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When you've been around long enough in any industry, you get to experience a wide variety of cycles and adjustments. After more than 30 years in the real estate business, I thought I'd experienced pretty much every possible combination of market variables. That is . . . until the fourth quarter of 2005.

The combination of three hurricanes: Katrina, Rita, and Wilma all within a two-month time period, coupled with a preceding year of cautionary market forecasts, has created a business environment that has taken the better part of the last quarter of '05 and the first quarter of '06 to decipher. While some skeptics still claim that the real estate 'sky is falling,' I am comfortable stating that all that we have witnessed over these past six months are some 'cloudy' days of uncertainty due to the fact that the storms caused us to veer off course for a few months. To put things in perspective: six million southern Florida residents, or one-third of the entire state's population, were without electric power at the end of October, 2005. Our company was collectively closed for business for 17 days over a 65-day period beginning after Hurricane Katrina, when we normally would have been closed for only one day: Labor Day.

Wilma did something that no other hurricane had done before . . .
it virtually shut down commerce in Miami-Dade and Broward Counties for a full two weeks.

In comparison, I remember that within two days after Hurricane Andrew struck in 1992, we had a line of customers outside our Coral Gables office waiting to speak with our associates . . . and business boomed. While the strength of Andrew's wind was unprecedented, its impact on our area was in many ways less dramatic than the slowdown of business created by Wilma. The fact that the electric outage was spread so far and wide after Wilma meant that almost no one in all of South Florida from the Atlantic to the Gulf of Mexico was doing business for several days. The delays created due to the inability to transact business for those days, has carried through the market until today. We are just now recovering.

Wilma did something that no other hurricane had done before . . . it virtually shut down commerce in Miami-Dade and Broward Counties for up to two full weeks. Wilma struck us on October 24th, and power was not fully restored to the broad affected areas until the middle of November. While the number of closings had begun to cool somewhat before Wilma, I would submit that the dramatic declines in home closings during October and November-numbers that reached nearly 50% decreases from the same period in the prior year-would have simply been far less dramatic. That also translates to the inordinate percentage growth in homes listed for these past six months.

Is the inventory of single-family homes and condos for sale growing? Yes. But, I would suggest that it was necessary. Historically, and I mean over the decades, six-to-nine months of inventory is healthy. We need this level of overall inventory to have a proper balance of buyers and sellers. This is the 'balanced diet' of our industry. Over the past 5 to 7 years, we've all become accustomed to our homes selling within days, if not hours, of having it offered for sale. A superheated market is not only not sustainable, but simply not healthy in the long run.

The fact that we have virtually no land left in Miami-Dade County upon which to build single-family homes leads us to believe that values for single-family homes will continue to increase at very favorable rates due to the pressures of demand versus the shrinking supply of land.

The market had indeed begun to change before Wilma. In Miami-Dade County, the number of single-family homes and condos listed spiked from a low of 7,966 in April '05, to 18,164 by the end of January '06. Even with such a seemingly large increase of inventory over a period of just nine months, the number-of-months supply moved from a critical low of only 3 months in April to just 10 months in January . . . still comfortably in the range of the six-to-nine month levels desired for a 'balanced' market. The data for Broward County / Ft. Lauderdale also showed a similar pattern during this period.

So what does this mean? First, even in the face of a dramatically growing inventory, our current months of supply is still within range of what is desired. And second, the sales and inventory data for the 4th quarter of 2005, due to Wilma and her friends Katrina and Rita, makes that data virtually unusable today, and for any analysis in the future. You can't compare data on an apples-to-apples basis when a quarter of your data input was taken from a period when most businesses were effectively shut down for several weeks.

While it is impossible to look into a crystal ball when it comes to the real estate market, I would submit that we will not have a true reading of inventory until we move into the Spring '06 selling season. I believe that we will continue to see a growth in inventory over the next six months until the market 'rights itself' from the months of distraction created by the storms of last year and the media attention being given to our growing inventories. The very positive benefit of having a greater supply of inventory is the affect that it will have on slowing the rate of appreciation. We believe that while we will continue to have increasing values in almost all segments of the market, the rate of growth will return to the single digits that Florida has been enjoying for the past 30 years. Increases of value in the range of 25% to 30% year after year is simply not sustainable.

Miami-Dade and Broward Counties currently have a 'net' increase in permanent population of approximately 190 new residents per day. That equates to a need for the real estate development industry to deliver almost 32,000 new living units per year, in just the two counties.

Many still ask, "Will values decrease in some areas?" That question needs to be divided into two questions: one for single-family homes, and one for condos. The fact that we have virtually no land left in Miami-Dade County upon which to build single-family homes leads us to believe that values for single-family homes will continue to increase at very favorable rates due to the pressures of demand versus the shrinking supply of land. It's the basis of economics. As the supply remains the same while the demand continues to increase, it's inevitable that values will go up.

In the case of condominiums . . . more and more buyers are now opting for the more carefree lifestyle that condos offer, the greater availability of design choice and location, and the lower, entry-level pricing. We will continue to see the balance of condo sales to single-family home sales weigh much more heavily toward condos. 58% of all homes sold today in Miami-Dade are condominiums, compared to 42% single-family homes, which is a marked change from 6 years ago when condos represented only 46% of sales.

While 'marginally' designed condos built in 'marginal' areas may experience a slight softening of value over these next 24 months, we believe that any softening will be slight, and that it will remain for a very short period of time due to our continued demand.

The #1 factor that drives real estate sales is population growth . . . and no one disputes the fact that South Florida will continue to grow in large numbers. Miami-Dade and Broward Counties currently have a 'net' increase in permanent population of approximately 190 new residents per day. That equates to a need for the real estate development industry to deliver almost 32,000 new living units per year in just the two counties. And, these numbers don't account for our burgeoning second-home market.

Will there be any residential properties that decrease in price? Only those that were significantly overpriced in the first place, or were in areas where supply is far greater than demand. Most properties will hold their value, and, will continue to increase over time.

Someone recently took me aside at a function and whispered, "OK, what are you really concerned about with this new cycle?" What I'm really concerned about has its roots in Greek mythology. I'm concerned about something called the "Pygmalion Effect." What does Greek mythology have to do with the South Florida real estate market? Actually, a great deal . . .

The Pygmalion effect is where we get our concept of the self-fulfilling prophecy. In Greek mythology, Pygmalion was the king of Cyprus. He decided that he would carve a statue in ivory of what he deemed to be the perfect woman. In the mythology, we learn that his belief and his desire were so strong that it actually (with a little help from the goddess Aphrodite) brought the statue to life, hence the concept of what we know today as the self-fulfilling prophecy.

A self-fulfilling prophecy can be extremely positive, or extremely negative. Believe in something strongly enough, and we can certainly affect its growth or its descent. A more contemporary concept says that "perception is greater than reality". If enough of the world's population believe that South Florida's values will continue to strengthen . . . it will happen. Most agree that South Florida is still an under-valued real estate market in comparison to other world centers, so I believe that that 'perception' will continue to lead us.

So, have we returned to a normal market? If the question is, "Have we returned to yesterday's market?" Probably not. South Florida seems to be charting a whole new course for itself . . . and the world is joining our ship! The best is yet to come for those who are prudent in their selections.

The real estate ‘bubble’ topic seems to be on everyone’s mind today… from the oval room to the breakfast room… and certainly to the news room! Wherever the topic arises, Florida, and particularly South Florida, grabs center attention. It seems that the entire world is coming here and that our friends from all across the globe either want to own a piece of South Florida… or at least frequent our shores often enough to feel a sense of belonging to what we all enjoy here on a daily basis.

A new book which just hit the bookstores this Spring titled, Are You Missing the Real Estate Boom?, is filled with great statistical data and sound reasoning regarding the direction of today’s U.S. real estate market. It was written by David Lereah, the Chief Economist of the National Association of Realtors and one of the nation’s leading experts on real estate trends. The book provides concrete data on the true ‘state of the union’ as it relates to the real estate market. I have extracted a few of his thoughts and numbers to add to what I am currently witnessing in the market.

USA Today reported in April, 2005 that Florida will become the nation’s third largest state by 2011, bypassing New York.

Is this explosive market which we have been observing over this past decade just about over? No… I don’t think so. Will the staggering annual rates of increase in value which we have been experiencing over these past five years subside? Yes… probably. While the market is clearly very hot, and while yes, it probably cannot continue to accelerate at the rate at which it has over these past five years, I certainly do not expect a crash of any kind. But more importantly than just my opinion, facts offered by experts like David Lereah and others support the idea that we still have a lot in which to look forward.

At its foundation, the real estate business is relatively simple. Real estate values are created by “supply and demand”. As the demand increases for homes (or any type of real estate) and the supply decreases, values will always rise. If we can accurately measure the demand for housing and correctly project the future supply of housing, it’s fairly easy to predict the direction of sales activity and the subsequent changes in value. The data needed to arrive at these conclusions is readily available; therefore, building a graph of future values is fairly easy.

USA Today reported in April, 2005 that Florida will become the nation’s third largest state by 2011, bypassing New York. Florida’s population is estimated to soar from 17.8 million today to almost 29 million full-time residents by 2030. Add the number of Florida second-home and dual-home residents… and the numbers are dramatically higher. Per Florida’s Office of Economic and Demographic Research, the State’s current “net” population gain is averaging almost 1,000 new permanent residents per day. Almost 200 of these new residents are establishing residency in Miami- Dade or Broward County each day. At an average of 2.2 people per household, that means that we need to build about 90 new living units in the two counties each and every day… or 2,700 each month to provide for our growth. That’s a need for over 32,000 new living units to be built per year just to house our new permanent residents… plus more for all of the 2nd-home buyers who are also wanting to buy.

As the demand increases for homes and the supply of developable land decreases, South Florida values are going to rise. It’s that simple.

There are a number of concrete facts that support the premise that this active real estate market will continue for still yet a number of years. The real challenge is maintaining a realistic perception in the minds of the consumer. I speak with people who are convinced that the growth will continue ad infinitum. That’s not a reality. I also speak with people who are convinced that the market is going to come to a grinding halt. Well, that’s not reality either. The truth is somewhere in the middle. Market values cannot continue to increase year-after-year at 25%+ rates, but I believe that we will continue to see overall market increases which will outpace any annual cost-of-living increases… due primarily to the demand for South Florida housing, which isn’t going away.

The one very large difference in South Florida and most every other U.S. market is our access to buyers from literally every corner of the globe. The western hemisphere has 800 million people… and we are smack-dab in the middle! Our single-family home and condo sales are not just dependent upon our local workforce. Many of our communities, especially our coastal communities, are already predominately inhabited by part-time residents… and that characteristic is spreading all across South Florida.

Going forward, we will continue to become more of a secondary-home community than a primary-home community… which is a good thing. Part-time South Floridians pay full real estate taxes, dine out in our fabulous restaurants, purchase tickets to our cultural and sporting events and shop in our wonderful stores and boutiques. We clearly have mitigating factors that make our market unique, not the least of which is the lack of land and the growing number of people who want to own our real estate. While the growth in South Florida values will probably not continue at such heated rates for the remainder of the decade, most acknowledge that we will experience rates of growth far-exceeding national averages. The long-term perspective for our markets is one of continuing world-wide attraction.

The following facts provide a basis of support for why I believe this active South Florida real estate market will continue to move forward in a positive direction.

1. Population Growth is the most important factor which influences demand for real estate.
   
   United States
   • There are 296,000,000 people living in the U.S and 6.5 billion people in the world.
   • The U.S. population is increasing by 7,200 new residents every day.
   • 1 “net” new resident is added every 12 seconds. 2,628,000 new residents each year.
   • The U.S. population in 2030 is projected to be 364,000,000.
   • The median age of all Americans is 35.3 years today and will be 39.0 years in 2030.
   • Americans will have to buy more housing in the future to house our growth.
   
   Florida
   • Florida is growing by almost 1,000 “net” new full-time residents per day.
   • 36% of Florida’s net migration is due to international migration.
   • Miami-Dade and Broward Counties represent almost ¼ of Florida’s population.
   • Miami-Dade and Broward will grow from 4.1 million residents to 5.6 million by 2030, an increase of over 170 people each day for the next 25 years.


2. Household Formations
   • Single households are increasing, which means fewer residents per average home.
   • Higher divorce rates = Greater number of households
   • 54% of homes in Miami-Dade and Broward Counties are condos vs. single-family.


3. Demographic Trends

   Baby Boomers	Born between 1946 and 1964	41 to 59 years old	82,000,000 people
   Generation X	Born between 1965 and 1976	29 to 40 years old	46,000,000 people
   Echo Boomers	Born between 1977 and 2005	0 to 28 years old	76,000,000 people
   75% of Americans		0 to 59 years old	224,000,000 people

   
   
   • The 82 million Baby Boomers are now entering their peak earning years.
   • Boomers and Xer’s in their 30’s and 40’s are the move-up buyers of this next decade.
   • Boomers will invest heavily in 2nd and 3rd homes as their net worth grows and as they have more free time to travel. South Florida is on every Boomer’s “list to consider”. Our great weather and the ease of traveling here are two very compelling forces.
   • 36% of all U.S. home sales in 2004 were secondary homes… an astounding %!
   • The 76 million Echo Boomers are just now beginning to purchase their homes.
   • Early observations show that Baby Boomer Parents are significantly involved in financially helping Echo Boomers purchase their first homes… more so than in any previous parent/children population groups.
   • Retirees are living longer; therefore, they are staying in their homes longer… reducing available inventory; thus, being partially responsible for driving up values.
   • The “transfer of wealth” from the senior generation to their heirs is now beginning to transfer hundreds of millions of dollars… much of which is going into real estate.
   • Immigration has accounted for one-third of the household growth in the U.S. since 1991… and their numbers are growing as a percentage of total sales.


4. Mortgage Rates
   • Interest Rates for 30-year mortgages from 1979 to 1990 ranged from 10% to 17%.
   • Rates have steadily fallen from 10% in 1991 to their lowest levels in approx. 40 years… 5.5% to 6.0% today… which continues to encourage real estate purchases.
   • The majority of respected forecasters predict that rates will stay in the single-digit range through the end of the decade. Great news for first-time buyers.


5. Homes Sales and Inventory
   • Existing U.S. home sales (excluding new) have increased nationally from 3.1 million in 1991 to over 6.5 million in 2004… doubling the number of sales in just 13 years.
   • The supply of homes in the U.S. has fallen from 8.6 months supply in 1998 to 4.5 months supply in 2004. We have a shortage of inventory from coast-to-coast.
   • The market needs to have a 6 to 9 months supply of inventory to have a balanced market of buyers and sellers.
   • Less than 6 months supply of homes for sale will continue to cause dramatic increases in home values.
   • Miami-Dade and Broward Counties are at historically low levels of inventory… less than 3 months in Miami-Dade and less than 2 months in Broward.
   • Available land for development surrounding urban areas is becoming scarce.
   • Difficulty in obtaining zoning and permitting will cause new home supply to fall short of demand… especially in South Florida.


6. Income Tax Benefits
   • What other investment allows a married couple to keep up to $500,000 in tax-free profit ($250,000 for a single person) as does a primary residence lived in for 2 years?
   • The deductibility of mortgage interest and real estate taxes means that the U.S. Government is helping homeowners make their monthly payments every month!
   • The maximum income tax due upon the sale of investment property held for more than one year is only 15% of the gain vs. a maximum tax on personal income of 35%.

While all of these items listed above will continue to help propel our real estate market, at the end of the day . . . population growth is the #1 factor which influences demand for real estate. Just about everyone agrees that thousands of newcomers will continue to purchase homes in Florida, either as permanent or part-time residences. As the demand increases for homes and the supply of developable land decreases, South Florida values are going to rise. It’s that simple.

It’s not a question of, “if we build it, will they come?” They’re already here… hence the growing demand for first, second and even third homes. It’s a great time to be living and working in South Florida. Spread the word . . .