Everyone knows that real estate in Florida was decimated by the real estate market crash, so I won’t bore you with those details. The question I intend to address is whether or not real estate in Florida is a good buy for real estate investors today. Florida home prices are already up 8% on the year, but should investors be buying or selling Florida real estate right now? Is this recovery going to continue, or is it just a temporary spike? In this article I will attempt to answer those questions and more.
When I’m evaluating real estate markets there are several key factors I look at. Those factors are: Supply, Demand, Affordability & Growth. There are several other things I take into account as well, but those four are the primary evaluation metrics I want to see. Now, let’s look closer at each metric, and then apply them to Florida’s real estate market.
When I’m evaluating the supply for a real estate market, I’m looking at things like the number of homes for sale in the market, how many new listings are getting added to the market and how many months it would take for the market to absorb the existing inventory.
In June, the Florida real estate market had 112,365 homes for sale—down over 31% from the previous year. There were 26,062 new listings added in June, which was down 3% from the previous year. And, according to statistics provided by Florida REALTORS, it would take 6 months for the market to absorb current inventory—down from 10 months a year ago.
While that gives me a good idea about current supply levels, I always look at future supply as well. Since builders are required to file for permits when they build new homes, you can figure out fairly precisely how many new homes are going to be added to the market in the coming years. Here is a graph showing the number of building permits issued in the state of Florida over the past several years:
As you can see, building permits spiked when housing prices where peaking, and then crashed when housing prices fell. Builders have this tendency to overbuild when things are going good, which then floods the market, causing prices to fall. When prices fall, they tend to pull back too much— which is where we are today. While there are a few building permits being issued, considering how large the state of Florida is, the current number of building permits is very low.
Supply numbers are great and all, but without knowing demand they are pretty much worthless. As an investor you want to know whether or not that supply is going to be consumed by the market. When demand exceeds available supply—that’s when prices rise. To gauge demand in a market, I’m looking for things like the average days listings are on the market, the percentage of asking price received by sellers, and the number of homes being sold—both pending and closed. So let’s see how the Florida real estate market stacks up.
The following numbers are from June’s Florida REALTORS report:
Average Days on market: 60 (down 23.1% from last year)
% of asking price: 91.5% (up 3.2% from last year)
Pending home sales: 23.709 (up 31% from last year)
Closed home sales: 18,800 (up 5.3% from last year)
Depending on the type of real estate investment you plan to make, you might want to consider other demand metrics as well. In a place like Florida, for example, tourism is huge. If I was considering purchasing a home to use as a vacation rental, I’d want to look at tourism levels and demand for vacation accommodations. The fact that over 55 million people visited Orlando last year—making it the number one tourist destination in the world—would be something real estate investors should take note of. You may also want to look at new home developments in the area as another data point.
Supply and demand are powerful metrics, however, as a real estate investor my favorite tends to be affordability. Affordability metrics help you understand whether or not a real estate market is going to be able to sustain price increases, or whether it is due for a sell off. Bottom line, as an investor I want to make sure that the average Joe in a given market can afford to buy a home. If home prices are so high that only the financially elite can afford to buy homes, the market is not sustainable. During the real estate bubble, investors were buying homes left and right, which caused prices to increase so much that the normal people begun to get priced out of the market. In addition to investors running up the market, many people got ridiculous loans they couldn’t afford in order to buy homes, but in the end the same result came about—the market was forced to correct. If the average person can’t afford to buy a home in the area, I tend to avoid it.
In the state of Florida, the housing affordability index currently sits at 168 (up from 167 a year ago). The housing affordability index is a computation of the median home price, median family income and average mortgage interest rates in a given area. The higher the number, the more affordable housing is. To give you an idea of how affordable Florida real estate is, a 100 score is the point where a median-income family household has exactly enough income to qualify for the purchase of a median-priced existing single-family home (assuming a 20% downpayment and 25% of gross income devoted to mortgage payments). So a 168 score means that most Florida families can buy homes.
Lastly I want to look at the growth prospects for a market before I start buying. While affordability is extremely important, it can’t live in a vacuum—you have to factor in growth when evaluating a market. Some markets can seem great until you start looking at their growth. Who cares if houses are ridiculously cheap if the population is leaving the area (i.e. rustbelt)? No renters and no buyers, equals falling prices and vacant rental homes. Ideally, as a real estate investor, you want to target markets that are growing—both in terms of population and employment opportunities. It probably goes without saying, but when more people come into an area, it means more homebuyers and renters. That is great news for real estate investors.
According to the latest census, the population of Florida grew 1.4% from 2010-2011, which is .5% higher than the national average. Florida has always been a huge retirement destination, and as more baby boomers hit retirement age, they are naturally drawn to the warm shores of Florida. Florida is also a favorite of immigrants, which keeps the population swelling and the culture robust.
Looking over the figures I provided throughout the article has likely lead you to the same conclusion I have—that real estate in Florida is a buy. In fact, it is my belief that today’s market represents one of the best times in history for investors to purchase real estate in Florida. I’m not just one of those guys talking and not doing anything about it either, my company (Hanover) is actively purchasing bulk real estate throughout the state, and we have plans to keep on buying as long as market conditions are favorable.