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@brianmuddradio Will the coming interest rate hikes have an impact on real estate prices going down? Or will the current influx of people moving to Florida act as a buffer on prices coming down?
Bottom Line: Next to the abortion debate, South Florida’s real-estate market has been the topic I’ve most been asked about over the past week. It’s clear many South Floridians feel like the tide may be turning on what’s been a non-stop red-hot run for homes since the 2020 lockdowns thawed across much of the country. Seemingly sky-high home prices combined with mortage rates that have already doubled to 13-year highs this year will naturally have that effect. Anytime I’m taking up these types of issues and questions, I start with looking back at the most recent times I’ve addressed them. By looking backwards, and now knowing what did happen, we can gain clues about what will likely happen going forward.
In my February 26, 2020 story entitled: The South Florida Real-Estate Boom is Back, which was at the onset of the impact of the pandemic, I explained this: It’s clear the combination of record low unemployment in South Florida along with record high credit scores, record high wages and near record low mortgage rates are providing the underpinnings of something pretty special in the making that thousands of South Floridians are taking advantage of right now.
Here’s something else to be mindful of. There tends to be a bit of a ying-yang effect with stock market selloffs and South Florida real-estate. Aside from the Great Recession which took everything lower, traditional corrections in the stock market have provided positive catalysts for real-estate with investors having money on the sidelines. The timing of the sudden surge along with a correction in stocks could provide even more fuel for South Florida’s real-estate fire early in 2020.
After that story I recall fielding a bunch of questions from listeners questioning my logic regarding how the pandemic and crashing economy could possibly be good for real-estate. Obviously, my analysis and thesis held true. In fact, truer than I even envisioned at the time. One of the economic keys I look for when attempting to determine what’s next, is understanding the catalysts that created the market we’ve been experiencing. So back to the details of that February 2020 analysis. Here were the positive real-estate catalysts.
- Record high credit scores
- Record high wages
- Near record low mortgage rates
- A stock market crash (with money needing to find a place to go)
I’m going to come back to those catalysts, but first I’ll revisit a more recent story – my February 1st, 2021 Q&A entitled: Is Florida in Another Real-Estate Bubble? In that Q&A I was asked if Florida was in a housing crisis like bubble. Here are the reasons I said we weren’t just over 15 months ago:
- 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 worlds away from where it was when it was about to crash.
Obviously, that proved true as well. So, what are the specific reasons why from that analysis?
- High percentage of all-cash buyers
- Record low mortgage rates
- Household income tracking above inflation
- Population growth
Between those two stories and analysis there were seven specific positive catalysts which led to what we’ve lived. Rather than a bunch of complicated economic analysis at this point – there's a shortcut way I make judgement calls on these types of economic things. If most of the reasons for how we got here change for the negative, the odds are you’ll see the market change as well. So, here’s the scorecard combining the seven catalysts from the two stories. How do we stand against them today?
- Record high credit scores: Check (they’ve risen from 711 to 714 over the past year)
- Record high wages: Check
- Near record low mortgage rates: No (13-year high rates)
- A stock market crash (with money needing to find a place to go): Check
- High percentage of all-cash buyers: No (All cash has fallen from over 30% of the market to 20%)
- Household income tracking above inflation: No (worst divergence in 39 years)
- Population growth: Check (in fact Florida’s only experienced an even higher rate of growth most recently)
So, it’s a mixed bag but what’s the overall scorecard? Three of the positive catalysts remain intact, however four of them have changed for the negative. What’s that mean? Without hesitation I’m comfortable saying that there’s zero chance of double-digit appreciation for the average home continuing over the next year. And I’ll take another step as well. The peak of the housing boom of the early 2000’s was May 2006 in South Florida. In addition to macroeconomic conditions there’s the cyclical nature of real-estate to consider as well. The housing boom of the past couple of years as we’ve known it begins to end this month in my estimation. In another words, we’re experiencing the end of the boom right now. In the near-term, aside from what I’d expect to be growing inventory and days on market – I think we’ll begin to see a tale of two markets. A resilient luxury market driven by cash coming out of stocks and a wavering market for average homes which largely rely on buyers who’re obtaining mortgages.
Outright declines in real-estate prices are rare, and it’s early to suggest that’s going to happen here – however the same analysis which led to me declaring a new housing boom at the onset of the pandemic leads to me suggesting this is the end of it. Right now.
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