Will the Florida Housing Market Continue to Increase in Value in 2022?

Predictions for the Florida Real Estate Market in 2022

Since May 2020, Florida real estate prices have gone through the roof. The combination of low taxes, low mortgage rates and a more nimble, mobilized post-Covid workforce led to a rapidly decreasing inventory. It also leads to bidding wars and record breaking prices. In this extreme market many are asking: “Is the Florida Real Estate Market in a bubble?“, “Will the Florida Housing Market continue to increase in value in 2022?“.

In the below article, we provide you with our Florida Housing Market predictions for 2022. We will discuss what we expect prices, inventory, demand and supply to do in 2022. We have mentioned in several articles we expect the market to normalize. But what does that mean for buyers and sellers?

Click to watch the full video and read part 1 of the 2022 Miami Real Estate Report

Is this really a bubble?

The term “real estate bubble” creates a sense of panic among many. As we see real estate prices sort to new heights, it’s a term we are hearing more and more. But is the South Florida housing market really in a bubble? We are indeed seeing hysteric buying, bidding wars and record high prices. It might make us all remember the 2008 housing crisis.

However, there are several differences this time around. A big chunk of Florida’s luxury real estate is paid in cash and mortgage standards have also become more strict than ever before. People are now paying down at least 20% and banks are more strict with their requirements. In 2008 market we experienced subprime mortgages, ballooning interest rates that ballooned and weak underwriting. With that said, bubbles can occur for different reasons and the housing market. The condo market are underpinned by two very different sets of behaviors.

What is a Housing Bubble?

The term “real estate bubble” create a sense of panic among many and its a term we hear often. But is the Florida housing market really in a bubble? According to Investopedia, a housing bubble is a run-up in housing prices fueled by demand, speculation, and exuberant spending to the point of collapse.

Housing bubbles usually start with an increase in demand, in the face of limited supply. It takes a relatively extended period to replenish and increase. Speculators pour money into the market, and further drive up the demand. At some point, demand decreases or stagnates at the same time supply increases, which results in a sharp drop in prices—and the bubble bursts.

Investopedia. “Housing Bubble.” Updated December 25, 2020, https://www.investopedia.com/terms/h/housing_bubble.asp

What is a Bubble?

According to a recent article by Wharton, a bubble is when values are artificially inflated. Today’s South Florida housing market is experiencing a very different market than the one we saw during he last real estate bubble. In this market one of the biggest drivers of higher home values is lack of inventory. That’s probably not going away soon regardless of what happens to interest rates.

In 2008, we already had a high amount of supply, and now we are  experiencing a very unbalanced market in which supply cannot keep up with demand. This is not something that can be solved overnight, especially when the shortage has been going on for over a decade.  This is because of the high cost of labor and material which becomes even more challenging.

Low Interest Rates

In order to support economic growth the Federal Reserve said it will keep interest rates low. Although interest rates are expected to slightly increase in 2022. Rates will have to eventually be increased to limit inflation for all areas of the economy not just housing. Realtor.com anticipates mortgage rates will rise to an average 3.3%, hitting around 3.6% by the end of 2022. That’s up from a low of 2.65%. According to Forbes, the fact that interest rates are likely to be increased is further evidence that the housing market is not in a bubble.

The Florida Housing Market

Looking at the current Florida housing market, we do not see the demand drop any time soon.  On the supply side, the construction of residential houses  hasn’t been keeping up with demand for over a decade. The low inventory will take a long time to overcome. As mentioned before, the current market is built on more solid fundamentals and a massive shift in supply and demand is not expected any time soon. Rather, we foresee the market to stabilize or normalize.

The South Florida Real Estate Market Will Continue to be a Sellers Market in 2022

We expect the Florida real estate market to continue to be a sellers market throughout 2022. However, we will not see the same crazy growth numbers anymore. The 2021 trend of homes trading for 25% to 50% more than they did 2 years ago will become less likely. The hysteria will disappear, but the demand for homes is still there and the inventory remains very low. It will still be a sellers market in which prices are likely to go up (at a slower pace) and properties are sold fast.

According to a recent article in Forbes, housing experts are bullish about the current market because of what they call “solid fundamentals.” Creditworthy borrowers and strict mortgage qualifications are coupled with a basic supply-and-demand imbalance have created a strong seller’s market that could last at least 10 years. However, the current record high prices and mortgage rates expecting to increase in 2022. People won’t be able to be as aggressive in what they’re willing to pay which will soften the market. The South Florida market will still be a competitive market with elevated price levels that are becoming the new normal.

Why we expect the South Florida Real Estate Market to Continue to be a Sellers Market 2022.

Of course, we expect 2022 to be a sellers market. A sellers market is one in which supply cannot keep up with demand providing sellers with an advantage and leading prices to increase. Below we discuss the factors that drive the South Florida housing market and what we expect to happen to them in 2022.

The Demand for South Florida Real Estate is Expected to Remain High

Tax Policies

Florida is extremely in demand for its favorable tax policies and therefore attracts many buyers from the high tax states. High-net-worth individuals still want to call South Florida home and buy a primary home in Miami, Fort Lauderdale or Palm Beach. The tax regulations are unlikely to change any time soon. Once migration slows down it will give more room to local buyers who have been priced out of the market and are still looking for a home.

Working from Anywhere

The “work from anywhere” momentum is unlikely to become a dealbreaker for many businesses. Working from home is becoming our new reality and when people are left a choice on where they want to live, many mention that will be Florida.

Next Tech Hub

Miami is establishing itself as the new Silicon Valley and quickly becoming the next tech hub. According to Crunchbase the hype around South Florida as an up-and-coming startup hub isn’t just hype. Seed- and early-stage investment to Sunshine State founders really is up several-fold year over year. As more tech companies are relocating, this will accelerate moves as people desire to be close to other likeminded people.

Financial Institutions

Cities as Miami and Palm Beach are establishing itself as the new playground for hedge funds and other financial institutions. As more and more hedge funds establish themselves in Florida it is unlikely the migration stops all of a sudden.

Interest Rates

In the last 2 years, interest rates were one of the catalyst for the high demand and rising home prices. As buyers could afford higher monthly payments their budget could be stretched. Interest rates are expected to go up in 2022. Realtor.com anticipates mortgage rates will rise to an average 3.3%, hitting around 3.6% by the end of 2022. That’s up from a low of 2.65% in the first week of January for 30-year fixed-rate loans, according to Freddie Mac data. This will limit the budget of some buyers although we doubt this would make much of a change in many of the Florida markets where many deals are paid for in cash. If anything it will soften the market slightly, but we doubt this will have a massive impact.

Quality of Life

Miami’s quality of life is unmatched with year round sunshine. It has the best restaurants, amazing nightlife, lots of nature, beaches, shopping opportunities and of course lots of things to do for families. People come for the taxes and stay for the lifestyle.

Investing 

For the investors the real estate market is less of a necessity and more a conversation about the right utilization of capital. Comparing real estate to other asset classes real estate makes much more sense now.  At the rate money is printed, you do not want to sit on money. Stocks are at an all time high, much higher than during the dot.com bubble and well above the values just before the mortgage crisis. Although we don’t have guarantees about how high the stock market can go it definitely seems to suggest that you are buying at more of a peak than buying in the Miami real estate market, therefore making it riskier. Other assets such as bonds are limited as investment rates are already near a historic low. Real estate in 2022 seems still one of the best choices for investors.

International Buyers

During Covid-19 most of the demand was coming from domestic buyers. As of November 2021, the US has opened its borders for international travelers again.  This will start a new surge of buyers coming into the market. The Florida housing market is expected to see buyers from Canada, Florida, the UK, Germany and France again.

In South Florida we focus so much on relocation buyers, one almost forgets the many millennials who are eagerly looking at homes now.

Saturation Levels of Each Market

It is important to recognize that not all markets are going to increase in the same way. Let’s look at the saturation levels of each market. How much has the inventory decreased and how has the dollar per SF adjusted over the last years?

In the graphs below we share key data of some of the main (larger) South Florida markets which are Coral Gables, Pinecrest, Miami Beach and Fort Lauderdale. We deal with other areas and can provide you with these data upon request, but for the sake of simplicity we decided to just show these 4 markets in this report.
Some of the graphs only show dry lot or waterfront homes. We only show data for market segments that have at least 6 sales in a certain period. It is striking that in 2019, 50% of the sales in the $3M-$5M markets were waterfront homes while in 2021 that price range sees 90% of its sales being dry lot homes.

The Sharply Declining Inventory Levels in some of South Florida’s markets

Coral Gables Market Prices in Q3/Q4 over the last few years divided per price range

Pinecrest Market Prices in Q3/Q4 over the last few years divided per price range

Miami Beach Market Prices in Q3/Q4 over the last few years divided per price range

Fort Lauderdale Market Prices in Q3/Q4 over the last few years divided per price range

The Supply of South Florida Real Estate is Expected to Remain Low

If anything is a challenge in today’s South Florida real estate market it is inventory. You can’t sell what you don’t have. We have experienced that the people who moved to Miami do not want to move away, so it is getting increasingly hard to get hold of product. Of course there is a difference in product types. The condo market is more prone to a sudden increase of supply as new condos are often built and delivered around the same time.

The supply for Miami real estate can vary because of:

Capital Gain Taxes

Sellers are asking themselves:  “Should I sell or should I hold off?”  Many sellers realize they can get top dollar, but do not necessarily know where to go to next. This keeps inventory at extreme low levels. A reason to sell now might be President Biden’s new tax proposition.

The President is expected to propose doubling the tax rate wealthy Americans pay on investment returns when they sell stocks and other assets. Investors currently pay a 23.8% top rate on long-term capital gains, but if this new proposal becomes a law, capital gains tax might be raised to close to 40%. Those who know they’ll be selling a highly appreciated asset next year, should consider doing it now just in case capital-gains taxes do increase.

Rental market 

One of the biggest problems we have seen is the extreme shortage of rental properties. One of the reasons I have observed why many high-end home owners won’t sell now is because the rental market is crazy (this also affects the demand). As one client explained: “I love the idea of selling at $1M above the market, but it does not make sense if I have to then spend $400,000 on rent and then buy my next home at an elevated price point.” As property owners are rarely moving out of town and as the next price point / level is affected across the board, these properties do not sell in a vacuum. It’s a knock on effect. As I describe to clients it’s like slow moving traffic, that turns into a traffic jam that turns into a car pile up. Buyers are coming physically and ‘psychologically’ into the market at great speed, but sellers are leaving at a much slower speed.

New Builds

There is a huge appetite for new homes, but pent-up demand means it will take 3 years to build a new home. These new homes are being far more expensive as the cost of construction is 30%  higher than 18 months ago. There is also a shortage of labor and in the US as a whole we are experiencing a 5 year shortage of new homes. According to Forbes experts predict that current supply constraints will largely remain for the next year or two, or until most of the world is vaccinated.

New Condos

Unlike the last cycle, we have far fewer new condos than before. During the last economic cycle 30+ new condos were announced, many of which were generic units. 10,000’s Of units flooded into the market. This cycle we see very limited new condo product (Mr C Residences, Monad Terrace, Waldorf Astoria, Five Park, Eighty Seven Park, 57 Ocean). Furthermore the condos in this cycle are more high-end, larger and better finished. With other words they are being constructed for primary residents. These new condos are also more boutique style condos with a lower density.

Off Market Sales

I personally live in Ponce Davis, which is a very desired area right now, because of its bigger lots and proximity to the city’s best private schools. The inventory here is extremely low and will remain low for the months to come. This is the reason many trades are happening off-market. The sales you see on Zillow or Realtor.com are just the tip of the iceberg. Some of the key sales happened off-market. In 2021, I sold $100M in real estate off-market. This means that successes in the housing market are going to be less obvious in 2022. Therefore it is extremely important, now more than ever, to work with a well-connected knowledgeable realtor.

Advice for Buyers of Florida Real Estate

For buyers, we advise that it is ok to buy in this market, but be advised by a knowledgeable realtor so you you will not end up overpaying. The market is selling at high prices and most of these high prices can be justified. There are however sellers that are just testing the market and asking for outrageous prices. You do not want to buy at the peak prices! We help clients go off-market, but that doesn’t mean you have to overpay. We protect our clients and we warn them when they are overpaying.

Furthermore, the condo market is very different to the single-family home market. Investor driven markets are very different to markets dominated by primary home buyers. At this moment I am actually very worried about some segments of the Miami condo market and the condo rental market in Miami. So if you are a buyer in this market who wants to make a safe investment please call me at 305.508.0899.

Advice for Sellers of Florida Real Estate

It is important for sellers to know there is a window of opportunity right now to sell for top dollar. With very limited inventory buyers will do anything to get a house. Even when your house is not very well finished or needs updating, buyers will overlook imperfections in this market. This window will soon be gone. Many sellers are looking at new neighborhoods for better value or large lots.

Certain parts of our coasts line gives you more bank for your buck. Please stay tuned for our newest article on South Florida’s emerging markets for 2022. Yes we know it’s hard to find the same property elsewhere, but there is opportunity now to cash in and to buy a bigger/better home elsewhere. We have helped several clients with this upgrade and we have personal experience with this. Both me and one of my top agents have just sold the family home and bought land or a shell home in up and coming areas to create the ultimate dream home for our families. Is this always easy? No! But if you double your net worth in a couple of yours, you know it was all worth it. Again call me at 305.508.0899 so I can tell you about my own experience as well as those of some of my recent sellers.

Consulted articles:

• https://www.cnbc.com/2021/09/10/why-foreclosure-crisis-unlikely-as-covid-mortgage-bailouts-expire.html
• https://www.floridarealtors.org/news-media/news-articles/2021/10/sneak-peek-real-estate-trends-florida-2022
• https://www.realtor.com/news/trends/what-to-expect-in-2022-housing-market/?
• https://www.forbes.com/sites/forbesbizcouncil/2021/10/14/is-the-housing-market-in-a-bubble-3-reasons-why-the-answer-is-no/?sh=27dc27146d6a
• https://www.forbes.com/advisor/mortgages/housing-bubble-experts/