Although inflation is beginning to cool, the affordability advantage South Florida has enjoyed historically has continued to dissipate and is unlikely to return, specifically for housing. The result is the rental market being the most affordable choice for many South Floridians.

The influx of new, high income residents, coupled with more constrained for-sale housing and single-family construction has made homeownership in the area increasingly difficult.

Residential construction activity has underperformed compared to the time period from 2003 to 2006. During this period, total residential construction permits almost doubled what has been issued in the past few years.

Construction activity looks even worse when looking specifically at permits for housing with less than five units, which includes all single-family construction. This metric has remained well below historical levels since 2010, and despite a rise leading into the pandemic, has continued to contract since 2020.

On the other hand, housing with more than five units, which includes condos and apartment buildings, has remained elevated. Still, the majority of these larger housing permits have been concentrated in for-rent apartment buildings, which are set to deliver through 2025.

Aside from limited new for-sale housing construction, the number of listings of existing for-sale housing remains constrained. Active for-sale residential listings remain at less than 50% of levels seen before the pandemic, both nationally and in South Florida.

This has put further pressure on one of the most active housing markets in the nation. In fact, despite limited for-sale housing, significantly higher home prices, which have risen over 50% since 2019, and elevated mortgage costs, buyers remain active in South Florida. Single-family and condo median sale prices have continued to rise to new heights in the past few months, with median sale prices for single-family homes standing at over $600,000 and condos at over $400,000 in Miami, as of the latest readings from Miami Realtors.

Home prices have continued to hold as housing demand from U.S. residents is also boosted by the international buyer. Florida remains the top destination for foreign buyers in the U.S., with international searches for properties in South Florida remaining elevated from countries like Colombia, Germany, Venezuela and Argentina.

International players in the market are typically not sensitive to mortgage rate activity as they tend to purchase with cash. In fact, a higher share of international buyers pay in cash in South Florida, with around 66% of international buyer transactions composed of all cash deals, relative to 44% nationally. This has continued to result in an elevated share of all cash transactions for single-family and condo housing in South Florida, with over 50% of condos being sold for cash and around one-third of single-family homes.

This influx of demand from cash-rich buyers which are not interest rate sensitive, coupled with a decreased inventory in for-sale housing, will likely continue to hold property values in the near term. Additionally, homeowners who locked in low-rate mortgages in the past few years are unlikely to sell unless they are pressured by some life event.

As of the second quarter of 2023, the effective rate of interest on mortgage debt outstanding stands at around 3.5%, according to the Bureau of Economic Analysis, while 30-year mortgage rates have risen to well over 7% in the past month. This has resulted in the widest divergence between existing mortgages and new mortgages since the 1980s and has made home buying increasingly expensive for households requiring financing.

Housing value appreciation, coupled with higher interest rates, has more than doubled the average mortgage payment an average buyer would have to pay to purchase housing in South Florida. This has pushed housing costs relative to income levels to new highs. Mortgage payments used to represent a healthy 30% of median household income levels in South Florida before the pandemic; they stand at around 50% of household incomes, and this is before accounting for significantly higher insurance and homeowners association costs.

Significantly higher housing costs starkly contrast with the demographics of existing and incoming residential demand. The expected influx of new housing demand is expected to come from lower-income households in the near term, as Oxford Economics projects South Florida employment growth will be concentrated in lower-earning industry sectors through at least the end of 2024.

Employment sectors such as arts, entertainment, recreation, accommodation, food services, educational services and construction, with annual wages of less than $70,000 per year, are expected to drive much of the forecast employment gains.

Housing demand from these new job holders will likely be concentrated in apartment rentals as an average mortgage payment relative to wages for these sectors stands at over 60% of income levels while renting remains at around 50% or lower, depending on housing quality. In sum, the average South Florida resident has been effectively pushed out of homeownership going forward, making renting a longer-term option for average to lower-income households in the area.

That said, South Florida continues to offer a warm climate, no state income tax and a wide range of entertainment activities that continue to expand. These factors have attracted new residents to the area for many years and will likely continue to draw in new households in the years to come, though newcomers will need increasingly higher incomes to afford the area’s new cost of living.