Trouble in Florida
Hello! My name is Ben Sprague and each week I write about the economy and real estate from my perspective as a commercial lender here in Bangor, Maine. Check back each week for new articles. Thanks for reading.
Trouble in Florida
There have been few more solid investments over the last ten years than a home in Florida, which have appreciated in value from a median price in the mid-$160,000 range in 2013 to well over $400,000 today. Federal Reserve data in the chart below shows the Florida home index going from 278.99 in the first quarter of 2013 to 766.75 in first quarter of 2023, an increase of 175% (the data is standardized for the value in 1980 to represent a round figure of 100; that would mean the average Florida home sale price is 667% higher today than it was in 1980). The 2005-2020 surge and collapse in real estate values now looks just like a speed bump:
Why has Florida been such a popular real estate market? Simply put, people generally love living there. There is no state income tax, the weather speaks for itself, and there are a ton of things to do if you’re into, well, doing things, and if you’re not, you can sit by the beach, lay by the pool, or relax on your screened-in porch. Florida has always been a popular retirement and snowbird destination, with people traveling there from all over the country to live for six months plus a day (for tax purposes) and to get out of the colder northeast and upper midwest states during the winter. Governor Ron DeSantis has even been running for president in the Republican Primary under the tagline, “Make America Florida.”
So what’s not to love about the Florida real estate market? And why might real estate values in Florida now be in peril? There are several key variables at play:
COVID REVERSALS
Largely fueled by lax COVID restrictions and a laissez faire attitude about the pandemic (in which 1 in 286 Floridians died of or with COVID, by the way), Florida experienced a significant in-migration of people from all over the country from 2020-2022. These new Floridians swelled demand for homes and condos. From July 2021 to July 2022, Florida was the #1 top state for net migration, with a net difference of people arriving vs. people leaving of nearly +445,000 according to the U.S. Census Bureau and the Tampa Bay Economic Development Council. This worked out to an average of 1,218 new Florida residents every day. By comparison, Illinois, New York, and California all saw net losses of over 100,000 residents each from people moving away during this time.
But now the in-migration is easing up. While people are always going to move to Florida for the reasons noted at the outset, the COVID-era migrations themselves are winding down. In-migration of 445,000 people in a year is just not sustainable. Plus many people who moved to Florida so they could work from home remotely are getting called back to the office. With the tide of people moving to Florida slowing down, demand for homes will also ease, as will prices.
LISTINGS ARE UP
Low inventory has been a challenge for the real estate market nationwide. In Florida, inventory of homes-for-sale is still well below typical figures. In July, there were approximately 83,000 homes for sale, for example, well below the 135,000 homes for sale in July 2019. But, that 83,000 inventory number is actually 10,000 more than the 73,000 homes for sale in July 2022, and 31,000 more than the 52,000 homes for sale in July 2021. This increase comes during a time when nationwide inventory continues to drop. Nationwide in July 2023, there were approximately 647,000 homes for sale, down from 691,000 in July 2022 (although up from 546,000 in July 2021). So in Florida there are 10,000 more homes for sale today than a year ago, while nationwide there are 44,000 fewer homes for sale over the same time period. As inventory in Florida continues to increase, prices will come down as buyers will have more options and the power in the buyer-seller relationship will flip from sellers to buyers.
CONSTRUCTION IS UP
The past decade has seen a steady increase in building permits for single-family homes and condos in Florida, as illustrated in the chart below. This, too, will be a source of continued new inventory if the trend continues. With more homes available, prices will ease.
CLIMATE
It is a storyline worthy of William Shakespeare: the very thing that draws so many people to the Sunshine State, the climate, is now turning against it, driving up costs in the very places people want to live the most. Consider this: Florida homeowners now pay an average of $6,000/year in home insurance premiums, which is nearly quadruple the national average of $1,700/year. Premiums were up 33% in Florida in 2022 as compared to an increase of 9% nationwide.
The culprit: stronger and stronger hurricanes as a result of warming sea waters from climate change. Just recently, Tampa-based insurance provider United Property & Casualty failed, never quite having recovered from Hurricane Ian last September. It was the seventh Florida-based insurance company to become insolvent in the past 18 months. Farmers Insurance and several other insurance providers have pulled out of Florida altogether. AAA is still offering policies, but is declining to renew some existing policies in particularly risky areas of the state. With fewer companies providing services, there is less competition in the market and fewer choices for consumers, which is driving insurance prices up. As the cost of homeownership continues to rise in Florida, it could eventually play out in softening demand for living there.
Add on, too, the rising cost of flood insurance. As I’ve written about before, the national flood insurance program is massively underfunded, which is particularly worrisome in a time when flood waters are rising. Keep in mind that flood coverage is not included in standard homeowners insurance policies, so homeowners must pay for it separately if they want it (or their bank requires it). According to Nerdwallet, the average Florida flood insurance premium is $677/year and along the high-risk Gulf Coast in places like Tampa, St. Petersburg, and Naples, annual flood insurance premiums range from $950-$1,029, an expense that also continues to rise with each passing year.
What Comes Next
The massive levers that drive prices in any market are supply and demand. Florida has seen increasing demand and limited supply to meet that demand over the past decade, particularly in the last 3+ years. That is a formula for rising prices. But now these levers are starting to reverse, with demand weakening due to less in-migration plus the rising costs of home ownership through increased insurance premiums. At the same time, supply is increasing through new construction and new inventory from people deciding to list their existing homes. Declining demand and increasing supply is, of course, a formula for falling prices.
I would add that the level of growth that certain areas of Florida have seen over the last decade present challenges in and of themselves. All of those new people create pressure on the physical infrastructure - roads, sewers, and utilities - and for school districts. And if you are choosing somewhere quiet and relaxed to live or retire, many areas of Florida that were exactly that ten years ago no longer are because of a decade of sprawl. That, too, may self-correct the abnormally large demand the state has seen over that period of time.
Is the Florida real estate market about to collapse? No - there is always going to be demand for living in Florida. But the growth in real estate values is likely to ease off, and I would not be surprised to see real estate prices decline over the next few years thanks to the formula above of softening demand and rising supply. If you are a Florida homeowner on the fence about selling, now is the time if you want to maximize price (but then again, you have to have somewhere to go, and who wants to pay a 7% interest rate these days?).
One last note, much of this commentary is also relevant to some of the other fastest growing real estate markets in the American West, including places like Phoenix, Arizona. Much like in Florida, home prices in Phoenix have surged over the last few years, but also like Florida, the region is dealing with its own climate-related issues, including the rationing of water for residential use as the Colorado River and other water sources dry up. The price growth that area has seen since the start of the COVID-19 pandemic is not likely to continue, and almost surely will reverse.
Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. © Ben Sprague 2023.