The Real Etate Bubble: To Buy or Not To Buy, That Is The Question

by Michael Eastham, CPA CRMS

As we consider the rapidly escalating values of homes in Central Florida, many people are asking if real estate is still a good, safe investment. This is becoming the topic of discussion in many circles throughout our area. In order to thoroughly understand why there should be little concern about a “housing bubble” here, it requires us to examine some of the underlying elements in order to put things in perspective. Additionally, there are several potential options relating to the ownership of real estate that can add to the complexity of a purchase decision.

In the last three years, we have seen real estate values increase by unprecedented amounts.  We have experienced double digit appreciation rates in many areas due to the incredible demand and the very low supply.  In fact, just one year ago, the average price for a house here in Central Florida was $159,900 and today it is about $200,000.  This should not be a surprise to us, because for the last several years, economic forecasters have projected that the greater Orlando area would be one of the fastest growing Metropolitan Statistical Areas (MSA’s) in the entire country, and that it would stay that way for many years to come. 

With respect to the pricing issue, if you compare the cost of a home in Central Florida to homes in many other areas around the country, homes here are still value priced and that is one of the primary reasons for the continued growth in demand.  Builders cannot bring product to market fast enough to satisfy the demand.  In fact, in the last twelve months, local inventories have dropped by as much as 50%.  Further, these attractive appreciation levels leveraged by the value of our currency in relation to certain European currencies have spawned a significant amount of overseas interest here.

Additionally, while many economists had predicted that mortgage rates would be between 6.5% and 7.00% by now, we have witnessed a roller coaster ride that has seen rates settle in even lower than they were last year at this time!  What an amazing bundle of circumstances!

This recipe of continued low rates, high demand and value prices bodes tremendously well for current home owners as well as for shrewd investors, because although we hear a lot of talk about diminishing real estate and fewer places to build, if you look at the amount of available land in Florida and compare it to other major metropolitan areas, you will see that we still have quite an abundance.  It may be pretty tight downtown, but look outside the city and I think you will see what I mean.

I believe this growth is sustainable for several years to come and I am a firm believer in the value of investing in real estate here.  The Orlando area is literally bursting at the seams and has begun to experience a phenomenon called “Urban Sprawl”.  Urban Sprawl is what occurs when people who are looking for homes begin to evaluate quality of life issues such as family, work, recreation and commuting, and prioritize them.  Then they begin to make lifestyle decisions based on those priorities.  This typically starts when people get disgruntled with home prices in a downtown area, which leads them to look farther and farther outside of the city until the ever sensitive balance of commute and affordability has been optimized to meet their level of acceptability.  Usually this change begins with real estate developers speculating on where the growth is going, buying up large tracts of land and building homes on them.  People begin to move further and further outside the primary city and those people want to have the conveniences that they had in the city.  So commercial developers come in and build town centers and retail centers.  The result is that within a major metropolitan area, you have many “mini-cities” which have their own “mini-economies”.  And people either work there or they accept the fact that their commute will be much longer because they have to travel downtown in order to get to work. 

As you travel farther and farther from downtown Orlando, you will see that there is a significant amount of available, undeveloped land.  This land is what will continue to provide new inventory over the next several years as we see population growth in this area.

Another reason why the growth is sustainable is that we are experiencing a shift in population here in Florida and many experts expect that shift to be quite dramatic over the next twenty years.  For years, Central Florida was considered a retirement Mecca, but now we are seeing an abundance of people moving their young families here for quality of life and value priced real estate among other reasons. 

We are attracting large companies from diversified industries including financial services and technology, which attract high paying jobs.  These companies spawn entrepreneurs who start small businesses that provide products and services to these and other companies.  And we all know that small business is the backbone of our economy, providing jobs for an overwhelming majority of the population. 

Additionally, Real estate is a collateral based investment with real, tangible value that is transferable and from a macro perspective, the last time I checked, the supply of real estate was not getting any larger.  This supports a very basic rule of economics called supply vs. demand; as supply decreases and demand increases, so goes the price.  Although we cannot expect to experience rapid appreciation forever, real estate has consistently provided competitive returns.

These are simply a few of the reasons why the growth will continue in Central Florida and why there should be little concern about a local housing bubble. 

Finally, when it comes to purchasing a home, there are so many creative loan programs available that nearly everyone with the will to own can take advantage of home ownership.  There are programs that allow for 100% financing and even more for those people who have very little or no money to put down; there are interest only loans that reduce your monthly payment so that you can qualify for a larger mortgage; Option ARMS are becoming more popular now and allow the borrower to choose from several payment options each month, depending on your monthly cash flow.  These programs can be a very effective cash management tool for people that do not have the same income every month (such as commissioned sales reps, or business owners) or for people who like to have more control over their cash flow in order to take advantage of other opportunities.  Most of us have heard of these leans; they are the ones that are advertised with the “1.00% payment rate”.  If you are self-employed or have had credit problems, even bankruptcy or foreclosures, there are creative programs that can get you into a home with very little money down and low rates.

Down payment assistance is also available through deferred payment loans, grants and gift funds through certain non-profit organizations.  Some of these programs have income guidelines and are distributed through government agencies and others simply require the seller to contribute to the pool of money that is gifted to other buyers.

There are even some programs that allow the borrower to use some or all of the realtor’s commission toward the closing costs or to buy down the interest rate on the mortgage.  This type of program can have a tremendous effect on the amount of money you need to come up with or on your monthly payment when applied properly.

If you currently own a home and are considering the purchase of a new home, but have gotten disillusioned by the prices or perhaps you do not think that you will be able to “move up” to the house you really want, you may want to consider building an addition or renovating your current home rather than moving.  The rapid increase in home values gives you a lot of flexibility with respect to the amount of increase in space or renovation upgrades you can add without worrying about pricing yourself out of the neighborhood.  So, if you love your neighborhood, need a bigger house, but cannot afford to “up size”, tapping into the existing equity for some of these changes may be an effective alternative.

The outlook for continued real estate growth in Central Florida is very strong.  And with interest rates continuing at record low levels, the abundance of creative mortgage programs available, population growth and many other reasons, I see no cause for concern about an impending housing bubble.  I agree that we cannot sustain such incredible appreciation growth forever, but I believe that for the foreseeable future, this area will continue to provide a robust and thriving real estate market.