Housing bubbles don’t always cause area’s market to collapse

South Florida has hit housing bubble territory. We clearly are in the price escalation phase of the current cycle, and now everyone wants to know two things: When will we reach the peak, and will we experience another crash?

Not all bubbles are the same, and if you use our market’s history as a guide, this one likely will be different than the catastrophic collapse that formed in the years after

2006.

In a housing bubble, prices rise steadily to an unsustainable level and fall. Sometimes the results are devastating, such as the historic meltdown after 2006, in which many homes across Palm Beach, Broward and Miami-Dade counties lost roughly half of their values.

Other times, the fallout is next to nothing, as we witnessed after the housing peak of 1980. Not many people may remember that bubble because housing prices barely changed as we moved through the peak of the cycle.

Since 1977, South Florida has experienced four housing peaks (1980, 1983,

1989 and 2006) and therefore four bubbles. But the only bubble we vividly remember was the peak and subsequent crash that started in 2006. The 1980 and

1983 peaks were followed by very modest price declines, while the 1989 peak was followed by nearly six years of flat prices.

The 2006 bubble saw wildly significant increases in housing prices — roughly 65% above where they should have been based on past sales and then nearly a 50% drop below where prices should have been by 2012. This is when the term “housing bubble” first entered our lexicon.

Housing prices in South Florida have been rising steadily since 2012. In 2016, prices were roughly where they should have been, based on the trend from 40 years of transactions. Since then, prices have continued to rise, and today they stand at roughly 13% above where they should be. Think of this as housing, on average, selling at a 13% premium.

So, history shows that South Florida has experienced four housing cycles since

1977, but only one collapse.

Now back to the questions at hand: When will we reach the peak of the current bubble, and will there be a crash?

It’s difficult to predict the future, but there are clues. The current rapid run-up in prices has been precipitated by a rapidly increasing population in the tri-county area, record-low mortgage rates brought on mostly by the Federal Reserve stimulating the economy and an extreme shortage of housing inventory 15 years in the making.

It’s clear what will trigger the peak of the current cycle: higher mortgage rates, which will happen when the Fed begins to taper its support of the financial markets. We will hear about Fed tapering on the financial news networks and in national news outlets. Mortgage rates then should rise slightly, but enough to slow down local housing prices.

But there’s no reason to believe the area will suffer a housing collapse similar to the 2006 peak. The continued increase in population, a persistent housing inventory shortage and relatively low mortgage rates should keep prices from falling significantly.

In addition, lenders are more careful about underwriting loans than they were more than a decade ago, meaning there’s a low probability of a foreclosure crisis being thrown onto weakening prices.

South Florida seems most likely destined for a 1989-type recovery, where prices remain relatively flat for an extended period, with only slight deviations in smaller annual property appreciation rates for several years.

What does all this mean for buyers and sellers? While this is an ideal time to sell, remember you then will be buying at the peak of the cycle or transitioning back to renting, which may not be ideal for personal reasons. Now might be a good time to stay in place.

Based on where South Florida prices are now, consumers would be better off financially by renting a home and reinvesting the money they would have spent on owning. But for those who insist on buying, bargain aggressively.

If you’re uncomfortable with the price and terms and the speed at which you have to make a decision, walk away. There always will be another property.

TRIBUNE CONTENT AGENCY Those looking to escape cold weather and state income taxes in 2020 were flocking to Florida, according to real estate agents. Sales in 2020 were 24% higher than the year prior, with the median home sale price increasing 17%.