Is Miami Real Estate in a Bubble? And Will It Burst?
Most of us have probably heard of a real estate bubble. But what does that mean? And is the Miami real estate market currently in one? With over 20 years of experience in Miami real estate, I have seen a bubble form and burst, and can give you a first-hand account of how it has affected the local residential real estate market.
Read on for more information on what makes a housing bubble, and my data-driven answers to the questions: “Is the Miami real estate market currently in a bubble? And will it burst?”
Miami Real Estate Market Facts
A Healthy Market
A healthy, stable real estate market is one with 6 to 9 months of inventory.
Inventory is the number of months it would take to sell all of the homes currently on the market, at the current rate of closed sales.
Shortage
If there is less than 6 months of inventory, it indicates a shortage.
A shortage leads to a buyer’s market and increased property values.
Not enough inventory = prices go up!
Oversupply
If there are more than 9 months of inventory, it indicates an oversupply leading to a decline in property value, and a buyer’s market.
Too much inventory = prices go down!
Miami’s Current Real Estate Market
Our most recent quarterly data for Miami-Dade County shows an average of 8,764 properties for sale. The average rate at which properties were selling in the last quarter of 2021 was 3,346 properties per month.
If we take the number of properties on average for sale in that quarter and divide it by the rate of sales, we get 2.6 months of inventory. This is indicative of a strong seller’s market with appreciating prices.
Analysis of Miami’s Current Real Estate Market
Taking the data into consideration, it is clear that Miami’s real estate market is currently in a boom. But to determine if Miami is currently in a nearly bursting bubble, we must compare the current market to the conditions during the last burst – in 2008.
Looking back at the Great Recession, during the first quarter of 2008, there were over 40 months of inventory.
How does inventory accumulation happen? And is it happening in Miami real estate now?
Two ways:
- New Construction
One could speculate that with the real estate boom currently happening, real estate developers would be building extensively. Well, they are trying, but with the cost of fuel, materials, and labor increasing, there are unprecedented challenges happening in new construction.
While currently underway projects by developers struck gold going from a normal market to this BOOM, developers in Miami also face the very high costs of land acquisition.
In the current market, you can buy a property resale for less than you can buy land and build on it.
- Resales
We are not currently seeing an increase in inventory DESPITE the fact that Miamians’ homes are currently goldmines.
Why?
Reason 1: Because Miamians have nowhere to go.
We cannot make a lateral move. If we sell well, that’s great. But there isn’t much on the market and often to get a better home, Miamians have to venture west. Way west. Not only that, we would lose our Amendment 10 tax savings and have to start fresh with a new base year. So, even with tax portability, our real estate taxes would go up. It just isn’t attractive to sell and buy within Miami UNLESS one has had a substantial increase in wages (which is rare in Miami).
Reason 2: Our inventory is being absorbed immediately by people from all over the world.
Reason 3: People are financially invested here.
One of the causes of the Great Recession was that many unqualified buyers were given 100% mortgages that they could not pay back. When all of these people realized the bubble was popping, their property would not continue to appreciate, AND they could not afford to keep the property, they all rushed to put it on the market to sell before their neighbor did.
The herd mentality of speculation and the same herd mentality of collapse and panic selling caused an explosion of inventory in 2008 the likes of which we had never seen before.
Can this happen again? Can we suddenly see an explosion in South Florida’s real estate inventory?
The answer is: No.
Why?
After the Great Recession, the Federal Government passed a series of amendments to the RESPA Reform Laws (RESPA: Real Estate Settlement Procedures Act). This meant that any buyers who were financing faced much stricter qualifying criteria, AND in most cases, much larger down payments.
In 2008, new homeowners had usually only invested 5-10k to purchase a property. And some had invested NOTHING. So, if you bought a property worth $1,000,000 and only paid some closing costs, but seemingly overnight, that property was worth $500,000… Would you continue to pay a mortgage on $1,000,000?
Most people opted not to, and FLOODED the market with short sale inventory. .If they couldn’t sell that way, they let the bank have the property via Deed in Lieu of Foreclosure OR they stopped paying their mortgage and waited to be foreclosed on.
After seeing the repercussions of fraudulent mortgage lending and speculative home buying, RESPA Reform came to the rescue. Most homeowners these days (whether investors or regular folks) have invested a large part of their savings for 20% to 50% down payments, or, at the very least 5% down and around 4% closing costs, which is a chunk of change when you consider 9% of the price of a Miami home.
There was even a period of time between 2009 and 2015 when you were hard-pressed to finance a condo in Miami AT ALL. Many condo owners own the condos outright for this reason.
Even if prices were to decline, we will not have the same short sale, foreclosure, and inventory oversupply CRISIS that occurred in 2008.
Answering the Questions:
Is the Miami real estate market currently in a bubble? And will it burst?
The short answer: Based on my analysis and over 20 years of experience as a real estate agent in Miami, I do not believe it will crash.
Inventory is on the lower end now, but will eventually increase to normal levels. Prices will stabilize (I believe at a new baseline level for South Florida) and, at some point, inventory will venture into a buyer’s market, like it has historically done.
The market has always expanded and contracted, risen and fallen, as is the nature of life. I always say, “Real estate is like life – with its unpredictability, its messiness, and, in retrospect, its patterns.”
