Florida - The Second Most Valuable Housing Market in the Country: Strong or Dangerously Inflated?

Gayle Kurtzer-Meyers

Florida has dethroned New York and has become the country's second most valuable housing market, but is this rise sustainable?

Florida is among the top states in the US when it comes to population growth. Between 1946 (2.4 million) and 2022 (22.4 million), the population has grown over nine times. The state experienced a significant population boom between 1946 and 1957, and even though the population increase percentage has been unsteadily falling, the number has always remained positive and almost always ahead of the national population growth rate.

Zillow's report cites this increase in population as the main reason for the state's rise to the country's second most valuable real estate market, pushing New York to third place. Eight out of ten Metropolitan Statistical Areas (MSAs) experienced the most significant price increase in 2022 were in Florida.

But how sustainable is this growth?

The rise of Florida's housing market

The increase in population is one of the most significant catalysts behind the rise of the housing market. Organic population increase (new births) impacts less than new people moving into a state. Florida has been the favorite destination for people moving away from other states for several years. In 2021, about 674,740 migrated to Florida from other states, and about 469,577 left, which resulted in a net increase of about 205,163. Even if we assume that all people moving in were in families of four, that would still increase demand for over 50,000 more housing units.

Increased demand allows homeowners/sellers to raise prices more rapidly, and increased market activity (many home sales and purchases) compounds this impact.

The three main reasons for this phenomenon are weather, tax laws, and cost of living.

As the hottest US state, Florida is ideal for people trying to move away from colder climates. Even though it's not always sunny in Florida, the state's average annual temperature has been at least 15 degrees higher than the country's average.

It is also among the most tax-friendly US states. There is no state income tax, whereas you can pay over 10% tax if you live in New York, leading to significant savings, assuming your income and expenses are similar in the two states.

It doesn't top the charts regarding the cost of living. Among the five most populous states, it sits right in the middle, with Texas and Pennsylvania ranking lower in cost of living and California and New York ranking higher. Rental fees are one of the main reasons behind this relatively high cost of living.

The primary reasons behind Florida's population growth and, as a consequence, the rising value of its housing market are natural/organic, a characteristic feature of a strong housing market. But there are some other factors that you should consider as well.

Foreign investment in Florida's housing market

Even though foreign real estate investment has fallen across the country for two consecutive years (2021 and 2022), Florida is still the most coveted market (by far) for foreign buyers. About a quarter of the homes (23%) purchased in the country between April 2022 and March 2023 were in Florida. Foreign investors bought about 98,600 housing units over that period. However, it represented just 1.6% of the total sales for the period. The trend (for Florida being the top destination for foreign investors) has persisted for 14 years. The reasons included Florida's population growth and its status as a well-known vacation state, which experiences a lot of visitor influx.

Since foreign investment has remained below 3% for the last three years (2020 - 2022), we cannot consider it to be a dangerous inflation element because even if you remove it, the demand may not fall hard enough to significantly lower the value of Florida's housing market as a whole. However, investors tend to lean towards specific needs, and they may have a high enough concentration of foreign investors to experience devaluation if foreign investors start diverting their attention away from the state.

But there is another, more dangerous side to it. Foreign investors still own a considerable segment of the state's real estate, and if a panic "selling frenzy" ensues, it can trigger a brutal snowball effect.

Florida housing market challenges

The rise of Florida's housing market has been meteoric, and even though healthy (organic) factors like inter-state migration and rapid population growth (and partly unreliable factors like foreign investments) drive this rise, you can't fully gauge the strength of this market unless you factor in the challenges as well.

Florida's housing market is facing some unique challenges. The current slowest poison for Florida's housing market is rising sea levels. Even at an alarming rate, the sea levels are rising at about an inch every three years, so it would take at least three decades for the sea levels to rise about a foot. Even at this rate, it would threaten, at most, a few thousand housing units that are too close to the shoreline.

A much more immediate threat to Florida's housing market, connected to rising sea levels, is floods. Most of Florida's land comprises low-lying plains, making hurricane-driven high tides deadly. Extreme rains can cause significant flooding, like in Fort Lauderdale earlier this year. It took over two weeks for water to recede from many city areas.

This flooding can cause long-term damage to the real estate properties. Hence, flood insurance costs have risen alarmingly in Florida, especially in high-risk areas. Even after FEMA has capped them, the prices may increase significantly over the years, as per the current calculations, which may change if floods become more devastating or frequent. In at least three Florida areas, a sizable number of policyholders may experience a monthly increase of about $80 or more in monthly insurance premiums, pushing the annual cost hike of insurance close to $1,000.

This cost of living increase, coupled with the problems floods cause for the state's residents, can significantly lower the desirability of specific Florida housing markets.

Like most heavily populated states, Florida also suffers from high crime, including scams. These crimes, especially the ones that directly impact the housing market (rental scams, vandalism, theft, etc.), are also challenging. So far, the robust rise of the housing market in Florida has subdued it, but once it starts to go down, crime statistics can exacerbate the problem and become one of the catalysts that accelerate the fall.

Inflated or strong

The core drivers behind Florida's housing market rise have mostly been healthy, which makes Florida a fundamentally healthy market. Also, two out of three reasons people come to Florida in droves (tax laws and weather) are distinct from the unique challenges facing the state's housing market.

However, the rapid rise, even if driven and sustained by the right factors, leads to some degree of inflation. If we disregard the climate challenges plaguing real estate in Florida, it's reasonable to say that the Florida housing market is nowhere near dangerously inflated.

However, climate crises, especially if they lead to frequent and more devastating flooding than current projections estimate and more of Florida starts getting hit, may not matter how fundamentally strong the housing market is. That's because negative natural catalysts like floods can permanently (or at least, for the long term) change public and investor sentiment.

The signs are already there, but they are hazy. Foreign investor activity has decreased in Florida's housing market, but that's driven more by rising interest rates and may have the chance to bounce back once the rates cool down. However, if it doesn't, and sales start outpacing purchases, it may become the first true sign of trouble for Florida's housing market.

This article is for informational purposes only. It should not be considered financial, real estate, or legal advice. The market fluctuates; therefore, not all information will remain the same. Consult a financial or real estate attorney before making significant real estate decisions.

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I am a Licensed Community Association Manager for the State of Florida and a published author. My top articles are about Florida RE, property management, and the many beautiful venues and activities available in the Sunshine State. Thank you for reading my work and joining me on the journey.

Kissimmee, FL

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