Interest rates are rising, but that won’t cool Miami’s hot real estate market. Here’s why....
Many expected the Federal Reserve’s interest rate hike in March — the first increase since December 2018 — to be a ray of hope for those looking to buy in Miami’s competitive residential real estate market. Under normal circumstances, the Fed’s action, which in turn prompted interest rates to rise on various forms of consumer borrowing and 30-year fixed-rate mortgages to jump to around 5%, should cool the housing market. But housing demand remains hot and there is so little land to build on in South Florida that the market still looks strong, experts say. “Everyone wants a piece of Miami,” says Edgardo Defortuna, a developer that has built some of Miami’s biggest projects.
“In general, the growth of the Florida market has been very good. We continue to see a very high demand, not only from natural markets such as Latin America, but from the rest of the United States,” adds the executive president and founder of the Fortune International Group. Miami is also becoming increasingly attractive to buyers who work in technology, an industry that has been favored when Greater Miami became the fourth-fastest growing area in technology jobs, according to a recent report by the Computing Technology Industry Association.
The data confirm that in Miami property sales continue to increase. February was the best month in Miami-Dade County’s condominium sales history, posting a 13.2% increase over last year, according to the Miami Association of Realtors. “Demand remains at all-time highs for Miami real estate,” said Fernando Arencibia Jr., president of the association’s board. INTEREST RATES HIKE WON’T HAVE A BIG IMPACT ON MIAMI After two years of falling below 3%, interest rates reached 5% on April 5 for a 30-year mortgage. While home prices are not expected to drop sharply in the general market, price increases should at least level off, experts nationwide expect.
Rising interest rates mean a higher monthly payment, and people selling their homes will refrain from asking a price too high because of the risk of not finding buyers. At the same time, with less attractive interest rates, houses will be on the market longer. Last year, buyers in Miami started bidding wars, making offers above the sale price, often in cash, to buy a home. Experts expect this scenario will become less common as the Fed moves to thwart inflation and continues raising interest rates several times this year. “The increase in interest rates affects the local buyer,” says Defortuna, indicating that in many cases they “finance 70% of the purchase of the property and a 1% change in rates means something important for them.” People who applied for mortgages in February will pay $127 more in principal and interest than those who closed in January, and $337 more than those who financed a property a year ago, according to national figures from the Mortgage Bankers Association.
MIAMI A BARGAIN FOR INTERNATIONAL BUYERS
The increase in mortgage rates would not affect international buyers, who represent a considerable percentage in the Miami market. “International buyers not only come with cash but are used to paying much higher rates than what we have here and potentially higher than what we are going to have,” says Defortuna, indicating that the political changes expected in Latin America will stimulate investing in South Florida real estate. As a consequence of this flow of foreign investors, in Miami cash is king. In January, 40% of homes sold in Miami-Dade were cash transactions, while 41% of sales in Broward County did not include mortgages, according to the Miami Realtors’ group. Both figures are well above the national average of 27% for home purchases in cash. This is one of the factors that affects the members of the middle class in Miami who want to buy a house. Rising interest rates, leading to less affordable monthly payments, will cause many first-time home buyers to give up or postpone their plans. This would further complicate the rental market, already saturated and in the midst of an affordability crisis.
GIVEN THIS SCENARIO, IS IT BETTER TO BUY THAN TO RENT?
“It’s 100 percent better to buy,” says Claudia Serna, CEO and founder of Brokers, LLC, with 20 years of experience in South Florida’s real estate market. “Rents have risen more than mortgages and interest rates are below inflation.”
REAL ESTATE MARKET TRENDS IN SOUTH FLORIDA With homes in short supply and exorbitant sale prices for those near the water, buyers are still looking for condominiums, now preferring larger ones.
“Buyers want to be close to the water, and when there are no houses available, they buy condos; that’s why the condo inventory is shrinking,” says Serna, noting that her company has 500 real estate agents and sometimes they don’t have anything to sell to customers, due to the low inventory. “We are still cheap, and for (buyers) in California and New York, we are a gift,” she says, indicating that this situation represents a “problem for people who sleep and work in South Florida.” Even so, other experts point out that the increase in prices in South Florida is bringing them up to the level of those in other areas of the country from which buyers are coming, which could limit the interest for those who come looking for savings in housing. The median home rent in South Florida last year was $3,000, according to the rental website Redfin, and with the rise in property insurance and repair and construction costs, landlords increased rents by as much as $500, prompting proposals and emergency measures to control rents in Miami-Dade.
“Both the cost of land and construction have been increasing significantly,” said Defortuna, adding that sometimes it goes up 30% including labor, which has not been reflected in employees’ salaries. “That makes affordability for people who can’t afford Miami price levels much more difficult.” Buyers and developers can protect themselves from rising rates, Defortuna says. There will be a trend towards fixed-rate mortgages, which in turn represents an advantage for buyers, who can guarantee a specific monthly payment for their homes. Unlike those who rent, they will not experience a drastic increase in the housing payments.
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