Many Floridians continue to struggle with affordable housing.
A recent report from researchers at Florida Atlantic University and Florida International University shows that prices in the housing market are significantly overvalued.
FAU real estate economist Ken H. Johnson is one of the report’s researchers.
He told WMFE's Talia Blake in Central Florida are paying a higher premium on rental and housing prices.
The following is an edited transcript of their conversation.
Listen to the full conversation at the player above.
Talia Blake: Can you give me a quick overview of what you found in your study on Florida's housing market?
Ken Johnson: What we're finding in Florida right now is that, unfortunately, we're winning a couple of races that we don't want to be winning. We are paying premiums on both the housing price side and on the rental price side. And the way we examine or execute on those premiums is to look at a history of rent prices and/or a history of housing prices, statistically model where prices should be, then compare them to where they actually are, and calculate a percentage difference. That's the premium, as if you were paying $1 on average for a loaf of bread, but you were paying $1.25 on a particular day, you would be paying a 25% premium. But unfortunately, both of those are high in Florida. We rank high in those premiums. So, we have an overpriced housing markets and overpriced rental markets. But then the good news on that, is that our rents are actually supporting our prices, because it's that price to rent ratio. The higher that ratio is the more it favors renting over owning. The lower that ratio is the more it favors owning over renting. When we look out to California, we see home prices falling much more significantly than they are anywhere on the East Coast, and especially here in Florida. So, the good news is our housing prices are probably going to be a little more stable this time around. The bad news is we are almost certainly entering a prolonged affordability crisis because both of those are high, but our average salaries are not rising fast enough to keep up with either rent price increases or home price increases. So you're trading one for another.
Talia Blake: When it comes to Central Florida counties, where do they fall on the list of market values compared to counties in the rest of the state?
Ken Johnson: On a rental premium Orlando right now is at 6.39% above where they should be. Year over year in the Central Florida area, the average rent increases is 5.67%, which that's not much different than the national increase. We've kind of returned back to that typical 3 to 5% increase in rents per year. But what we're forgetting is that, 'oh my goodness, the rents are high and incomes haven't come up.' For example, in Central Florida right now to avoid being rent burden as defined by the Department of Housing and Urban Development, a family or a household renting the average unit would need to make $82,800. That's not a small number. That's a rather significant number and is an indication of how unaffordable rents are right now in Orlando. As far as premium goes on housing for Central Florida, currently you're at roughly a 39% premium. In other words, you're paying on average 39% above where you should be based on a past history of housing prices.
Talia Blake: As you said earlier, wages are not coming up the same way that these prices and these premiums are coming up. So, therefore it's still making housing very unaffordable in Florida. What's contributing to these high prices in Florida's housing market?
Ken Johnson: We have two things contributing to both high prices and rent on the operational side. Number one, Florida is a very popular place more so than ever before to move to. It's not our statistic, and I can't remember the source, but a couple of months ago, the number came out about a 1.9%, almost 2%, increase in population in a 12 month period. That's phenomenal growth and that's an understatement. So we have this huge influx of population many wanting to settle in the Central Florida area. But at the same time, we have a severe shortage of housing units, both roofs to live under and own, and roofs to live under and rent. So that shortage of units combined with that massive influx of population are major contributors to the spike in rent prices and the spike in home prices.
Talia Blake: And I know you said that these premiums are going up when you look at it year over a year. Historically, has Florida's housing market always been overvalued?
Ken Johnson: No. What makes it easy to statistically model is that both rents and housing prices follow a trend. It's not always linear, but you can pretty easily follow it because it's mean reverting. Housing prices or rent prices will get above their long term pricing rent for a little while, then it will migrate below that long term trend, then migrating back up. So it forms these cycles, and housing follows cycles on both the home prices and rental side. So that's what enables us to pretty easily statistically model based on past housing prices we'll have this trend and right now, both trends are near record level peaks. So that premium in both gets high when you're getting near the peak.
Talia Blake: I know you said you just said that we are getting to a record peak when it comes to rent and housing. Have we ever gotten close to this type of peak before?
Ken Johnson: We only have data that we can track back about 15 years, good sound data, and we've never been this overpriced before during that period, that's for sure. Without the data, I can tell you at least going back 20 something years, we can follow housing price peaks rough going back roughly to the late 60s, and we've had several peaks in housing prices, the last being by far the biggest. We're nowhere near as overpriced this time around. Last time around was closer to 60%. Now we're at that 39% mark. Rental premiums don't get that high, for whatever reason, but this is definitely the highest we've seen in say the last 20 years.
Talia Blake: Based on your research, and I know you said that this kind of goes in cycles, and you made kind of a peaks and valleys motion with your hand, when do you think we will come down from this peak? How far out do you think that is?
Ken Johnson: That's very, very, very difficult to say when we will actually start to see the other side, if you will, and see the light at the end of the tunnel. Every one of these cycle peaks is a little different. I think this time around, we're probably looking at a couple of years of flat housing prices because I don't think they'll fall that much. And I think we're probably looking at a couple of years of stable rent prices, but high rent prices, especially relative to our incomes. I'm thinking anywhere 18 to 36 months over the horizon, before we start if we go back, and then we run our numbers that will say, 'Oh my gosh, we're on the bottom side of those long term trends.'
Talia Blake: And then lastly, is there anything that we can be expecting from the housing and rental market for the rest of the year?
Ken Johnson: Sure. So one of the things I think we're gonna see in Central Florida and all of Florida will be the density, the average number of people that live in a unit be it their home that they own or a unit they rent, that number is going to rise. To date myself, the TV show The Golden Girls, or even The Odd Couple, which is really dating myself to sitcom back in the 60s and early 70s, that was where you have these groupings of individuals that come together and live together. Those weren't just sitcoms, those were taken from real life type examples. So we've seen this, density will naturally rise as housing cost gets high relative to our incomes. I think you're going to see more non traditional family units living together, you're going to see the density level rise, and something that we're going to probably see is alternative forms of housing. And that's just code for something we don't like to talk about in Florida, which are mobile homes, for many reasons. But the mobile home will be part of the solution in the short term, where they're easier to manufacture and the development of the land is easier or less expensive. But we're probably going to see a surge in those alternative forms of housing. This will pass. It always has. This one will be different. This crisis will be different. Again, I think it's going to be that unaffordability crisis that we're going to be in for a few years.
