Thanks to the Federal Reserve easy money policy, all asset classes have experienced upward lift over the past several years. ZIRP (Zero Intrerest Rate Policy) has acted as an invisible hand supporting and lifting stocks, bonds and real estate prices. As with any asset price bubble, when prices become distorted, it is just a matter of time before they experience mean reversion. Maybe historical lows in borrowing costs aren’t enough to inflate prices anymore and the bubble is beginning to leak some air. Let’s take a look at a few charts. First, here is a snapshot of the average sale prices for houses and condos in South Florida through the month of August. By looking at this chart, you will notice that the prices of single-family homes have been on a slow grind higher for years, but appear to have peaked in May of 2014. House prices rallied slightly, but lost momentum this summer. As for South Florida condo & townhouse prices, it looks like they peaked in April. There may be a few fluctuations up and down over the next few months, but the longer term price trend appears to be heading downward.
What types of transactions are closing? Well, the next chart shows that traditional sales in the single-family home segment peaked in June with prices. In June there were 3,869 traditional sales and that number dropped to 3,195 in August. That represents a 17% drop over a few months. Foreclosure sales have risen slightly while short sales have declined, primarily due to the expiration of the mortgage debt forgiveness act.
How about the condo – townhouse market in South Florida? They haven’t fallen off a cliff like houses, but they have certainly leveled-off. There were 3,628 traditional condo/townhouse sales in April and that number slid 17% to 2,997 in August. Once again, the decline in short sales can be attributed to the expiration of the mortgage debt forgiveness act. Those distressed properties will gradually enter the foreclosure pipeline.
As for borrowing costs, they are still at historical lows. The real estate industry seemed overjoyed that the Fed didn’t hike rates in September, but they should be more concerned about why they didn’t hike. If the economy was actually healthy and not artificially inflated, a 25 basis point hike would have minimal impact. When they do have the guts to hike rates, you will see further price deflation across all asset classes as the invisible hand that has been supporting them gradually slips away.