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The American Central Bank (FED) raised the basic American interest rate to contain inflationary pressure. Higher interest rates tend to cool down the economy and reduce the average price of various products and services. The measure also makes mortgage loans more expensive, which could bring Florida’s super-heated housing market to more balanced levels. It doesn’t seem to have had any effect! The skyrocketing demand for homes in the Sunshine State keeps property prices high and the uptrend continues.
Not only is demand for new homes high, but the existing inventory of homes available for sale remains very low. There are also no great predictions of new properties entering the market, as there is a shortage of land for construction. Even existing projects need a long period of time to be delivered, from approval by the competent bodies to the construction and delivery of the keys. The situation is further aggravated by the lack of manpower and materials.
Central Florida and the city of Miami are also becoming increasingly attractive to tech companies. Florida is becoming the new Silicon Valley. The state offers an attractive tax environment compared to most other US states (state income tax exemption). At the same time, California was criticized for its excessive bureaucracy and high taxes. As a result, the “Sunshine State” is now seen as the new Eldorado for technology companies.
Rising interest rates will not discourage the market
After two years of falling to levels below 3%, interest rates have risen again to contain mainly rampant US inflation. Rates had been reduced to stimulate the American economy in times of a pandemic.
Higher interest rates mean more expensive mortgages (mortgages), which should discourage the purchase of new properties, bringing the market to more balanced levels. Today a home put up for sale in the Orlando area takes, on average, about 30 days to sell. The normal would be an average period of 6 months. The situation became so critical that the same residential house receives 6 offers in a real auction, nicknamed in the market of “Bidding War”.
It so happens that, even with high interest rates, experts believe that the market will remain heated. Buyers from other states such as New York and California have purchasing power to make “cash” offers, that is, in cash. They do not opt for financing. The average price of a property in these states is considerably higher than in Florida. It’s not difficult for a Californian or New Yorker to bid higher than the advertised Florida property price.
International investors, especially Latin American ones, are already facing higher interest rates in their home countries. For this audience, a rate of 5% or 6% per year is still too low.
Is it better to buy or rent in a scenario of inflation and high interest rates?
The average rental price has risen more than the cost of financing in Florida, which makes buying more attractive than renting.
It would not be surprising to understand why the average rental price has soared. In a market where real estate purchase prices have exploded by more than 20% (2021), real estate has become inaccessible to a large part of the local public. Renting, for many, is the only option. Higher demand pushed up the average rental price.
On the investor side, renting is not an option. Buying a property in Orlando or Miami is a diversification and dollarization of wealth, especially for Latin Americans. In Orlando, the grand strategy is the so-called investment leverage. You buy a financed Vacation Home and pay off the loan with your own rental income. The expected return on rent exceeds, in most cases, the total cost of the property, including the financing installments, and still generate profit in the operation.
In the case of Vacation Homes in Orlando, the investor doesn’t even have to manage the rent. Everything is done by a property manager. Just designate the bank account that you want to receive the rent collection. Learn more about Total Rental Management in Florida.
Another opportunity is to take advantage of the context of high inflation and take advantage of the banks’ fixed interest rates. In this way, the property is purchased at a fixed cost (fixed interest) and the property purchased is automatically corrected for real market inflation. We explain it better in the article: High inflation creates an opportunity to invest by leveraging with fixed interest rates.
Most banks offer a fixed fee period at the beginning of the contract. After the initial period, rates become floating, but restricted to a band, to protect financial institutions and borrowers. Taking advantage of the moment of high inflation and interest rates that are still fixed and relatively low is a limited-time opportunity, as the Fed shows its intention to raise interest rates even further.
Florida real estate trends
Gradually, the expressive demand for residential houses, which grew a lot during the pandemic, is migrating to condos (apartments). Houses, in recent years, have come to be seen as a better solution for periods of confinement. Large houses in suburban areas, with a large outdoor area, were and continue to be the most sought after.
However, it is precisely in this segment (single-family homes) that the inventory plummeted. The low availability is due not only to high demand, which sold out what little stock there was, but also because the owners chose not to sell in an uncertain market.
With the low availability of residential homes on the market, public attention has turned to large apartments in luxury condos in Miami, known as the Condo segment.
The condos segment, unlike the single-family homes segment, saw its inventory grow and the average price plummet. Apartments weren’t supposed to be the best option in times of quarantine. This judgment proved to be relatively wrong, as apartments in luxury buildings in Miami are large and condominiums are true mini-clubs or mini-cities, with infrastructure that suburban homes can hardly compete with. There is yet another segment, called low-density condos, which are buildings with few residents (low population density) that supposedly offer a lower risk of contagion.
The demand for condos is still low, but gradually increasing. The condo market is expected to suffer, to a different extent, the same as the single-family home segment. If that happens, prices will go up a lot, as they are already going up.
This is today the great opportunity in the Florida real estate market: buying luxury apartments in centers like Miami and Fort Lauderdale.
About AMG International Realty
AMG International Realty is a global real estate company specialized in Florida. If you want to know more about investment opportunities in the Orlando, Miami or Tampa real estate market, contact me right now and chat with me on WhatsApp: +1 305 318 6968 (Heloisa Arazi).