Residential real estate brokers from all across Palm Beach County are reporting to me that their sales are either slowing, or taking longer to close. It's the pause that refreshes!
Since 2010, our market has been on a constant upward spiral of price increases, with inventories slowly winding down to normal levels. Just as I predicted late last year, we are beginning to see a residential housing slow down. While inventories of residential homes have recently increased slightly, the number of eligible buyers has diminished. Why?
First, home prices have risen to levels almost equal to the high point of the price increases in the last real estate cycle. This was the cycle that started in 2001 crested in 2006 and ended with the stock market crash in 2008. Current affordability has declined, and as a result, fewer buyers are in the market, shopping for a home.
Second, the US dollar has risen to new highs in the world currency markets over the last year and a half, so much so that buyers from international destinations have come to realize that they can no longer afford a second home in Florida. Because of the dollar's rise in value, buyers from Canada, South America and Europe have all lost their currency edge for their purchases of US real estate.
Here is just one example of what I mean. What cost a Canadian buyer $ 400,000 in Canadian Loonies two years ago, now cost them $ 490,000 in their same currency - all because the US dollar is now worth 1.30 in Loonies as opposed to almost being at parody with the US dollar two years ago. Add to that cost of Canadian currency the stress of a significant rise in US prices of homes on the market in Florida, and a Canadian buyer simply cannot afford the same property that they could afford two years ago. By the way, the same principle of higher currency costs applies to buyers from Brazil, Argentina and from almost all parts of Europe too.
Third, the job market in this current real estate cycle has not been nearly what it was in the business cycle from 2001 to 2006. In fact, though we all see the headlines in most of our newspapers, indicating that the US economy is creating an average number of 170,000 new jobs per month, those jobs are not paying the same kinds of compensation that workers enjoyed in previous business cycles. In fact, American workers are working longer hours, and collecting less pay for their work. Productivity has declined too, so that US employers are using more workers to do the same work ten years ago. US employers are also providing significantly fewer benefits to their workers in this business cycle, and as a result, workers are having the extra burden of providing for themselves some of their benefits via their own salary deductions, thus receiving less after tax discretionary income for their savings and for their large purchases. With fewer workers making enough money to save a down payment on a home, has also come a rising deficiency of buyers in the current real estate market. And that is exactly what has been creating a kind of built in correction to our Florida real estate market.
So, how long will this moderate pause in the market that refreshes, last, and how long are home prices going to stay soft? The answer to this question is this: not long!
In fact, the seeds of another market move up in prices are being planted now. Since last February of this year, the US dollar has started to weaken. The dollar's fall so far has been large enough to cause a reaction, and that reactive change is going to be noticed first here in the Florida real estate market. My estimation is that starting next October we are going to see Florida home prices begin rising again. It takes about six to seven months for the decline of the dollar to begin affecting the Florida real estate market, so the price decreases we are seeing in the US dollar now, will finally begin to affect our real estate market in October. As the dollar falls, more and more international demand for homes in Florida will return, and as a result, home prices will start going up.
A change to the political structure in Washington is also coming. We have an election in the Fall. And this may lead to some significant changes to our US economy. No one knows who will win and who will lose, but one thing for sure is that changes are coming, and these changes may lead to Congress modifying US tax policy, and to a more moderate regulatory climate in which US businesses find the need to create a more robust and accelerated job market. More, and better jobs, will give our real estate market here in Florida a positive jolt of buyers, and this is what our market currently needs.
John K Brackett, Ph.D.
John K Brackett Real Estate