Quick – name an asset class that will increase in value by a double-digit percentage, every year, with no decline, forever. I’ll wait a minute while you consider some options.
Give up? Well, I admit it was something of a trick question. Because no such asset class exists – not even single-family homes in South Florida.
Why do I say this in the Forward to my Third Annual Real Estate Yearbook (available at www.NewRealtyConcepts.com/Yearbook)? The Universe has not blessed me with the special crystal ball that is a guaranteed predictor of the future. Yet the real estate market in South Florida looks very different today than it did in 2011 (the market trough), 2013 (when I moved here), or 2015 (the first year of my Yearbook).
Among Broward, Palm Beach, and Miami-Dade counties, I have analyzed pricing, sales and inventory trends in 60 distinct neighborhoods, defined by the local municipalities and by U.S. Census tract. This is a finer gradation than zip code and more meaningful to current and potential owners, and my Yearbook is the only publication of its kind to do this on a large scale.
Among the 60 neighborhoods, the median (half above, half below) rate of price change since the 2011 market trough, on a compounded basis, has been 10 percent per year. Consequently, the general pricing level in the median neighborhood is now approaching the levels achieved at the 2006-07 peak.
Between 1999 and the peak in 2006-07, prices generally tripled here in south Florida – that’s an increase of more than 14 percent per year, every year, compounded. Then came the crash, with massive destruction of short-term value. But since then, we have seen a brisk improvement by historical standards (“only”10 percent per year).
Still, in looking back at the very long-term (40 years), real estate prices in South Florida have generally increased on an annual basis at about half a percent above the underlying rate of price inflation. Now consumer price inflation over the last six years has averaged about 1.7 percent per year. So in other words, annual price increases of about 2.2 percent (as opposed to 10) would have been more in line with the historical standard.
There are times in the economic cycle when a more careful and cautious approach is prudent. Good strategies would include finding special situations, up-and-coming neighborhoods, and properties where some investment in updating could produce an enhanced return. Owning for the long-term (more than 10 years) has both a forced savings component and (historically) has provided a good inflation hedge.
Right now, there is generally a glut of single-family home inventory at the $750k plus price point. Even though some sales are occurring, this suggests that the market clearing price in that segment is well below the prices of recent sales. Conversely, at the opposite end of the price scale, inventories of single-family homes are low, and activity brisk.
We are no longer at a point in the cycle where you can throw a dart, buy anything, and come out a winner. Now more than ever, the skill of an active Realtor with strong local market knowledge is essential to your satisfaction and success in current market conditions.
James Oaksun, Florida's Real Estate Geek(SM), is Broker-Owner of New Realty Concepts in Oakland Park. In addition to having degrees from Dartmouth and Cornell, he is a Graduate of the Realtor Institute (GRI).