EconSouth (Third Quarter 2005)
Blueprint for Success?
Encouraged by continued population growth, a strong economy, and enthusiastic foreign investment, builders in Florida are breaking ground at a record pace on luxury high-rises and planned beachfront communities. And home buyers, eager to ride the wave of soaring property values, are snapping up properties that are still on the drawing board. Can the real estate market sustain this torrid pace?
Lined with many international banks and upscale, high-rise properties, Miami’s Brickell Avenue is sometimes called the Wall Street of the South. But in recent months much of this lively downtown neighborhood has become a construction zone, a transformation that marks Brickell Avenue as one of Miami’s most popular sites for new development.
Across the city, some $5.5 billion in construction is under way. As of July 31, 2005, 60 construction projects encompassing 14,134 residential units were rising from the sidewalks and reshaping the city’s famed waterfront skyline, according to the Miami Downtown Development Authority.
The supply of new housing now becoming available in Miami exceeds what was built in the past decade (9,152 units) and does not include another 212 projects encompassing 57,392 residential units that developers have proposed throughout the city.
While few analysts expect that all of these projects on the drawing board will be completed, the rush to build condominiums in Miami has raised concerns about the potential for an imbalance in the most active segments of the local housing market. “Miami is high on the risk chart,” said Brad Hunter, director of the south Florida division of Metrostudy, a real estate data firm.
A well-timed boom
But, offsetting concerns about overbuilding, others note that Miami’s construction boom has occurred during a time when the economic and demographic conditions throughout Florida have been generally favorable to housing.
|Photo courtesy of St. Joe Co.|
Growth in per capita incomes in Florida has kept pace with that in the United States as a whole over the last decade while the rate of population growth has consistently been about a percentage point ahead of the overall U.S. rate. The influx of new residents has put pressure on a limited supply of land—especially in desirable locations—and thus pushed housing prices up.
In the 12 months before June 2005, the statewide median sale price for homes rose 31 percent, according to the Florida Association of Realtors. By comparison, the median home price for the United States as a whole increased 14.7 percent—still strong by historical standards but well short of Florida’s recent performance. Of the nation’s 30 hottest housing markets (as defined by an increase in the home-price-to-income ratio since 1980) identified in a June 2005 report by Merrill Lynch, four are in Florida, with Miami number one in the “white hot” category.
Global investment flows to Florida
As a financial and transportation gateway between the United States and Latin America, Miami has long attracted plentiful international investment. But in recent years the flow of overseas money into Florida has become a torrent as investors flush with cash from economic growth in Latin America seek to capitalize on the state’s soaring property values, according to real estate analysts. South Florida is a popular destination for Europeans, and portfolio managers in many countries tend to view Miami beachfront property as a bargain even at current prices, especially in comparison to sky-high property values in Europe, and when purchased with dollars that are weak relative to the euro and other major currencies.
According to the National Association of Realtors, foreign investment now accounts for about 15 percent of all home sales in Florida, with the figure estimated to be much higher in Miami. Much of this money is going into mixed-use developments that blend high-rise residential units with some office, retail, and hotel construction. Although some Florida-based financial institutions have stopped financing new condominium projects in Miami, larger national and international banks have been active lenders in the south Florida housing market.
And the building boom has spread beyond the concentration of new housing near Brickell Avenue. In nearby Palm Beach 7,095 housing starts were reported in the first quarter of 2005 compared with 2,837 starts a year earlier, and in Broward County 10,811 starts were reported in the first quarter of 2005 compared with 3,466 starts in all of 2004.
New products spark rising demand
The strong demand and competition among buyers have led to the development of new products. For example, Web-based marketplaces such as condoflip.com allow investors to bid on contracts for units in luxury residential high-rises in Miami before ground is broken. Although many of the properties so far exist only as blueprints, buyers have continued to bid up prices. For their part, developers have responded by hiring renowned architects and promoting increasingly large and lavish waterfront properties that offer towering views and feature amenities such as gourmet dining, upscale shopping, heated pools, and high-speed Internet access.
“We’ve had a growth in demand that’s very real and based on economic fundamentals,” said Florida-based real estate consultant Lewis Goodkin. “But that growth has been greatly enhanced by something that has very little relationship to it, and that is speculation, or investment buying. There’s a sense of urgency in the marketplace that accelerates moves on the part of buyers.”
Some of the factors driving the run-up in housing prices are national in scope, including low mortgage rates and more flexible financing terms. Last year, adjustable rate mortgages accounted for 46 percent of the value of new mortgages originated, up from 29 percent in 2003, according to the Mortgage Bankers Association. The trend toward more flexible financing options has accelerated in recent months, effectively lowering barriers to homeownership. As a result, buyers who are willing to take on additional risk are able to get more house for less money, at least initially. Even with rapidly appreciating home prices, the rate of homeownership in Florida has climbed steadily to 72 percent from about 67 percent 10 years ago, according to the U.S. Census Bureau, slightly more than the current national rate of just above 68 percent.
Economic factors undergird housing
But Florida’s housing market possesses other unique factors. Because of the state’s warm climate and absence of a state income tax, Florida has been a longtime retirement destination, home to relatively few native-born residents and a large percentage of newcomers compared with the rest of the country. Only about 33 percent of Florida residents were born there, whereas 60 percent of people nationwide reside in their birth states. But with a steady influx of new residents, Florida has seen its population increase in 2004 by about 400,000 people to 17.4 million, said Stanley K. Smith, director of the Bureau of Economic and Business Research at the University of Florida in Gainesville.
|As the growth in housing demand continues to outpace supply, Florida is attracting more and more homebuilders.|
Florida doesn’t attract just retirees who bring their wealth; it also attracts a growing number of younger people who move there to work.Since the beginning of 2003, Florida has added 536,700 nonfarm jobs through August, bringing the total number of nonfarm jobs in the state for August 2005 to about 7.8 million, according to the U.S. Bureau of Labor Statistics (BLS). During that same 29-month period, Florida’s important leisure and hospitality industry alone has added approximately 83,000 jobs while solid growth has occurred in education and health services, professional and business services, and financial services.
Too high a price tag?
While homeowners reap the gains of rising asset prices, housing affordability has become an important issue across Florida (see the sidebar). In Orlando and Tampa, more than 60 percent of residents in a recent survey by the National Association of Realtors said they were very concerned about the cost of housing. Five years ago, the median sale price of a home in Florida was lower than the national average. But in June 2005 the median price of a home in Florida was $248,700, well ahead of the national median ($204,600). Still, housing in Florida costs less than in some states from which residents are relocating, such as Maryland ($287,439). During the past five years, Florida’s median home price increased more than 108 percent, according to the National Association of Realtors.
One reason why Florida’s real estate has appreciated faster than the national average is the strong and persistent growth in the market for second homes, which are abundant across the state. In 2004 second-home sales in the United States were a record 2.82 million units, up 16.3 percent from 2003, and for the same period vacation-home sales increased 19.8 percent, according to the National Association of Realtors. Foreign investment is helping to boost this demand as 75 percent of the overseas buyers in Florida said that their property there is for vacation purposes or rental income, according to the National Association of Realtors.
Finding the right vacation home in Florida can be difficult because many areas have geographical restrictions that limit the supply of available land and lead to sharp price increases in the event of rising demand. For instance, southeast Florida’s real estate supply is constrained by the Atlantic Ocean on the east and the Everglades National Park and Big Cypress National Preserve in the west. The supply of land for single-family homes remains especially tight, Goodkin said.
As the growth in housing demand continues to outpace supply—a key factor in price increases—Florida is attracting more and more homebuilders. Even Atlanta, which leads the Southeast in new home construction, can’t match the rate of growth in many key markets of Florida. While second quarter 2005 data show that Atlanta had 54,300 housing starts in the previous 12 months (a 55 percent increase in five years), Metrostudy shows that Orlando has 35,312 annual housing starts, a nearly 100 percent increase since the first quarter of 2000, and Jacksonville has posted similar gains. In smaller markets such as the “Treasure Coast,” with fast-growing St. Lucie, housing starts in the past five years have risen 164 percent.
Speculators could face surprises
Four hurricanes in 2004 weren’t enough to inflict permanent damage to the foundations of Florida’s housing growth: job and population growth. But Goodkin and others are concerned that market dynamics could change if mortgage rates increase, causing homeowners who hold adjustable rate debt to struggle to make higher payments. Goodkin notes warily that in Miami a growing percentage of condominium buyers—more than 80 percent, he estimates—are buying solely to reap continued price appreciation and have no intention of living in the units.
Attempting to capitalize on an expected glut of Miami condos, some investors have started to put money into “vulture funds” that jump into a weakened real estate market where properties are offered at reduced prices, according to a Miami Herald report and consultant Goodkin.
Moreover, as of mid-2005, many of the deals in the Miami condominium market had not yet closed. Investors who buy planned or under-construction condominiums typically cannot resell the unit until the entire building is finished; only at that point can buyers close on their units and gain title.
The condoflip.com Web site offers the following cautionary note: “ ‘Closing’ refers to the time that the buyer takes over the deed to the property. At that time, the developer also expects to have the balance of the amount owed remitted. So, until that time, you really don’t own the condo. You merely have a non-cancelable interest in the condo that ultimately becomes your condo at closing.”
But a condominium project going from start to finish can take years. With many condominium units “sold” in buildings that are still in the planning stages or are nowhere near completion, how or when many of Florida’s condo transactions will resolve is unclear.
Many factors are involved in determining housing demand and asset values, but the recent pace of activity in the hottest markets in Florida is unlikely to continue for the long term. “The housing boom will inevitably simmer down,” Federal Reserve Chairman Alan Greenspan said in August 2005. “As part of that process, house turnover will decline from currently historic levels, while home price increases will slow, and prices could even decrease. As a consequence, home equity extraction will ease and with it some of the strength in personal consumption expenditures.”
How the market will react to this sort of adjustment is anyone’s guess. Florida’s recent housing boom has been both a cause and an effect of the state’s strong economy, and it’s been a long time since certain markets there have experienced significant slowdowns. But while the dynamics of the state’s housing marketplace will vary from place to place, the fundamental factors that sustain economic growth in Florida appear set.
Milestones in Florida’s Development: A Century of Rapid Growth
Early 1900s: Oil magnate Henry Flagler begins developing the Florida East Coast Railway in 1885, connecting swampy frontier land to Jacksonville and the rest of the country. Flagler builds several hotels along the line, including the Breakers in Palm Beach. In 1895 the railroad reaches Biscayne Bay, where Flagler lays the groundwork for Miami by dredging a channel, building streets, instituting water and power systems, and financing a newspaper. The railway is completed in 1912, when it reaches Key West, then Florida’s most populous city.
1920s: A few years after the end of World War I, Florida becomes an attractive vacation destination accessible to “tin canners” who arrive in growing numbers via automobile. Northern newspapers promote Florida’s growth potential, and waterfronts sprout many lavish hotels. Land prices increase sharply during the early 1920s as investors from across the country pour money into Florida real estate. But the real estate market begins to weaken in 1925 followed by a collapse in 1926, the year a hurricane kills 243 people and destroys more than 3,000 homes in south Florida.
1940–50s: The U.S. military develops training bases in Florida during World War II and expands Florida’s network of paved roads. Later, wider toll highways such as “Alligator Alley” and multilane interstate highways extend into Florida, speeding the flow of cars carrying vacationers and retirees from the North.
1960–70s: During the late 1960s Walt Disney secretly accumulates 43 square miles of mostly agricultural land in central Florida. After announcing the development of a huge entertainment and hotel complex near Orlando, Disney undertakes the world’s largest private construction project. In 1971 the Walt Disney World theme park opens to the public, propelling central Florida’s rapid development. Statewide, the population grows and becomes more diverse with an influx of not only retirees but also immigrants from Latin America and the Caribbean.
2000s: Florida’s residential construction industry booms with increased demand for waterfront vacation homes and the emergence of discount air travel into key Florida markets. An antigrowth movement emerges, but with employment growth and real estate price appreciation strong, Florida’s population grows more rapidly than ever.
This article was written by William Smith, a staff writer for EconSouth.