The 2022 Miami Real Estate Forecast | Part 2: The Macro-Economic Market

Understanding the Macro-Economic Market and how it Influences the Miami Real Estate Market in 2022

To better forecast the 2022 Miami real estate market we need to be aware of the broader macro-economic climate and how this can influence the actions of buyers and sellers. David sat down with asset manager Jimmy Ly, CEO & Founding Partner of Tigris Investments to discuss the macro-economic factors influencing the Miami real estate market.

Large Amounts of Liquidity and Negative Rates are Driving Funds Towards Real and Financial Assets

What does the macro-economic look like “post Covid” in 2022? We are experiencing a very liquid and bullish market. There is a high amount of economic stimulus, which will continue to drive this market forward and lead to continuous growth.  The amount of liquidity will continue to drive cash towards assets such as stocks, bonds and real estate. To put this into perspective, from December 2019 to December 2020 mutual funds and ETFs grew from $120B to $160B. That is an enormous growth in money in one year.

This overstimulated economy is now creating a level of inflation none of us has seen in this lifetime. The price of goods, gas and food has gone up considerably and is now really noticeable as is it reaching record highs near 7%. The high inflation rate is making people realize they sit on liquidity which they will have to mobilize. Real rates are negative so sitting on cash, besides opportunity costs, means you are loosing money. Many people are now setting things in motion to invest their cash and to get out of that negative rate environment. We are therefore still seeing lots of movement into stocks, bonds and of course real estate. Although interest rates are moving against bond prices, people are still searching for yield. In order to stop the economy from growing too fast and to control inflation,  Central banks are now reacting and reducing or even removing their stimuli programs.

Interest Rates Are Increasing – Effect on Miami Real Estate Market Will be Minimal

This year the interest rates are going up, which will affect mortgage rates and buyers’ psychology. The Fed will raise rates in march with .25% and the predictions for 2022 are a .75% hike. Rates have been low in recent years and an increase in interest rates might bring some doubt. In addition to this, the Fed will reduce the amount of bonds they are buying back. The Federal Reserve System had been buying back bonds in an effort to bring more liquidity into the market.  With the upcoming increase in interest rates it is to be seen what it does to the market’s confidence and how this affects investments and returns.  Of course if you decrease the market’s stimuli and increase interest rates the market will have to take time to adjust. With this amount of growth and economic development, volatility will come along. Fluctuations will happen so don’t run for the hill at the first signs of it.  So far the market is already reacting to the fed’s changes and it has been a subtle ride.

Will an increase in interest rates affect the Miami real estate market? I doubt it. If you look at interest rates and compare it to the market, it is still a no-brainer. There is so much demand and such a low inventory with relocations from around the country and investors from around the globe. Besides the enormous amount of sales, the demand for rentals is also insane. We are experiencing a 30% increase in rental prices and we have true examples of seasonal rentals on the beach that three seasons ago rented for $8K per month, while they now rent for $20K. As the rental market (specially the short term rental market) is going through the roof, many people are looking for an investment property or rental property with cash. Cap rates that used to be 4%/5% are now 10% and property appreciation is up 20% to even 50%. Looking at these data, the small increase in mortgage rates is insignificant. In part 4 we discuss cap rates and asset appreciation in further details.

Day to Day Live in Miami

Miami is seeing increasing economic activity, the market is developing rapidly and 2022 is a different market. Miami is becoming a leading city in the US, following in the footsteps of NYC as one of the US’ most important cities. Business is booming, already a regional hub for many multinationals, more and more tech and financial institutions are coming into Miami and here is tremendous growth. There is lots of movement from the northeast, California and South America. The new way of living and working from home has really helped Miami to become a more powerful city. Miami attracted new residents (for a lot of different reasons – see part 1) and knows how to keep these people. Besides this we are experiencing (on a national level as well) the wealth effect. There is a tremendous growth of wealth. The wealth effect of Covid has given the baby boomers, many of which are on edge of retirement, the ability to retire. We are also experiencing a new kind of economy with new workers. The new generation is going out on their own, they engage in side gigs, earn money on the internet and invest on the site. While for years young people didn’t want to invest in real estate or preferred renting over buying, we have experienced a shift in their behavior and spending pattern.

Everyone wants to sell at a major profit, but nobody wants to leave town. So you bought a $5M home that can now trade for $8M to $10M, but where are you moving to? Home owners are telling us they will need to buy in a sellers market themselves and with their proceeds they can barely find a better home than the one they sold. They need to buy at the same price and even if they buy at a lower price, their taxes will go up. This is specially a problem often mentioned by the baby boomers. Being on the edge of retirement you do not want massive property taxes and carry costs. These owners are really questioning whether it all makes sense to sell. People do want to buy but nobody is selling, that is a problem. We will have to start exploring other markets to migrate to.

What Keeps Financial Advisors up at Night?

Everyone wants to grow their wealth while protecting themselves. That’s what we want for ourselves and for our clients. So what are financial advisors worried about at this moment? Policy mistakes! Buying back the bonds, the increase in interest rates and additional reductions of stimuli, all of it might be necessary, but there is always a risk it is done too fast or too drastic and the market will not react well to it. Mass psychology is underpinning our market, so if you scare the herd it will have mass consequences. There are lots of variables that can influence this market. We cannot be overly bullish nor be overly bearish. It is hard to foresee the market too far ahead, but you cannot spook a market nor follow the herd without paying attention.

Focus on the Latin American Markets

In 2022 we are not just expecting national migration to continue, we also expect to see more wealth coming into Miami from the Latin American markets. The socio-political and economic climate in South America is drawing money outside of the continent. The risk of nationalization, massive inflation, currency devaluation and the lack of social programs create a hostile environment to generate wealth and therefore many are now seeking investments in the US, protected by US jurisdiction. Additionally, as a way to stimulate the economy, many Latin American governments allowed for pension funds to be withdrawn without taxing these funds. Wealthy families are now seeing ways to gather large sums of money and to invest this in the US.

With the Latin American markets typically being very keen on yield and cap rates in the Miami real estate market being at an all time high we are expecting the Miami real estate market to see a next big wave of buyers in 2022. As the Latin American markets generally focus more on the condo market we expect the condo market, particularly new construction projects, to continue growing.