We now return to our series on predicting major moves in real estate prices here in South Florida.
Over the last 45 years, there have been four major trends in south Florida real estate prices – down/up/down/up – and three readily identifiable inflection points – late 1997 (down turned up), late 2006 (up turned down), and early 2012 (down turned up).
This week we will look at that first inflection point and see if we can answer two critical questions:
1. Why were real (inflation adjusted) prices falling from 1977 through 1997? and
2. What might explain the reversal of that downtrend?
Adjusted for inflation, real estate prices fell by 21 percent from 1977 to late 1997 – about one percent per year. Sure, there were a few blips here and there, but the clear trendline was down.
I’ve been looking for a formula that might explain why this and the other inflection points occurred. So far, no luck. Perhaps it is a fool’s errand, and I am no fool. I can look at the situation, however, and see a couple things that standard economic theory would suggest as contributors to that first inflection point of late 1997.
1. Supply and Demand. All other things being equal, prices will increase when demand exceeds supply, and decrease when supply exceeds demand.
What do we know about the period 1975-2000 from a development and building standpoint? That was the time frame when the suburbs west of 441 and the Turnpike were developed. Cities like Tamarac, Margate, Sunrise, Plantation and Pembroke Pines saw enormous new construction.
Broward County had tremendous population growth then, as well. County population increased from just under 900,000 in 1975 to 1.6 million in 2000.
So,
the population almost doubled. But believe it or not, the number of
housing units in the county more than doubled – from around 300,000
to around 700,000. And at that point, the county was just about built
out. Supply exceeded demand.
2. Substitution Effect.
The desirability of investment in real estate depends in part on
expected rates of return compared with other alternative investment
options. Indeed there are personal, emotional and psychic benefits
from owning one’s home. But there are times in the economic cycle
where its attractiveness as an investment is more favorable.
Considering the period 1977 to 1997, the S&P 500 index, with dividends reinvested, had a real (adjusted for inflation) return of nine percent per year. That compares with the -1 percent for Broward real estate. Clearly, having your money in the stock market in that time frame was more lucrative.
Of course, with the stock market (as with real estate), good times eventually end. In December 1996, Federal Reserve Chairman Alan Greenspan – whose every word and facial expression were analyzed by Wall Street – warned of “irrational exuberance” in the stock market.
But investors don’t just stop investing. Although the stock market game was ending, there was an asset class whose practical supply was almost maxed out, demand was strong, and was 20 percent cheaper than it had been 20 years earlier.
Open the floodgates Broward County, here comes the money. Inflection Point One has been reached.
Next time: The Bubble.
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