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When is the Normal South Florida Real Estate Market... Going to be Normal Again?
1st Quarter, 2006When you've been around long enough in any industry, you get to experience a wide variety of cycles and adjustments. After more than 30 years in the real estate business, I thought I'd experienced pretty much every possible combination of market variables. That is . . . until the fourth quarter of 2005.
The combination of three hurricanes: Katrina, Rita, and Wilma all within a two-month time period, coupled with a preceding year of cautionary market forecasts, has created a business environment that has taken the better part of the last quarter of '05 and the first quarter of '06 to decipher. While some skeptics still claim that the real estate 'sky is falling,' I am comfortable stating that all that we have witnessed over these past six months are some 'cloudy' days of uncertainty due to the fact that the storms caused us to veer off course for a few months. To put things in perspective: six million southern Florida residents, or one-third of the entire state's population, were without electric power at the end of October, 2005. Our company was collectively closed for business for 17 days over a 65-day period beginning after Hurricane Katrina, when we normally would have been closed for only one day: Labor Day.
Wilma did something that no other hurricane had done before . . . it virtually shut down commerce in Miami-Dade and Broward Counties for up to two full weeks.
In comparison, I remember that within two days after Hurricane Andrew struck in 1992, we had a line of customers outside our Coral Gables office waiting to speak with our associates . . . and business boomed. While the strength of Andrew's wind was unprecedented, its impact on our area was in many ways less dramatic than the slowdown of business created by Wilma. The fact that the electric outage was spread so far and wide after Wilma meant that almost no one in all of South Florida from the Atlantic to the Gulf of Mexico was doing business for several days. The delays created due to the inability to transact business for those days, has carried through the market until today. We are just now recovering.
Wilma did something that no other hurricane had done before . . . it virtually shut down commerce in Miami-Dade and Broward Counties for up to two full weeks. Wilma struck us on October 24th, and power was not fully restored to the broad affected areas until the middle of November. While the number of closings had begun to cool somewhat before Wilma, I would submit that the dramatic declines in home closings during October and November-numbers that reached nearly 50% decreases from the same period in the prior year-would have simply been far less dramatic. That also translates to the inordinate percentage growth in homes listed for these past six months.
Is the inventory of single-family homes and condos for sale growing? Yes. But, I would suggest that it was necessary. Historically, and I mean over the decades, six-to-nine months of inventory is healthy. We need this level of overall inventory to have a proper balance of buyers and sellers. This is the 'balanced diet' of our industry. Over the past 5 to 7 years, we've all become accustomed to our homes selling within days, if not hours, of having it offered for sale. A superheated market is not only not sustainable, but simply not healthy in the long run.
The fact that we have virtually no land left in Miami-Dade County upon which to build single-family homes leads us to believe that values for single-family homes will continue to increase at very favorable rates due to the pressures of demand versus the shrinking supply of land.
The market had indeed begun to change before Wilma. In Miami-Dade County, the number of single-family homes and condos listed spiked from a low of 7,966 in April '05, to 18,164 by the end of January '06. Even with such a seemingly large increase of inventory over a period of just nine months, the number-of-months supply moved from a critical low of only 3 months in April to just 10 months in January . . . still comfortably in the range of the six-to-nine month levels desired for a 'balanced' market. The data for Broward County / Ft. Lauderdale also showed a similar pattern during this period.
So what does this mean? First, even in the face of a dramatically growing inventory, our current months of supply is still within range of what is desired. And second, the sales and inventory data for the 4th quarter of 2005, due to Wilma and her friends Katrina and Rita, makes that data virtually unusable today, and for any analysis in the future. You can't compare data on an apples-to-apples basis when a quarter of your data input was taken from a period when most businesses were effectively shut down for several weeks.
While it is impossible to look into a crystal ball when it comes to the real estate market, I would submit that we will not have a true reading of inventory until we move into the Spring '06 selling season. I believe that we will continue to see a growth in inventory over the next six months until the market 'rights itself' from the months of distraction created by the storms of last year and the media attention being given to our growing inventories. The very positive benefit of having a greater supply of inventory is the affect that it will have on slowing the rate of appreciation. We believe that while we will continue to have increasing values in almost all segments of the market, the rate of growth will return to the single digits that Florida has been enjoying for the past 30 years. Increases of value in the range of 25% to 30% year after year is simply not sustainable.
Miami-Dade and Broward Counties currently have a 'net' increase in permanent population of approximately 190 new residents per day. That equates to a need for the real estate development industry to deliver almost 32,000 new living units per year in just the two counties of Miami-Dade and Broward.
Many still ask, "Will values decrease in some areas?" That question needs to be divided into two questions: one for single-family homes, and one for condos. The fact that we have virtually no land left in Miami-Dade County upon which to build single-family homes leads us to believe that values for single-family homes will continue to increase at very favorable rates due to the pressures of demand versus the shrinking supply of land. It's the basis of economics. As the supply remains the same while the demand continues to increase, it's inevitable that values will go up.
In the case of condominiums . . . more and more buyers are now opting for the more carefree lifestyle that condos offer, the greater availability of design choice and location, and the lower, entry-level pricing. We will continue to see the balance of condo sales to single-family home sales weigh much more heavily toward condos. 58% of all homes sold today in Miami-Dade are condominiums, compared to 42% single-family homes, which is a marked change from 6 years ago when condos represented only 46% of sales.
While 'marginally' designed condos built in 'marginal' areas may experience a slight softening of value over these next 24 months, we believe that any softening will be slight, and that it will remain for a very short period of time due to our continued demand.
The #1 factor that drives real estate sales is population growth . . . and no one disputes the fact that South Florida will continue to grow in large numbers. Miami-Dade and Broward Counties currently have a 'net' increase in permanent population of approximately 190 new residents per day. That equates to a need for the real estate development industry to deliver almost 32,000 new living units per year in just the two counties of Miami-Dade and Broward. And, these numbers don't account for our burgeoning second-home market.
Will there be any residential properties that decrease in price? Only those that were significantly overpriced in the first place, or were in areas where supply is far greater than demand. Most properties will hold their value, and, will continue to increase over time.
Someone recently took me aside at a function and whispered, "OK, what are you really concerned about with this new cycle?" What I'm really concerned about has its roots in Greek mythology. I'm concerned about something called the "Pygmalion Effect." What does Greek mythology have to do with the South Florida real estate market? Actually, a great deal . . .
The Pygmalion effect is where we get our concept of the self-fulfilling prophecy. In Greek mythology, Pygmalion was the king of Cyprus. He decided that he would carve an ivory statue of what he deemed to be the perfect woman. In the mythology, we learn that his belief and his desire were so strong that it actually (with a little help from the goddess Venus) brought the statue to life, hence the concept of what we know today as the self-fulfilling prophecy.
A self-fulfilling prophecy can be extremely positive, or extremely negative. Believe in something strongly enough, and we can certainly affect its growth or its descent. A more contemporary concept says that "perception is greater than reality". If enough of the world's population believe that South Florida's values will continue to strengthen . . . it will happen. Most agree that South Florida is still an under-valued real estate market in comparison to other world centers, so I believe that that 'perception' will continue to lead us.
So, have we returned to a normal market? If the question is, "Have we returned to yesterday's market?" Probably not. South Florida seems to be charting a whole new course for itself . . . and the world is joining our ship! The best is yet to come for those who are prudent in their selections.