 | The Investment U E-Letter: Issue # 373
Monday, September 27, 2004 Florida Real Estate: Housing Bubble or Still Cheap?
By Dr. Steve Sjuggerud, President, Investment U
"The housing market is rapidly losing touch with reality… The passionate faith that money poured into real estate will magically multiply is creating a self-fulfilling speculative frenzy that's bound to end badly."
~ Fortune magazine's cover story this month $474,370: Median home price in California
$189,500: Median home price in Florida Florida real estate prices have gone nuts since 1999… since the stock market peaked. I bought my house on the Northeast coast of Florida less than four years ago, and right now I have it on the market now for twice what I paid for it. I could have done much better… I used to live in Delray Beach, FL. My wife and I negotiated (and passed) on a beachfront townhouse down there six years ago for around $160,000. Today I'm sure it's more than $500,000. My parents were smarter… They bought an investment property in Delray in 1998 for around $66,000. It's on the Intercoastal Waterway, three blocks from the beach. A same-sized unit in the complex just sold for $190,000, so my parents are looking at a near triple on their investment in six years. Sure, Florida real estate has gone crazy in the last five or six years. But has the gain been irrational? I don't think so… There Is No Nationwide Housing Bubble I was amazed when I ran the numbers… and discovered that Florida real estate has only risen by 0.75% per year in value since 1975, when you take out inflation. And yes, that includes the big run-up in prices since 1999. Unbelievably, before 1999, Florida home prices show no gain for the previous 25 years, when you adjust for inflation. (See chart below…) 
Meanwhile, Investment U Vice President Brian Hunt was out in Carlsbad, CA last week. He went out for a jog, and while jogging he passed a sign that said "Starter homes, starting in the $900s…" Of course, these home have no ocean views… or views of anything. It was a cookie-cutter neighborhood… nothing special at all. What's going on? According to the current issue of Fortune magazine, what's going on is a nationwide housing bubble. But by my research, we do not have a nationwide housing bubble. We have a bubble in California, and a few coastal towns, and that's it. Home prices in much of America are still affordable. Let me explain… Sell California Real Estate, Buy Florida Real Estate I live on an island off the east coast of Florida, near Jacksonville. The median home price in Jacksonville is about $150,000, and the median family income is about $50,000. At current interest rates, the median family would spend about 17% of its monthly gross income on its mortgage payment (principal and interest). Jacksonville prices have risen fast. But mortgage rates have fallen faster than the home prices, making home payments very reasonable. It's not just Jacksonville. The numbers for a long stretch of Florida's east coast - the Melbourne-Titusville-Palm Bay area, for example - are about the same. It's a great deal for coastal real estate. People are starting to catch on - real estate prices in that area are up nearly 20% in the last year. But it's still cheap. Not everywhere in Florida is a great bargain. For example, the West Palm Beach-Boca Raton-Delray Beach stretch isn't nearly as attractively priced anymore, as prices are much higher and incomes are lower than the other regions I talked about. But compared to California, Florida real estate is super cheap… In Florida, from Jacksonville to Palm Bay, the median family can buy the median house with 17% of their monthly gross income. But in certain California areas (including San Francisco and San Diego), it would take the median family over 50% of their monthly gross income just to afford the median home. The east coast of Florida down to Palm Bay is so cheap, relatively (even after the big price rises), that it compares with towns like Omaha, NE, and Indianapolis, IN, where it takes the median family only 14% of gross monthly income to afford the median home. But it snows in Omaha… Want to buy a few minutes from the beach, at close-to-Omaha prices? Consider buying near the coast in central and north Florida. Prices are rising fast. Judging by how high prices are in coastal markets like California and the northeastern U.S., there's plenty of room to run. Today's IU Cribsheet - As for other markets, at first glance, the median home in the Washington D.C. area appears very expensive, in the $400,000 range. But surprisingly, the median family income in a few surrounding counties (like Fairfax County, Virginia, and Montgomery County, Maryland) is nearly $100,000. The mortgage math works out where these median families can afford the median home. New York / New Jersey is somewhere in between D.C. and California… not cheap by any standard, but not at California's bubble proportions, as incomes are higher in New York and home prices are lower than California's.
- It's tough to compare apples to apples here. I used data from http://www.ofheo.gov, http://www.realtor.org (the National Association of Realtors), the California Association of Realtors, the Florida Association of Realtors, for home prices; and http://www.census.gov for median family incomes.
Good investing, Steve
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