FEMA, Homeowners Insurance, Citizens and
Waterfront homes, low lying areas of Florida
Keith Gordon | November 15, 2022
I get asked questions all the time from homeowners and friends about home values. Now that hurricane Ian has
devastated parts of Naples, Bonita Springs, Estero, Ft. Myers Beach, Sanibel Island, and likely parts of Boca Grande has
this event changed anything about how buyers value waterfront and low-lying areas of the West Coast of Florida?
The short answer is no.
But there are other macro-economic issues at hand that has affected Florida’s home values. After any major event the real estate market does quiet down for a bit of time as people find their way back to buying and selling. This even
happens after major holidays or a selloff in the stock market. But this storm has emotionally exhausted all residents on the West Coast of Florida whether directly affected by Ian’s wrath or not.
There are two very big issues right now facing the Florida real estate market: The Federal Reserve (or inflation) and homeowners’ insurance. Below I talk about interest rates and where I see home values now. For more information
on FEMA and homeowners’ insurance, please read my article title “FEMA, Homeowners Insurance, Citizens and Waterfront homes, low lying areas of Florida.”
The real issue with the housing market in Florida is not from hurricane Ian but the damage that has already occurred by the sleeping Federal Reserve. Home sellers are now affected by what I refer to as the remaining effects of the
irrational exuberance left over from the 2021-2022 underpriced cost of money which led to the overvalued real estate market.
Let’s cut to the chase. How much of the 30% appreciation in Florida home values during the 18 months from Jan 2021 to May 2022 was a direct result of the Fed not raising rates to counter either buyer’s irrational exuberance or run-a-way
inflation?
The bottom line is buyers were likely very smart by buying anything they could as inflation soared taking advantage of the undervalued cost of money. In retrospect was 3% for a 30-year mortgage a gift from the Fed? How much were
rates underpriced during the 2021-2022 explosion in real estate prices? It appears by 4%. This amounted to another windfall for those homeowners that took advantage of the low rates and the 30% gain in home prices. A literal windfall.
Borrowing money at 3% reduces the risk of holding an overvalued asset just like it is for funding a new startup company. I would say the buyers were right this time taking advantage of the undervalued cost of money unlike 2006 when
rates were in the 5-6% range.
Just as a reference point the Fed funds peaked at 5.25% in 2007 as the Fed attempted to put on the breaks following the mortgage and housing crises in 2007. The Fed funds rate are now at 3.25-3.5% still 2% points under the 2007 levels.
The inflation rate in June 2007 was 2.85% and now CPI stands north of 8%. This gives a small perspective on how far the Fed is off right now.
A buyer that bought a $800,000 home when rates were 3% now enjoys that home with very low payments and the comfort of having 30-year money locked in at 3%. Fast forward to today. That same buyer keeping the same payment can only
buy a $500,000 home since rates have moved up to around 6%.
1% increase in rates is equivalent to 12% increase in payments. So how much has the value of that $800,000 dropped since the top in real estate prices was set in May 2022?
This is the question at hand for all sellers, buyers, and agents. We don’t exactly know yet. In some markets we see strength with prices remaining at or near May 2022 levels. I see these properties as unicorns though producing high
ROI such as high-end rental properties in luxury small markets.
But a home in a typical subdivision where homeowners are competing against new construction, where buyers need mortgages to buy and are priced under $800,000 have lost quite a bit of value. It seems there was at least 10% of fluff
or irrational exuberance built into May 2022 housing prices that instantly evaporated in June 2022: and possibly another 5% loss of value since then due to economic forecasts and higher rates. The irrational exuberance was a due
to lack of home supply, below market interest rates, supply chain issues and the resulting bidding wars.
In other words, it now appears we are about 15% lower in value as of October 2022. So, that $800,000 home is now valued near $730,000. On paper that $800,000 homeowner has lost possibly $68,000 in value but they own a very nice home
at low rates. That $800,000 home is a lot nicer than what you can buy today for the same payment.
This is the pricing quagmire we now find ourselves in. A homeowner’s purchasing power has been reduced by 40% over the past 5 months. Now that $800,000 buyer can only buy a $500,000 home. So, you get 40% less home for the same payment.
Ouch!
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