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Study Shows South Florida Homes Are 35% Overvalued, Sparking Bubble Worries

You've heard of Florida Man, but that may not fit the Florida bubble. Consider a new study from researchers at Florida Atlantic University and Florida International University in South Florida. They found that the average home in the region is almost 35% overvalued relative to its long-term cost and are sounding the alarm.

“This trend concerns me because prices are still rising in the Miami metropolitan area, but not in the rest of Florida's measured areas,” Ken H. Johnson, a real estate economist at FAU's College of Business, said in a statement.

The combination of rising housing premiums and mortgage rates is “a potentially worrying sign for the housing market,” the researchers said. March data from the top 100 U.S. real estate markets that FAU tracks monthly shows South Florida home prices rose 15 basis points, or 0.15%, compared to February.

Most concerning, the rise in South Florida home prices could be an indication of a housing bubble. This happens when property prices are rising rapidly, demand is increasing and inventory is low. All of this is reflected in South Florida's current real estate market.

“South Florida is experiencing a real estate bubble,” says Alyssa Soto Brody, real estate agent and co-founder of Miami and New York City-based real estate sales and marketing brokerage firm Development Marketing Team Assets. “As we continue to monitor the impact of inflation and the looming recession, there is certainly the possibility of a real estate crash in the near future as a large majority of buyers will be locked out of the Miami market.”

Why real estate prices are rising in South Florida

Researchers and other real estate experts agree that South Florida's severely overvalued market is due to extremely low housing inventory, which is driving up prices. FAU's Top 100 U.S. Housing Markets dashboard calculates how over- or undervalued the typical home is in the country's most populous cities. Johnson and Eli Beracha, director of FIU's Hollo School of Real Estate, examine the difference between actual average home prices in a city and compare it to long-term price trends. They use Zillow data for their research.

Home prices for an area should “closely follow” the area's long-term home price trends, Johnson said in a statement, but that's not the case in South Florida. This allows “purchases today to soon be worth more without the worry of property prices fluctuating wildly above and below trend.”

“This is a key factor in achieving the American dream of homeownership,” Johnson said in a statement. “Unfortunately, this has not happened in the last two cycles in South Florida.”

While South Florida real estate prices are trending upward and are largely overvalued, other real estate markets across the state are experiencing slower price growth. For example, Cape Coral experienced a 0.63% decline in real estate premiums; North Port recorded a decrease of 0.48%; Deltona saw a decrease of 0.32%; Lakeland fell 0.07%; and prices in Tampa fell 0.04%, according to the FAU and FIU study.

“With rents declining and interest rates rising, price growth should be muted, but South Florida prices continue to rise despite these market forces,” Johnson said.

South Florida's real estate market could collapse

To be sure, other South Florida real estate experts see the sharp rise in home prices as more of a correction, as cities like Miami have been “undervalued for a long time,” says Nancy Batchelor, vice president of real estate brokerage Compass Assets. This is particularly because Miami and other cities in South Florida have become more popular in recent years – especially among the super-rich like Jeff Bezos, who has bought several villas there.

“The rise in property prices is just the city’s way of catching up with its true value,” says Batchelor. “I think this is just a correction for a city that has been undervalued. The market has changed and we will not see the sharp price increases of recent years. It will be more of a gradual stabilization.”

Although Johnson doesn't expect a “major crash” for South Florida's real estate market, it “bothers” him that home prices continue to rise despite rising mortgage rates, he said in a statement.

“The area could be in for an extended period of stagnation in real estate prices, so it's a little better to rent and reinvest at this point,” Johnson said.

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