The South Florida Condominium Market

The South Florida Condominium Market

The anatomy of a bubble.

K E N N E T H T. R O S E N CHARLIE H. ROSE

T H E S O U T H F L O R I D A condominium market has attracted much attention from real estate investors across the world in the past three years. Prices have risen more than 112 percent since 2000, new construction and conversions have soared, and the media has highlighted the easy money to be made by the "day trader" in condos. To many experienced investment professionals, this market appears to be a speculative real estate investment bubble, but most analysts (including Fed chairman Alan Greenspan) take the view that you cannot identify an investment bubble until after it bursts. We disagree. The purpose of this paper is to identify the indicators that show a real

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investment bubble has formed in the South Florida condominium market. We will also forecast the fallout from the bursting of the bubble that will inevitably take place.

The huge boom in condo construction that is taking place in South Florida has all the classic signs of an asset price bubble. While definitions of bubbles differ, it is our view that a bubble can be defined as market conditions in which new supply becomes disconnected from fundamental demand and a significant portion of purchases are made for speculative purposes, not occupancy by the purchaser. Other characteristics of a real estate bubble include rapid price increases, massive media coverage, participation in the market by naive investors (e.g., the shoeshine boy, taxi drivers, flight attendants, doctors, and dentists), rapid resales of units, flipping of units not yet built or occupied, easy credit conditions, a belief that prices only rise, and a massive entry of new professionals into the real estate industry (more brokers, developers, financers, etc.). This paper provides an anatomy of the South Florida condo bubble and will discuss the consequences and timing of a potential bursting of the bubble.

DYNAMICS OF DEMAND

Demand for condominium housing comes from a number of sources. New

entrants to the market come from the existing population who are now renters or possibly from existing single-family homeowners who want to move to the condominium lifestyle. New migrants to the area add to the fundamental demand for units. Part-time residents from the North (snowbirds) are especially prominent as consumers of the full-service condo lifestyle. Part-time residents from abroad are also an important part of this market, representing both demographic demand but also safe haven demand from Latin American political and economic instability. Move-up demand from existing condo owners trying to leverage up their existing equity also provides a significant portion of demand. Finally, during parts of the real estate cycle there can be massive amounts of demand from speculators taking advantage of the peculiar institutional weaknesses of the condo development and financing process.

South Florida's economic growth routinely outpaces the nation as a whole. As indicated in Figure 1, total employment in the area is expected to grow by 2.4 percent in 2005, down from 3.3 percent in 2004. Although the manufacturing, information services, and transportation and utilities sectors lost jobs, strength in the construction and service industries more than compensated for those losses. In a worrying sign of the broader economic impact of the current housing

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% change year to year

Figure 1: South Florida employment growth

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

-1.0%

-2.0%

-3.0% 1991

1993

1995

1997

1999

2001

2003 2005f 2007f

bubble, a large portion of recent job growth has been concentrated in real estate-related employment sectors.

In general, the economy is strongest in Broward County, followed by Palm Beach and Miami-Dade Counties, respectively. In the past year, Broward added 18,500 jobs, Palm Beach added 15,800, and Miami-Dade 14,000. We believe employ-

ment growth in the area will continue to outpace national levels during the next three years, with 50,000 new jobs added in the three-county area per year.

The condo bubble in South Florida has been a major driver in the local economy as real estate-related employment directly accounted for 25 percent of job growth during the past four years. As shown in

Figure 2: Private real estate employment (000): South Florida (1)

Total Real Estate Jobs Total Non-Farm Jobs Real Estate as Percent of Total Real Estate Jobs Added Total Non-Farm Jobs Added Real Estate Jobs Added as Percent of Total Jobs Added

2001 185

2,737 7%

2002 189

2,744 7% 4 7

60%

2003 195

2,757 7% 6 13

49%

(1) Preliminary figures Source: BLS

2004 208

2,828 7% 13 71

18%

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Figure 3: South Florida demographics

(thousands)

1970s* 1980s* 1990s*

Total Population

Annualized Absolute Growth

2,262.5 99.3

3,255.1 82.3

4,078.6 95.0

Annualized % Change 3.7%

2.3%

2.1%

Annualized Natural

Increase

4.2

12.8

17.5

Annualized Births 33.6

51.5

60.2

Annualized Deaths 29.4

38.7

42.8

2000 5,028.7

96.7 2.0%

20.7 67.7 47.0

2001 5,116.7

88.0 1.7%

19.9 68.7 48.7

2002 5,205.8

89.1 1.7%

20.2 68.4 48.2

2003 2004e 5,277.5 5,361.7

71.6 1.4%

84.3 1.6%

22.1

20.9

69.7

71.3

47.6

50.4

Net Migration

95.1

69.6

77.6

76.1

68.0

68.9

49.6

63.3

Households

Annualized Absolute Growth

774 1,266

49.2

32.0

1,586 32.7

1,913 36.8

1,947 33.5

1,981 33.9

2,008 27.3

2,040 32.1

% Change

5.0%

2.3%

1.9%

2.0%

1.7%

1.7%

1.4%

1.6%

Note: Pre-2000 population and household data are levels at start of decade, other figures are annualized changes from

1970-79.

Sources: US Census Bureau, Florida Dept. of Health, University of Florida Bureau of Economic and Business Research, RCG

Figure 2, more than 200,000 people out of a current total of 2.1 million workers are employed in real estate-related industries. In fact, the real estate boom has resulted in hiring in many diverse employment sectors, and directly and indirectly accounted for well more than 25 percent of total job growth since 2001.

The present burst of condo activity in South Florida started in 2001, spurred by real demand for housing from current residents, migrants to the region, and secondhome purchases from other parts of the United States and abroad (especially safe haven money from Latin America).

In analyzing the region's demographics, it is clear that there is strong demand for housing in South Florida. Figure 3 shows population growth in South Florida for the past four decades as well as for the last four

years. While the annual percentage growth in population has slowed over the decades, the average annual absolute growth remains strong in the range of 80,000 to 90,000 persons. Net migration from the rest of the United States and from international sources is also shown in this table. In addition, the table shows household formations of 30,000 to 40,000 per year. By Census definition, each household occupies one housing unit, giving us a direct measure of primary demand for housing.

Approximately 30 percent of Florida's population lives in the Miami-Fort Lauderdale-Palm Beach Area. In 2004, the combined resident population of MiamiDade, Broward, and West Palm Beach Counties grew 1.1 percent to nearly 5.4 million people, up from 4.3 million ten years prior, as shown in Figure 4. We

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% change year to year

Figure 4: Population and household growth: South Florida

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%

-1.0%

1991

1993

Household Growth

1995

1997

1999

Population Growth

2001

2003

2005f

2007f

Net Migration

Figure 5: South Florida net migration

35

30

25

20

15

10

5

0

-5

-10

-15

-20 1991

1993

1995

1997

Source: Census Bureau

1999

2001

2003

2005f

2007f

expect the area's population will grow by almost 270,000 people, and approximately 91,000 new households will be formed, between 2005 and 2008.

Although in-migration has slowed from the high levels of the 1990s, Figure 5 shows that the three South Florida counties will attract an average of 15,000 new

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