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Media Area Is A Real Estate Bubble Forming in South Florida? As interest and mortgage rates begin to rise, the debate is in full swing as to whether a bubble is looming over the real estate (or housing) market. A bubble, in real estate terms, is the point where home prices are no longer sustainable, indicating that the market is headed dramatically downward, usually at least 10 percent. The bubble argument rests on two main suppositions: the decline in interest rates by the Federal Reserve inflated the housing bubble, and subsequently, rising interest rates will most likely burst the bubble i. The other argument is that real estate speculation, driven by low mortgage rates, has created an artificial demand and home prices are thus poised for a decline ii. Forecasting whether a bubble exists, and if it does, when the bubble will burst is near impossible. Even so, the overheated South Florida real estate market is raising concerns that the market mania is reaching the unprecedented rise and subsequent precipitous decline of tech stocks at the turn of the millennium. Demand is still at an all-time high. According to the Florida Association of Realtors, the median sales price for a home in Broward County jumped to $332,400.00 this past March, a 31% increase over March 2004. In Miami-Dade County, the median home price jumped 40 percent to $322, 300. Real estate professionals are crediting low mortgage rates and lack of inventory for the heated rise in home prices, driving would-be buyers to making quick decisions. In Weston, it's not uncommon for a seller to receive multiple bids on the first day the home hits the market, resulting in a contract price higher than the list price. Real estate is also a hot market for investors. The downturn in stock values has prompted investors to literally bank on the robust real estate market for high returns. Both local brokers and brokers from Latin America are attracting potential investors to South Florida with pre-construction investing into condominiums with the promise of returns as high as 100% per year…sometimes more. Indeed, many of these investors have no intention of ever living in the units they buy; instead, they look for rental income or are more likely to resell their units for a profit. Both the New York Times and Associated Press have noted the increasing trend in house flipping, investors solely buying homes that they can “flip” for a quick sale and a big profit. It is these speculative buyers that analysts accuse of being culprits since they are creating an artificial demand for condominiums and homes that will quickly vanish as soon as mortgage rates and interest rates increase significantly. Many of these buyers and investors are buying simply due to rising prices rather than for intrinsic value, such as one's desire to use the property for oneself. Secondly, the high price jumps of homes have risen faster than incomes. In a report from HSBC, entitled The U.S. Housing Bubble — The case for a home-brewed hangover, HSBC chief U.S. economist Ian Morris found that house prices relative to income, rent, replacement-cost and home-equity is reaching record highs. Home prices, he warned, could decline by five percent to ten percent nationally over the next five years. “Expectations of future house price appreciation are spectacularly, and unrealistically high,” he said. The decline in rent-to-price ratio also signals to some economists that a bubble is looming. Dean Baker, co-director of the Center for Economic and Policy Research, argues that if home prices are at a higher rate than rental prices and inflation, a bubble must be looming. If a growing population and a limited supply of homes are causing the increase in home prices, rental prices should also be roughly the same amount as home prices. Rental prices, however, are at a standstill and are not appreciating at the same rate as home prices. Rising mortgage rates can also impact the housing market since they make homes less affordable, which can hurt selling prices. Analysts at Business Week Online found that if 30-year fixed-rate mortgages rise just one percentage point, to 6.93% from their current 5.93% -- well within the range of forecasts -- house prices would have to fall 11% to keep new buyers' monthly mortgage payments from rising. If fixed rates went to 8%, prices would need to fall 20% to keep payments level. Mortgage debt has also risen faster than home values since 2000, according to Federal Reserve data. Many analysts argue that it is the relationship between interest and mortgage rates that inflate and deflate the real estate bubble. If the real estate bubble exists, experts argue, its explosion could also greatly impact the economy. Goldman Sachs economist Jan Hatzius argues that a decline in housing reduces consumer spending at least as twice as much as a same-sized loss in the stock market. On the other hand, optimists of the real estate market downplay the danger of a bubble, by pointing to the fact that despite the increase in interest rates, mortgage rates remain at a record low and the tight supply of homes for sale has helped to boost demand. Some economists also argue that rising interest rates are an indicator of the health of our economy. "The reason interest rates are higher is that we are in a growing economy," said NAR chief economist David Lereah in a recent release. The opinion is that rising salaries and stock market returns can create enough wealth to offset the negative effects of rising mortgage rates. Optimists of the real estate market also point to the government's campaign to boost the rate of home ownership. The government introduced initiatives to boost the rate of house ownership with tax incentives and the private sector has responded too, with increased competition in mortgage lending in the past decade. For South Florida, the real estate market reflects both investor enthusiasm and enthusiasm for home ownership with new demands coming from the climatic and multicultural attributes of the region. There remains an unwavering demand for South Florida housing, with unprecedented growth in Palm Beach County and steady growth in both Fort Lauderdale and Miami. South Florida continues to attract new residents from Canada, the Northeastern U.S., Latin America and Europe, and that high demand is outpacing new construction, creating a housing shortage. Although there are many buyers seeking to flip homes for high returns, there are equally as many South Florida buyers looking for places to live. Therefore, while experts are split on whether a housing bubble exists in the United States, for South Florida the soaring demand and drop in inventory suggests that home prices will continue to remain strong. While prices may dip or not continue their immediate escalation, one thing is certain: real estate is still your best long-term investment. If you are a new buyer you are advised to spend only what you can afford and use home equity with care. Do not plan to buy a house if you do not plan to live there for a few years. If you are a “flipper,” be ready to close on the property and rent out the place for a few years if you are unable to sell. Otherwise, be ready to walk away from your real estate deposit. Real estate investing is really just like musical chairs; when the music stops, and it will, because it always does, will you be left standing out in the cold? Roy D. Oppenheim is a highly respected real estate attorney with the Weston-based law firm of Oppenheim Pilelsky, P.A. He is also President of Weston Title and Escrow. Mr. Oppenheim recently provided expert analysis on the South Florida real estate market during a guest appearance on WPBT-TV, Channel 2. To see his interview, please log on to either www.oppenheimlaw.com or www.westontitle.com Research for this article was compiled by Connie Lewin, a senior at Princeton University.
i http://www.businessweek.com/magazine/content/04_29/b3892064_mz011.htm ii http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_wasik&sid=aDX8ADXYd6iE
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