Market Analysis

COMING SOON: Florida Housing Crash 2.0?

Florida’s Housing Market is red hot through mid-2021. Buyers are flooding in from out of state. Inventory is plummeting. Home prices are surging. The market looks like it will keep going up, up, and up!

But hold on a second…we’ve seen this story play out in Florida before. Rampant price appreciation. Inventory shortages. Lots of inward migration. This all happened about 20 years ago.

And then the bottom fell out of the Housing Market with a 50% CRASH in prices from 2007-12.

Could another Housing Crash be heading Florida’s way in 2021? Or will the BOOM continue as more and more people flood into the state?

The article below uses deep dive on Florida real estate variables such as inventory, price appreciation, migration, and investor demand to find out. Let’s get into!

No Homes for Sale in Florida

The story of Florida’s current Housing Market, along the mania sweeping the US right now, is dictated by extremely low inventory. Put simply – there’s been a big spike in the demand for homes to go along with a decline in those looking to sell.

To put thing in perspective: Florida’s Housing Market had 123k Active Listings on the market in June 2020 according to data from Realtor.com. Fast forward 12 months to June 2021 and the Active Listing count has dwindled to a meager 51k.

Housing Inventory across the US has plummeted over the last year. Few places more than Florida, where Active Listings have declined by 58% YoY.
Active Inventory on the market in Florida has declined by 58% from June 2020 to 2021. (Source: Realtor.com)

That’s a miraculous -58% decline in the number of homes available for sale. The 2nd biggest drop in the US after South Carolina, in fact. When inventory declines so swiftly in a short period of time, it means one thing…

A Big SURGE in Appreciation

There’s only one place for prices to go when inventory bottoms out like that. UP.

And UP they have gone. According to data from Zillow, the typical home price in Florida has grown by a robust +15% YoY through June 2021. That’s the highest level of appreciation Florida has experienced since the frothy times of the mid-2000s.

Home Price Growth in Florida has exploded to +15 YoY through June 2021. Is this the sign of another Housing Bubble?
Florida’s price appreciation has surged to +15% YoY in June 2021. (Source: Zillow ZHVI)

The Key Question to ask yourself is: “Where do prices go from here?”

Will the recent surge in appreciation sustain itself? Or will price growth drop down to 2019 levels (+3%). Or worse yet – could we see another repeat of 2007-12 where home owners in Florida saw values crash by -50%?

To answer this question it’s important to delve into the FUNDAMENTALS. The key ingredients that determine Housing Market Growth and Security – particularly MIGRATION.

How many people are moving in and demanding housing units?

New York Exodus = Florida BOOM?

“New Yorkers are fleeing and coming to Florida!” How many times have you heard this over the last couple years? And no doubt it is true. New York, as well as numerous other states across the Northeast and Midwest, send a lot of people to Florida each year.

So many, in fact, that Florida is the #1 Migration State in America. Over the last four years Florida added over 1 million people to its population from inbound migration alone.

But simply acknowledging that Florida has high migration doesn’t really help us in terms of analyzing the future of Florida’s real estate market. There’s a better question to ask, which is “How much is Florida’s inbound migration increasing, and how will that increase drive price appreciation going forward?”

Florida is the top migration state in the America. No state receives more inbound migration. Yet those levels of migration aren't increasing - they're staying largely the same.
Net Migration into Florida has been surprisingly…stable. 200-350k per year going back to 2000. (Source: US Census Bureau)

That’s a trick question, because Florida’s migration figures aren’t increasing. If anything, they’re decreasing. US Census Bureau estimates show Florida’s net migration in 2019 and 2020 at their lowest levels since 2013. The peak in Florida movement actually came back in 2016, when +375k more people moved IN than moved OUT.

I suspect this realization will baffle many, because the mainstream real estate narrative suggests that Florida is experiencing a migration boom unlike anything it has ever experienced right now. But applying historical US Census Migration Estimates suggests otherwise.

As a result, Florida’s housing market surge over the last year likely isn’t a function of more people moving to the State.

But if not migration, then what…?

Speculation, Flipping, and 2nd Homes

The one thing everyone needs to remember about Florida’s Housing Market is that it is SPECULATIVE. There’s lots of buying and selling. Lots of people looking for 2nd homes. Lots of investor doing rehab flips.

One way to understand this is by looking at metric called Sales Velocity %. This takes the number of homes sold in a metro over the previous 12 months (June 2020-21) and divides it by the total number of home owners in the metro. The resulting percentage shows how frequently a home is bought/sold.

The higher the Sales Velocity %, the more a market relies on speculative sources such as flipping, investors, and 2nd home owners to drive demand.

Florida's Housing Market is heavily fueled by flippers and speculators. The result is that eight of the top 15 Sales Velocity markets are in Florida.
The typical market has 7.2% of its home sold in a given year. Every Florida metro is well above that level. (Source: Zillow)

Florida houses the top two highest velocity markets (Cape Coral/Fort Myers and North Port/Sarasota) as well as eight of the top 15. The typical market across America has a sales velocity rate of 7.2%. All of Florida’s large metros are at 10%+.

Think of high sales velocity as a stimulant of existing housing market conditions. So if inventory is low and the market is in a frenzy, strong velocity will stimulate further price gains. But if the opposite occurs, and the market dips, high velocity could perpetuate further price declines.

FUNDAMENTAL v. SPECULATIVE Demand

Why does this happen? Well, it’s important to think about FUNDAMENTAL v. SPECULATIVE demand for housing. Fundamental demands comes from the families and couples who live in the area and would like to stay in their home long-term. SPECULATIVE demand comes from investors, flippers, and 2nd home owners.

When the housing market goes south, FUNDAMENTAL demand is unlikely to go far. After all, these are the people who own their home for the pleasure of living in it. Not for simply making money. So most will stay in their homes and ride out the downturn.

But that SPECULATIVE demand on the other hand…they will run for the hills. After all, the only reason speculative demand exists in the market is to make a profit. And if values start going down, there will be a big pressure take gains and exit the market. That, of course, will mean a deluge in listings that pushes prices down further.

My suspicion is that a significant portion of the decline in active inventory across Florida over the last year comes from SPECULATIVE demand. That type of demand can sustain the market for a while – months or even a year. But at some point those buyers will look to take profits, and when they do, watch out. Listings could spike and prices decline, especially over the next 6-12 months.

Florida Housing Crash 2.0?

When that happens I expect home prices in Florida to decline. How much will they decline? Another 2008-style 50% drop is unlikely since the state 1) has better lending standards today than 15 years ago and 2) isn’t overbuilding as much. However, something on the order of 20-25% price declines seems like a distinct possibility given the pullback in migration to Florida combined with the high sales velocity figures.

Of course, this is just my opinion based on the data. You will need to conduct your own research, both from a data-driven perspective and on the ground, to make the right home buying or real estate investment decision for you.

Note: the opinions and data represented in this article are for educational and informational purposes only. They do not reflect financial advice. The decision to buy real estate, or not buy real estate, is a complex one and often involves personal finances, family situations, and preferences. Using data like this is just one piece of the puzzle in the decision-making process.

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