When Will South Florida Real Estate Recover?

My trusted local realtor, Cathy, presented me with the current conventional wisdom on the question, and answers ranged from extremely optimistic "presently" to extremely pessimistic "the year 2030". Her answer raised in my mind a few other related questions, most notably, whether the market had yet "bottomed" and what "recovery" actually means. I also wondered about all the factors that would cause each process to occur.

The optimists say the market has already bottomed, and base that conclusion on scant recent data showing a recent up tick in sales activity and prices. Pessimists, however, are less sanguine and think it difficult if not impossible to call a market bottom so long as all the government tinkering with the markets through stimulus programs, such as buyer tax credits, residential loan buying programs, and bank bailouts, continues to gum up the free market clearing process. They think that banks sitting on foreclosed assets are also artificially propping up the market and keeping markets from achieving their true prices. Unless and until those temporary subsidies abate, and all the sellers actually finish selling, calling a market bottom and plotting a recovery trajectory will be premature at best. Eventually, however, even the pessimists believe a bottom will be reached.

Recovery means everything from a modest bounce off the bottom to a return to the all time price highs achieved in 2006. Short term recovery will depend on unemployment rates, currently at an all time high of 12+ percent, wealth levels that ebb and flow with a volatile stock market, and the availability and cost of mortgage financing. With all the talk of a possible double-dip recession, the stock market potentially re-testing March 2009 lows, mortgage interest rates reflecting more stringent underwriting criteria, and Fed interest rate hikes inevitable within the next year, the prospects for recovery seem to be fragile at best.

Longer term recovery will hinge on those factors and some others. Florida population growth has slowed significantly during the past several decades and will continue to slow. In addition, the Obama administration is determined to implement a big government agenda that is pushing public debt and deficits to astronomical levels, and could push interest rates, the US dollar, income taxes and inflation to their most unfavorable levels in ages. None of that will be good for the economy or real estate market recovery, with the possible exception that a weak US dollar may encourage more foreign investment in South Florida real estate.

What is the likely recovery scenario? South Florida's sky high real estate prices in recent years were part of a national real estate bubble that was borne out of the extraordinary availability of cheap mortgage financing and irresponsibly lax mortgage underwriting standards. Some think those conditions and the extraordinary price level they created are gone forever, but most think they are unlikely to re-emerge for at least a generation. Price recovery to a level three to four times South Florida median income levels would be affordable and sustainable and is probably the most likely price recovery scenario. According to the South Florida residential real estate price index, current median home prices are in an affordable range now and may suggest that indeed a market bottom is imminent. Unfortunately, however, that index may also suggest that further price increases based on local economic dynamics will be slow and modest going forward. (The index shows that South Florida home prices in 2006 reached 270 percent of their year 2000 level, and that even after the dramatic decline in recent years prices are still nearly 50 percent higher than in the year 2000.) What would it take to reach that 2006 high price level? Answer: home price increases would need to average 3 percent yearly for the next two decades in order to reach by 2030 their all time 2006 high.