What’s going on in the market?
Where is the market now and where do we expect it to go in 2023? Which of course leads to more questions like… do I buy, sell or hold in 2023? Let’s take a look at past results and current trends to shed some light on what’s ahead so you are not groping in the dark and can create a good plan for how to move forward in 2023 based on the best data available.
Sales Prices
Condo Prices: Fort Walton Beach, Destin and Miramar Beach (including Sandestin) condo prices started skyrocketing in 2019 when the median sales price jumped almost 38% in just 3 years, going from $332,500 to $535,000 last year. Not quite the same 3 year runup as 2002 to 2005 but pretty impressive nonetheless. Of course the down side of that 2003-05 curve needs to be considered as we look forward here in 2023 and beyond. Notice what happened in 2006 when that run ended.
To See Panama City Beach Data Click Here. To see data on other markets text 850+-217-7618 and tell me which market you are interested in.
Home Sale Prices in Destin and Miramar Beach (including Sandestin) also jumped dramatically, climbing from $533,750 in 2019 to over $1M in just 3 years. That’s an impressive 46.6% hike over a very short period of time and an even steeper climb than back in 2003-2005. Keep in mind that with most steep price jumps there is a fall back so we need to be ready for that eventually. The question is, will that occur in 2023?
To See Panama City Beach Data Click Here. To see data on other markets text 850+-217-7618 and tell me which market you are interested in.
Why did prices climb so high so fast?
Here’s why. The cost of money was cheap. During the pandemic the Fed did two things that massively impacted mortgage rates: First, they cut the federal funds rate which basically decreased the interest rates for both short-term (think credit cards) and long-term (think mortgages) loans, making it cheaper for people and businesses to borrow and spend. Next, the Fed bought more than $1 trillion in mortgage backed securities during 2020 and 2021. This poured a ton of money into the economy further resulting in an environment where money was both cheap and easy to get.
So what did people do? They borrowed cheap easy money and spent it, which for us here at the beach meant we saw record high rental income and sales prices. In November of 2019 the 30 year fixed mortgage rates were at 4.94% which made buying investment property (Airbnb’s) and real estate in general very attractive. Then when Covid hit in March of 2020 the Fed pushed rates even lower until they ultimately bottomed out in January of 2021 at 2.65%. Of course, by 2021 we were in the heart of a real estate boom. Go back and look at the graph showing prices from 2019 to 2022.
What happens now?
I think we are going to see prices drop in 2023 for these three simple reasons…
Cost of Real Estate. As we mentioned earlier real estate prices have jumped so high so fast over the last 3 years that the cost of real estate is now too expensive for most buyers. You will still have sales because of marriage, divorce, job transfers and folks that simply don’t care how much a property costs, they can afford it. But the pool of buyers will be much smaller.
Cost of Money. Again, mortgage rates have jumped so high so fast that the cost to finance the purchase of a property has become prohibitive.
Cost of Everything. The cost… of everything (inflation)… is so high which is forcing people to consume less. Fewer people can afford things like buying an investment property at the beach or going on vacation at the beach.
The bottom line? At the current “cost” the R.O.I. numbers don’t work for investors and the monthly payment is too high for folks who want to buy and live in the property. In other words.. The cost of money is not cheap anymore. Take a look at this graph showing how high interest rates have climbed since the beginning of 2022.
Does that really matter that much? Yes. When people buy real estate they generally solve for a monthly payment. How much they will pay for a property depends on what it’s going to cost them on a per month basis to own it. If they can afford the monthly payment, they buy. If they can’t, they don’t. For investors, it’s all about the cap rate. What is the return on my investment? With that low mortgage rate their return was high and worth the risk. With the new high rates… not so much.
Here’s an example: Let’s start with some context; during the first week of January, 2019 the 30 year fixed mortgage rate was 4.51%. Just two years later in January 2021 it had dropped to 2.65%, a 41.24% decrease. That is a massive difference in the cost of the monthly mortgage payment. Now, buyers and investors are dealing with the exact opposite. Mortgage rates a few days ago were 6.42%, or 58.7% higher than two years ago.
Here’s how much it matters on the purchase of a $500,000 home, putting 20% down, and getting 30 Yr mortgage: At 4.51% the monthly mortgage payment is $2,157. But at 6.42% it’s $2,899 or $742 more per month or $8,904 per year more. In short… It matters.
What’s Happening Now?
Transactions have ground to a halt. Buyers don’t see value at today’s list prices, especially with today’s mortgage rates so they are sitting out and not buying real estate at this time.
# of Condo Sales: This graph shows the number of condos in Ft. Walton Beach, Destin and Miramar Beach (including Sandestin) sold over the last 20 years.
Pay close attention to the spike in sales from 2002 to 2004 because it looks a lot like the spike from 2019 to 2022. Then look at the drop off in 2005 and beyond. Now look at the drop off in 2022. Look familiar?
Houses in Destin and Miramar Beach (including Sandestin) are feeling an even sharper decline in the number of sales.
To See Panama City Beach Data Click Here. To see data on other markets text 850+-217-7618 and tell me which market you are interested in.
What has to happen for buyer to come back?
This is a pretty easy answer… either real estate prices have to drop or the cost of money (mortgages) has to drop, or both.
Will mortgages drop in 2023? Jerome Powell, Chairman of the Fed, has consistently said that the Fed is not going to reverse its tight money policies in 2023. Additionally, many analysts believe there will be at least one more rate hike and possibly two this year so it doesn’t look like the cost of money is going to come down anytime soon.
If not mortgage rates? If the cost of money isn’t going down, that will put a ton of pressure on real estate sellers to lower their prices which is the most likely scenario.
What else are we watching?
Cost of living. Because life costs so much more in 2023, the number of people taking vacations will likely drop and the vacations they do take will likely be shorter. If things play out this way, the number of nights booked will drop, taking rental income with it. This will put pressure on owners trying to keep “heads in beds” to lower the price of rentals. Resulting in even lower rental income numbers.
Cost to own property at the beach. The cost to own property here at the beach jumped a lot in 2022. According to Forbes, Florida homeowners pay the highest insurance premiums in the U.S. at an average of $4,231 per year, more than triple the U.S. average, according to Mark Friedlander, spokesperson at the Insurance Information Institute. Average year-over-year increases are about 33% in Florida compared to the 9% that you see with the national average, says Friedlander. Some homeowners are seeing renewal rates of over 50% to 100%.
Condo HOAs are also experiencing increasing insurance rates and expensive special assessments for ongoing building maintenance.
General maintenance that property owners deal with such as appliances, HV/AC systems, and upkeep in general has jumped as well because of inflation, supply chain, and labor issues.
When will things change?
This is the question we are all wondering. Here’s the thing… markets are mostly driven by emotion which is then backfilled with action based on logic. Often, markets suffer from a self-fulfilling prophecy. When prices start falling buyers tend to hold out even longer believing they will be rewarded with a lower price for a property or a better property for the same price. This often results in… lower prices.
The same thing happens on the selling side when prices are going up. Buyers will often overpay believing if they don’t buy now they won’t be able to afford to buy in the future. This overpaying leads to… higher prices. Until it doesn’t. That is when a cohort of buyers decides prices are so low and will likely start going back up soon that they “break the ice” and buy. This then causes other buyers who have been watching to also jump in, emotion takes over and we are off to the races again.
Where are we right now?
From what I am seeing, reading and hearing we are at a point where prices are too high for most buyers and investors. This has caused transactions to slow to a crawl. BUT… BUT prices haven’t started falling yet. Or at least very much. BUT… BUT… they will. Soon.
Our Advice?
If you are a long term investor (not a flipper or someone at the end of their ownership cycle) you can afford to ride out this market. You may even want to get ready to add a property if prices drop far enough.
If you are a short term owner and looking at selling in the next couple of years you may want to sell now while we know prices are pretty high. We saw back in the last downturn that when prices dropped they dropped fast, they dropped deep, and they took a long time to get back. I don’t know how far prices will correct this time, or how deep the correction will be, or how long it will take to get back to the high prices again, but it could be a while. Be careful.
If you are a buyer and plan on holding it for a long time, then go after the best deal you can get, max out your rental income, and ride the market until the time is right to sell and reinvest or cash out. After the Great Recession it took 17 years for prices to get back to the 2005 highs again but… but… if owners invested in 05, and collected an average of $15,000 in annual positive cash flow per year, they would have collected $255,000 in rental income and had someone else (renters) pay off 17 years worth of mortgage cost. Not to mention, tax write offs, deprecation and many cash out refinance opportunities. All pretty good options.
If you are buying to flip and grab quick cash… be very careful.
Bottom Line
We are wealth builders, so our goal (whether you are buying or selling) is to build or protect your wealth – based on your financial goals and the current market conditions. Call us today and lets talk about how you can max out your position as a buyer, a seller or as an owner to continue building your family’s wealth well into the future.
Committed to your success,
John Moran – CEO The Smart Beach Investor | Keller Williams Realty AT THE BEACH TEAM
Keller Williams Realty – For Your Place at the Beach