painful as the housing crisis was for so many locally during that time, did the value of our housing market collapse by 80% back then? No, not even close.
From top to bottom the decline in home prices in the Palm Beaches was 46%, or a decline that was 34% less than what the study’s methodology suggested at the time. What’s more is that their methodology first pegged our metro as being “overvalued” in 2002, yet property continued to significantly appreciate for another four years after that point twenty years ago. That’s obviously a big miss. So, let’s say for example that their model is off by a similar amount today to what it was back then. Our housing market would only be “overvalued” by about 5% - or not even the average cost of selling a home which is 6% - let alone moving expenses and headaches. That’s one point in considering whether it may make sense to sell a home today anticipating a decline allowing you to buy back in at a lower price. The other point is using history as a guide.
Using the same 27.5-year window as the study’s period, how many years have you felt, or have you perhaps even heard of local real-estate prices being high or overvalued? How many years do you think prices have declined during that time? There are only a total of five years, all during the housing crisis/Great Recession period in which local real estate prices have declined. In other words, over the past three decades, real estate prices in South Florida have appreciated in 82% of the years while declining in only 18% of them. If you’re attempting to try to time the housing market for a correction in prices locally, those are the odds you’re facing.
Now, independent of all of that info do I think a pause in prices or even a bit of a correction for local real-estate prices is possible? Absolutely. However, unlike the housing crisis of two decades ago which was built on speculation, debt and liar loans which were made illegal way back then, the current runup in prices is a pure product of supply and demand. That’s evidenced through foreclosure rates. At the peak of the housing crisis the local foreclosure rate was 1 in 32 homes. The current rate is 1 in 2,470 homes. Florida has led the country in net relocations for over five consecutive years and until and unless that changes, we’ll continue to have a state and local real estate market which reflects it with above trend prices for real estate.