Study: South Florida Housing Premiums Growing Despite Slowing Rents

Housing premiums in the Miami metropolitan area increased once again despite rising interest rates, a potential worrying sign for the housing market, according to researchers at Florida Atlantic University and Florida International University.

According to the end of March data from the Top 100 U.S. Housing Markets, the typical home in South Florida is 34.7 percent overvalued compared to its long-term pricing trend, up 15-basis points from the month before.

“This trend does concern me as prices are still going up in the Miami metropolitan area, but not in the rest of the measured areas in Florida,” said Ken H. Johnson, Ph.D., real estate economist with FAU’s College of Business. “Price growth should be tepid considering the slowdown in rents and rising interest rates, but South Florida prices continue to rise despite these market forces.”

The Top 100 U.S. Housing Markets, a part of FAU’s Real Estate Initiative, calculates how overvalued or undervalued the typical home is in the country’s 100 most populated metros. Johnson and fellow researcher Eli Beracha, Ph.D., director of FIU’s Hollo School of Real Estate, examine the difference in actual average home prices in a city and compare it to the long-term home pricing trend for the same city to calculate how overvalued or undervalued a housing market is using publicly available data from Zillow.

“South Florida’s rise in premiums suggests there is a dynamic on the supply side of the market specific to the local market that has yet to be addressed. We want property prices for an area to closely track the area’s long-term property pricing trend,” Johnson said. “This allows purchases today to be worth more soon without worrying about home prices violently swinging above and below the trend. This is a key factor in ensuring the American dream of homeownership. Unfortunately, this has not happened for the last two cycles in South Florida.”

Other metropolitan areas in Florida, however, showed positive signs of returning to their long-term trends. Measured against the previous month’s data, Cape Coral posted a 63-basis point decline in premium; North Port, a 48-basis point decline; Deltona, a 32-basis point decline; Lakeland, a seven-basis point decline; and Tampa, a four-basis point decline.

“As prices slowly make their way back to normal, it is a tossup between renting and reinvesting monies that would have otherwise been put into ownership and buying a home and building equity in terms of wealth creation,” Beracha said.

Johnson disagrees slightly as “it bothers me that home prices continue to increase despite slowing rents and rising mortgage rates. While I do not anticipate a major crash, the area could be in for a prolonged period of home price stagnation, making it slightly better to rent and reinvest at this point.”

Both researchers agree that the days of rapid property price appreciation are coming to an end sooner rather than later.

-FAU-