Miami Condo Lifestyle - Real Estate Bubble

Bursting the "Bubble Talk"

2nd Quarter, 2005
Ron Shuffield, President
Esslinger-Wooten-Maxwell, Realtors
Miami and Ft. Lauderdale

The real estate 'bubble' topic seems to be on everyone's mind today...from the oval room to the breakfast room...and certainly to the news room! Wherever the topic arises, Florida, and particularly South Florida, grabs center attention. It seems that the entire world is coming here and that our friends from all across the globe either want to own a piece of South Florida...or at least frequent our shores often enough to feel a sense of belonging to what we all enjoy here on a daily basis.

A new book which just hit the bookstores this Spring titled, Are You Missing the Real Estate Boom?, is filled with great statistical data and sound reasoning regarding the direction of today's U.S. real estate market. It was written by David Lereah, the Chief Economist of the National Association of Realtors and one of the nation's leading experts on real estate trends. The book provides concrete data on the true 'state of the union' as it relates to the real estate market. I have extracted a few of his thoughts and numbers to add to what I am currently witnessing in the market.

USA Today reported in April, 2005 that Florida will become the nation's third largest state by 2011, bypassing New York.

Is this explosive market which we have been observing over this past decade just about over? No...I don't think so. Will the staggering annual rates of increase in value which we have been experiencing over these past five years subside? Yes...probably. While the market is clearly very hot, and while yes, it probably cannot continue to accelerate at the rate at which it has over these past five years, I certainly do not expect a crash of any kind. But more importantly than just my opinion, facts offered by experts like David Lereah and others support the idea that we still have a lot in which to look forward.

At its foundation, the real estate business is relatively simple. Real estate values are created by "supply and demand". As the demand increases for homes (or any type of real estate) and the supply decreases, values will always rise. If we can accurately measure the demand for housing and correctly project the future supply of housing, it's fairly easy to predict the direction of sales activity and the subsequent changes in value. The data needed to arrive at these conclusions is readily available; therefore, building a graph of future values is fairly easy.

USA Today reported in April, 2005 that Florida will become the nation's third largest state by 2011, bypassing New York. Florida's population is estimated to soar from 17.8 million today to almost 29 million full-time residents by 2030. Add the number of Florida second-home and dual-home residents...and the numbers are dramatically higher. Per Florida's Office of Economic and Demographic Research, the State's current "net" population gain is averaging almost 1,000 new permanent residents per day. Almost 200 of these new residents are establishing residency in Miami- Dade or Broward County each day. At an average of 2.2 people per household, that means that we need to build about 90 new living units in the two counties each and every day...or 2,700 each month to provide for our growth. That's a need for over 32,000 new living units to be built per year just to house our new permanent residents...plus more for all of the 2nd-home buyers who are also wanting to buy.

As the demand increases for homes and the supply of developable land decreases, South Florida values are going to rise. It's that simple.

There are a number of concrete facts that support the premise that this active real estate market will continue for still yet a number of years. The real challenge is maintaining a realistic perception in the minds of the consumer. I speak with people who are convinced that the growth will continue ad infinitum. That's not a reality. I also speak with people who are convinced that the market is going to come to a grinding halt. Well, that's not reality either. The truth is somewhere in the middle. Market values cannot continue to increase year-after-year at 25%+ rates, but I believe that we will continue to see overall market increases which will outpace any annual cost-of-living increases...due primarily to the demand for South Florida housing, which isn't going away.

The one very large difference in South Florida and most every other U.S. market is our access to buyers from literally every corner of the globe. The western hemisphere has 800 million people...and we are smack-dab in the middle! Our single-family home and condo sales are not just dependent upon our local workforce. Many of our communities, especially our coastal communities, are already predominately inhabited by part-time residents...and that characteristic is spreading all across South Florida.

Going forward, we will continue to become more of a secondary-home community than a primary-home community...which is a good thing. Part-time South Floridians pay full real estate taxes, dine out in our fabulous restaurants, purchase tickets to our cultural and sporting events and shop in our wonderful stores and boutiques. We clearly have mitigating factors that make our market unique, not the least of which is the lack of land and the growing number of people who want to own our real estate. While the growth in South Florida values will probably not continue at such heated rates for the remainder of the decade, most acknowledge that we will experience rates of growth far-exceeding national averages. The long-term perspective for our markets is one of continuing world-wide attraction.

The following facts provide a basis of support for why I believe this active South Florida real estate market will continue to move forward in a positive direction.

Population Growth is the most important factor which influences demand for real estate.
United States

There are 296,000,000 people living in the U.S and 6.5 billion people in the world.
The U.S. population is increasing by 7,200 new residents every day.
1 "net" new resident is added every 12 seconds. 2,628,000 new residents each year.
The U.S. population in 2030 is projected to be 364,000,000.
The median age of all Americans is 35.3 years today and will be 39.0 years in 2030.
Americans will have to buy more housing in the future to house our growth.

Florida

Florida is growing by almost 1,000 "net" new full-time residents per day.
36% of Florida's net migration is due to international migration.
Miami-Dade and Broward Counties represent almost ¼ of Florida's population.
Miami-Dade and Broward will grow from 4.1 million residents to 5.6 million by 2030, an increase of over 170 people each day for the next 25 years.

Household Formations

Single households are increasing, which means fewer residents per average home.
Higher divorce rates = Greater number of households
54% of homes in Miami-Dade and Broward Counties are condos vs. single-family.

Demographic Trends

Baby Boomers	Born 1946 to 1964	41 to 59 years old	82,000,000 people
Generation X	Born 1965 to 1976	29 to 40 years old	46,000,000 people
Echo Boomers	Born 1977 to 2005	0 to 28 years old	76,000,000 people
75% of Americans		0 to 59 years old	224,000,000 people

The 82 million Baby Boomers are now entering their peak earning years.
Boomers and Xer's in their 30's and 40's are the move-up buyers of this next decade.
Boomers will invest heavily in 2nd and 3rd homes as their net worth grows and as they have more free time to travel. South Florida is on every Boomer's "list to consider". Our great weather and the ease of traveling here are two very compelling forces.
36% of all U.S. home sales in 2004 were secondary homes...an astounding %!
The 76 million Echo Boomers are just now beginning to purchase their homes.
Early observations show that Baby Boomer Parents are significantly involved in financially helping Echo Boomers purchase their first homes...more so than in any previous parent/children population groups.
Retirees are living longer; therefore, they are staying in their homes longer...reducing available inventory; thus, being partially responsible for driving up values.
The "transfer of wealth" from the senior generation to their heirs is now beginning to transfer hundreds of millions of dollars...much of which is going into real estate.
Immigration has accounted for one-third of the household growth in the U.S. since 1991...and their numbers are growing as a percentage of total sales.

Mortgage Rates

Interest Rates for 30-year mortgages from 1979 to 1990 ranged from 10% to 17%.
Rates have steadily fallen from 10% in 1991 to their lowest levels in approx. 40 years...5.5% to 6.0% today...which continues to encourage real estate purchases.
The majority of respected forecasters predict that rates will stay in the single-digit range through the end of the decade. Great news for first-time buyers.

Homes Sales and Inventory

Existing U.S. home sales (excluding new) have increased nationally from 3.1 million in 1991 to over 6.5 million in 2004...doubling the number of sales in just 13 years.
The supply of homes in the U.S. has fallen from 8.6 months supply in 1998 to 4.5 months supply in 2004. We have a shortage of inventory from coast-to-coast.
The market needs to have a 6 to 9 months supply of inventory to have a balanced market of buyers and sellers.
Less than 6 months supply of homes for sale will continue to cause dramatic increases in home values.
Miami-Dade and Broward Counties are at historically low levels of inventory...less than 3 months in Miami-Dade and less than 2 months in Broward.
Available land for development surrounding urban areas is becoming scarce.
Difficulty in obtaining zoning and permitting will cause new home supply to fall short of demand...especially in South Florida.

Income Tax Benefits

What other investment allows a married couple to keep up to $500,000 in tax-free profit ($250,000 for a single person) as does a primary residence lived in for 2 years?
The deductibility of mortgage interest and real estate taxes means that the U.S. Government is helping homeowners make their monthly payments every month!
The maximum income tax due upon the sale of investment property held for more than one year is only 15% of the gain vs. a maximum tax on personal income of 35%.

While all of these items listed above will continue to help propel our real estate market, at the end of the day...population growth is the #1 factor which influences demand for real estate. Just about everyone agrees that thousands of newcomers will continue to purchase homes in Florida, either as permanent or part-time residences. As the demand increases for homes and the supply of developable land decreases, South Florida values are going to rise. It's that simple.

It's not a question of, "if we build it, will they come?" They're already here...hence the growing demand for first, second and even third homes. It's a great time to be living and working in South Florida. Spread the word.