How Sustainable Are The Forces Driving Florida's Latest Housing Boom
September 8, 2005 - Mark Vitner, Senior Economist
Florida has seen some of the nation's most dramatic gains in home prices during recent years. The median price of an existing home has soared 33 percent during the past year, is up 105 percent over the past five years, and has risen a whopping 180.7% over the past decade. The dramatic rise in home prices has raised concerns that the Sunshine State may have one of the most overheated housing markets in the nation. A few analysts are even warning that many of the state's major housing markets will see outright price declines in coming years.
While there is a fine line between boom and bubble, we still believe that most of the rise in Florida's housing values can be explained by basic economic and demographic forces. Quite simply, prices are rising rapidly throughout most parts of Florida because the demand for single-family homes is vastly outpacing supply. Moreover, builders have been uncharacteristically slow in responding to the strength in home sales, which has kept inventories near record lows. We would be remiss to say that there is no speculation in Florida's major housing markets. Clearly, there is. Our contention, however, is that speculation is not the primary force driving prices higher.
The only way to determine how much of Florida's housing boom is being driven by the fundamentals and how much by something else is to look at the fundamentals and see how much of the strength can be explained by economic and financial forces. We also take a look at the current Florida housing boom relative to previous cycles, so that we can get a sense of proportion as to what is occurring today and also see how previous excesses in Florida's residential markets were unwound.
To start, lets look at the where we are today. Sales of existing homes in Florida are currently running at record levels. Data on existing home sales are available from two sources, and they measure the housing market somewhat differently. Both show sales running at a record pace. The National Association of Realtors shows sales of existing single-family homes, condominiums and co-ops running at record 583,500-unit annual rate during the second quarter of 2005. Separate data from the Florida Association of Realtors produce a similar result, with sales of existing single-family homes totaling a record 245,300 units over the past year.
The huge gap between the two surveys is due to differing definitions of the housing market. The National Association of Realtors (NAR) data includes single-family homes, apartment condominiums and co-ops, while the Florida Association of Realtors only includes re-sales of existing detached single-family homes. Taking the different definitions into account still leaves a fairly large gap, however. We are a bit suspicious of the NAR data. The total sales figure for Florida is larger than the same data for Texas and nearly as large as California, even though both states are significantly larger.
One possible explanation for the gap is that the Florida numbers are being skewed higher by the recent run of apartment and hotel conversions. Re-sales of condominiums under development might also be playing a role. Whatever the difference, the bottom line is that Florida's housing market is booming. Sales of existing homes are running at a record pace by the two most comprehensive measures available. Moreover, the median price of existing Florida homes sold has soared in recent years, with price gains in several metropolitan areas ranking among the most rapid in the nation.
Five Fundamental Factors Driving Florida's Housing Market
When you look at the fundamentals, there is little mystery as to why home sales are so strong. In fact, all the stars appear to be perfectly aligned for Florida homebuilders. The first half of this decade has been characterized by near record low mortgage rates, strong job growth, a growing population, an increasing supply of aging baby boomers, and growing interest from overseas visitors, immigrants, and investors.
Mortgage rates dropped to near generational lows back in 2003 and have remained near these levels for the past two years. At the same time, the mortgage market has opened up and become far more inclusive. An extremely active secondary market, regulatory requirements, and market economics have combined to dramatically increase the supply of mortgage money available to borrowers that would not have had access to credit in previous cycles. The drop in mortgage rates helps drive demand for Florida two ways, directly by reducing the cost of homeownership and indirectly by strengthening sales in the markets that account for the bulk of Florida's new residents.
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