Should I Invest in Florida Real Estate?
November 2005
YES! Florida has always been relatively insulated from any national real estate downturns. Why? Retirees are constantly moving here, and at a robust pace. The migration of service sector employees from the declining 'rust-belt' states is rampant. And all of these people need a place to live!
So what about the recent increase in housing prices? From 2001-2005, the median home price in Florida has increased by over 50%. Bear in mind that home prices were relatively flat for most of the 1990's! so part of the recent increase is attributable to the 'catch-up' effect. Florida home values are only now beginning to reflect how desirable it is to live in the state.
California home prices rose significantly during the past 40 years. California housing markets reflect a strong demand to live in the urban tropics. Florida too offers this urban tropic lifestyle, and at a fraction of the cost of California living.
Florida job gains have been robust in the last five years. Many new job holders seek their own housing units. With few resales available, the Florida construction boom has far exceeded that of the rest of America. The ratio of five-year job gains to five-year new home construction shows the market is essentially on target for the supply and demand.
And what about Baby Boomers? They are in their peak earning years and have been active in purchasing second homes, which many consider their future retirement homes. The baby boomer impact on the Florida housing market will continue for at least another decade.
Florida is also a prime retirement destination for an ever increasing group of wealthy foreigners, who are purchasing Florida real estate rapidly. A relatively weak US dollar makes our real estate a prime investment for those who would rather enjoy their winters here than in their cold and cloudy homeland.
With home prices rising strongly in most parts of the country, there has been widespread media coverage on the possibility of a housing bubble creating a housing market bust. A thorough analysis of the Florida market by the National Association of REALTORS reveals that the Florida market is in very little danger. In fact, markets like West Palm Beach and Tampa/St. Pete are in excellent shape with a potential for significant housing equity gains, particularly for homeowners who plan to keep their house for the long run.
Because prices have risen faster than income, the ratio of price-to-income is currently above the historical norm. This measure is frequently cited to imply that there is a housing market bubble. But this ratio is a misleading measure in assessing bubble prospects. A more relevant measure is the mortgage servicing cost relative to income. This ratio is only minimally higher than the local historical Florida average. It implies no widespread financial overstretching to purchase a home in the region.
So why should you invest long term in real estate?
- Home price declines are very rare. In fact, the national median home price has not declined since the Great Depression of the 1930s. Stock market collapses, the OPEC oil crunch, economic recessions and even wars have not negatively impacted national home prices since the 1930s.
- There have been few times when prices declined in any real estate market. In nearly all these cases, the price declines were accompanied by sharp prolonged job losses. Floridas job creation ability has proven to be well above the national average, therefore it is difficult to foresee a price decline in a job creating economy.
- Homes trade far less frequently than financial assets, therefore home prices are not prone to fluctuations as in the stock market. There are neither panic sells nor margin calls associated with homes.
- There are immense tax benefits to owning a home. These tax considerations mean that most home sales result in no capital gains tax. In addition, long-term capital gains tax rates were reduced in 2003, thereby providing higher return for home investors. These positive benefits show an even stronger case for housing fundamentals in supporting home prices.
http://www.624home.com/
