My Crystal Ball Says ... Orlando Real Estate Predicitons

Are you like me and need the detailed Orlando Home Market predictions and why I came to my conclusions in this Blog? Grab a cup of coffee, I’ll try and keep this brief, but the real estate market isn’t exactly the most simple thing to explain.

First: When predicting anything, one has to make certain educated assumptions based on the data one is looking at. My assumptions are:

- The real estate market is cyclical, and we can look to the past to help predict the future.

- The dynamics of Supply and Demand control where prices go in the short term.

- Affordability is the dynamic that most stabilizes Supply and Demand over the Long-Term.

- The market is efficient but not perfect, it rarely stays in perfect equilibrium. This causes prices to continuously rise above and sink below that point, but within a historically consistent range.

- Only once in a generation do bubbles have the magnitude to break long-term trends.

Second: The consistency and how far back the data goes in time, I believe is much more useful to us when making the kind of broad analysis of all Orlando real estate than the absolute accuracy of the data.

Simply because the accuracy of a specific median price for the entire Orlando area is going to have very little meaning to your particular home; BUT the trends and changes in that median price going back 25 years, all consistently gathered in the same way, will have a direct meaning to your specific home value and where it is going.

In particular, if I used one of the many organizations estimates of affordability, their definition of “affordable” may have changed going back as far as I wanted to go, so I had to come up with my own measure, based on consistent and raw income and interest rate data gathered from HUD and Freddie Mac. For our purposes, the specific percentage of affordability doesn’t matter as much as the range affordability stays within.

Third: These predictions are not meant to tell you if it is the BEST time to sell. Only to tell you when will be a BETTER time to sell. The only way to tell when it is the BEST time is to look at the supply/demand and affordability in your specific neighborhood (You can do this by contacting Your Local Home Expert). Then determine if it is worth holding out for higher prices, or to sell now while it is still a sellers’ market.

So, let’s now look at some helpful graphs that summarize all the data gathered:

Orlando Real Estate Median Price 89’-13’



Here you see the typical jagged line that represents median price levels in the Orlando metro from January 1989 through to July 2013. Overlaid onto this are market Trend lines/resistance levels. The blue line represents a historical resistance the market has to prices above this, and the green line represents a historical resistance to the market going below.

The long term trend in pricing equals between a 2.5% and 3% average yearly gain spread over the past 25 years.

We start looking at years 89’ to the end of 93’ when prices stayed close to the upper resistance line with 1994 being a transition year to a new cycle of low trend line prices (A 6 year period from Expansion to Trough phase). Then we see from 95’ through the beginning of 2001 the market went from low (Trough Phase) to high (Expansion Phase) in about a 6 year period.

The market stayed along the upper trend line from 2001 ( start of Expansion phase) until 2003 when demand skyrocketed due to easy credit. This caused prices to break through established resistance levels all the way through to early 2007 (A 6 year period from trough to expansion), when prices started falling precipitously; forming the classic “bubble” shape. This time around however, we went from a high to a low in only 4 years.

As of July 31st 2013 Orlando median home prices are $157,000. Still slightly below the lower resistance line; a line that indicates prices should be around $160,500 today.

The question is, will we stick to a 6 year low to high then high to low trend pattern or will the pattern be equal years of falling prices to then rising prices?

Predictions!

We are almost 3 years into an expansion phase. We are about to hit the lower trend line, which is likely to slow price growth as the market will no longer be making up lost ground. I also think both the 4 year and 6 year patterns described above can both work in tandem. We will likely hit the upper trend line by the end of 2014 (4 years of price growth). Which would put median prices at or around $185,000, or about 18% higher than today.

At that point prices are likely to stagnate with little change in Orlando home prices throughout 2015 and 2016 (6 years from the end of trough to the end of this expansion phase), likely held back by rising interest rates. Those two years of steady prices also allows time for the lower trend line to catch up to median prices and the start of another 6 year cycle of prices remaining relatively flat, bouncing along the lower trend line.

If rates stay low however, there is the possibility of prices sticking to upper trend through the end of 2016. A line that indicates prices would, at that time, be up to $195,000 or a gain of ~5.4% over those 2 years. If that happens though, expect a quicker correction downward in 2017.

2014 to 2016 will be key years for the Orlando real estate market. A time for an investor to consider what properties to keep another decade, or sell.

REMEMBER THOUGH, we always have to double check our predictions to make sure things also line up with the long-term affordability trend; which brings us to:

Orlando Real Estate Affordability 89’-13’



The typical Jagged Line representing affordability levels for Orlando Real Estate. The red and green lines representing historically sustainable affordability levels.

Points in time where affordability is close to the red indicate a better time to buy; as the median family can afford more home than in a balanced market. Affordability closer to the green line indicates it is a better time to sell, as families may not be able to afford higher prices, inhibiting prices.

170% seems to be the historical lower range of affordability (Green Line, better to sell)

220% seems to be the historical upper range of affordability (Red Line, better to buy)

As of July 2013, affordability is only now just touching the upper range (about 220%), so it is still a great time to buy in terms of affordability.

WARNING: Affordability has 3 different variables! Incomes, interest rates, and home prices. While affordability in July was still at a buyer friendly 223%, if Interest rates today were at a more traditional 6.5%, July’s affordability level would be at a more seller friendly 186%.

Checking my predictions earlier, lets make up some numbers for median prices that will hold true to the prediction (Peak prices in late 2014, rising interest rates, then stagnant prices), and see how they relate to affordability levels….

Predicted Orlando Median Prices 13’-17’



Then compare it to how affordable homes would be at those levels.

Predicted Orlando Affordability 13’-17’



Even increasing interest rates steadily up to 6.5% by 2017, and only assuming modest income gains, my predictions would hold within long-term affordability trends.



Potential Opportunities:

Increased Growth: The long-term pricing trend is based on a steadily growing Orlando Metropolitan area. The truth is that Orlando is growing and is likely to continue growing at a quicker pace than it did between 1989-2001. This could easily shift the long-term trend line upwards.

Higher Incomes: Increases in median wages in Orlando can have a dramatic effect on affordability, and relate to a faster growing and more diversified Orlando employment base and a new, steeper trend line.

Interest rates: If they remain at historically low levels, around 5%, they might help push prices slightly above trend for a short period.

“Echo Bubble”: Just as Orlando Home prices over corrected well below trend after rising well above, there is a good possibility we will see a small over correction above trend in the short term. If it happens, it is likely to be driven by interest rates being held artificially low to long and/or a growing ownership of single family homes by hedge funds using buy to rent strategies.

Potential Threats:

Mortgage Scarcity: If banks tighten up lending too much again, it will limit the number of buyers that are able to get a mortgage, no matter how affordable the market is. This however is not likely as interest rates rise, banks have more incentive to lend. Plus they are already on the trend of loosening credit to a more traditional standard.

Rising Interest Rates: We saw one happen in June when interest rates jumped nearly a full percentage point in a matter of a week. It did slow down the market slightly, but not enough to stop the trend as it wasn’t enough of a jump to shift affordability levels into a more seller friendly zone. However if rates rise to the point of making affordability to low, this will quickly slow the market. Luckily, even at $185,000, rates would have to be 2% higher than today (6.5%) to get to the un-affordable line.

Forgetting Real Estate is LOCAL: Not all areas of Orlando are gaining value at the same rate. People that make certain incomes tend to live in certain parts of town, and certain price ranges have increased quicker than others. While this analysis is great for showing in which direction the overall market is going, only a specific analysis of the zip code your home is within will show If your area is already at the top of its affordability range and you should sell now, or if there is still room to go! Be sure to contact Your Local Home Expert for a specific analysis of your neighborhood.




Greg Traub - Realtor GRI

Your Local Home Expert

Greg@MyOrlandoHomeExpert.com

Cell - 407-222-7281


***INVESTING INVOLVES RISK. ANYONE LOOKING TO INVEST SHOULD SEEK THEIR OWN PROFESSIONAL ADVICE AND PERFORM THEIR OWN RESEARCH. Remember, these are just predictions and not fact, no one can know the future!***