Miami has a well-deserved reputation for hospitality, welcoming tens of thousands of visitors and migrants attracted by the city’s legendary beauty and tolerance, and its promise of opportunity (not to mention having one of the largest cruise ports in the world).

As we look ahead at Miami’s opportunities and challenges during the fourth stop on our Housing Roadmap to 2016 tour of America to discuss issues like the changing demographics, foreign buyers, cash buyers, affordability and equality, it is essential to understand Miami’s recent history and its current situation. You have to understand where it came from to know where it will go.

In advance of our trip to Miami on August 27, we will be posting a series of research briefs focused on the challenges and opportunity unique to the area. All our Miami research can be found here.

Home Values

Miami-Dade County is the most expensive of the three counties – Broward, Miami-Dade and Palm Beach – in the Miami metro. The median home value in Miami-Dade County as of June is $240,200, roughly $60,000 more expensive than the median U.S. home.

Miami was a poster child for the housing boom and bust. During the run-up of the housing bubble, median home values in Miami-Dade County climbed 189 percent from January 2000 when they stood at $114,900 to February 2007, when home values peaked at $332,100, only to fall 53 percent until bottoming at $156,500 in August of 2011. Since then, home values have climbed at a dizzying pace of 53 percent over the last roughly 4 years to reach $240,200. But despite all these recent gains, home values are still 27.7 percent below their bubble-era peak.

What’s more, different sectors of the Miami housing market have recovered at different speeds. The housing recession was not an equal-opportunity offender, with the bottom third of the market hit much harder than the top third. Bottom-tier homes (homes in the bottom third of the home value distribution) lost 66 percent during the housing bust and have been slower to recover values, now still off by 41 percent. Homes in the top third of the market also lost a lot of value, roughly 41 percent, but have regained most of that loss, and home values at the high end are currently only 16 percent off from the 2007 peak.

Still, getting back to original, bubble-era peaks is not the be-all and end-all. In fact, playing the “what if” game for home values shows that had Miami County continued to grow at its pre-bubble rates (for this we use historical Miami metro appreciation), home values would have appreciated by 3.5 percent annually and would now stand at roughly $195,300 – 18 percent lower than they currently are.

Indeed, the boom and bust did more than just make home values shift up and down – it wreaked havoc on the distribution of home values, and therefore wealth inequality. The spread between the 10^th percentile of home values and the 90^th percentile of home values has gotten much larger over time. In 1997, the most expensive homes cost 4.2 times more than the cheapest homes. Today, they cost 6.5 times more. Nationally, this increasing spread between the cheapest and most expensive homes also exists, however, the bottom decile is only 9.1 percent off from peak values and the top decile is off only 6.3 percent. So we can see that an incredible loss of wealth has occurred at the bottom end of the wealth distribution, as buying a home often represents the number one driver in wealth generation. Furthermore, the bottom decile remains 44 percent below the 2007 peak, while the top decile is only 1.6 percent away from peak. The recovery has been very uneven.

The fact that the bottom end of the market is still so far away from peak values is also one of the reasons Miami county still has a very high overall negative equity rate. Most of the negative equity is stored up in the bottom tier of home values, uprooting the entire real estate market.

Negative Equity

The drastic fall in home values from 2007 through 2012 produced massive amounts of negative equity, in which a homeowner owes more to the bank than the home is actually worth. At its worst, in Q1 of 2012, 50.5 percent of mortgaged homeowners in Miami-Dade County were underwater. While that number sounds high, especially considering that the normal level is typically less than 5 percent, a more sobering stat is that at this point in time, 36.3 percent of those underwater homeowners owed more than double what their home was worth. So not only where homeowners underwater, but many of them were so deeply underwater that there was no end in sight.

Negative equity caused a wave of foreclosures, starting a domino effect that has continued through today, thanks to Florida’s judicial foreclosure process. Florida foreclosures are handled by the courts – an often lengthy process. The sheer number of foreclosures had a negative feedback effect on home value, which dropped rapidly in areas with many foreclosures. As of the first quarter of 2015, Miami county has more than halved the number of homeowners that are in negative equity, with the current rate being 19.5 percent – surprisingly, the highest among the metro counties, and a bit higher than the nation as a whole. The fact that it is the highest in the metro can be traced back to high housing inequality. Most of the negative equity has been stored in the bottom of the market, presenting a double whammy for bottom-tier homeowners: Not only are they more likely to be underwater, but they are also much more likely to be deeply underwater.

Inventory

Negative equity really distorted many markets nationwide. With so many underwater homeowners, few were able to actually list their homes for sale and move, since selling and buying a new home would have required additional funds to pay off the mortgage at the time of sale. This means inventory became incredibly tight, especially at the bottom end of the market where negative equity is higher.

Furthermore, investors purchased many of the available bottom-tier homes and converted them into rental properties, thus further limiting inventory. As home values have steadily risen, homeowners are hanging on to their properties, trying to regain as much equity and avoid selling then buying again in an extremely competitive market, impacting the move-up market. This shortage of entry-level homes has made it hard for first-time homebuyers to break into the market. In addition to facing down payment and mortgage financing hurdles, they also often find themselves in an extremely competitive market for buyers, with very few starter homes for sale. A positive side effect of tight inventory has been the upward pressure on home prices, as limited supply and high demand lead to bidding wars that help push prices higher.

Affordability

Despite home values still being off almost 30 percent from bubble peaks, affordability is right about historical norms. A buyer making the metro median income, wanting to buy the metro median home can expect to spend roughly 20 percent of her monthly income on a mortgage payment, as opposed to 21 percent historically (the average rate between 1985 and 2000). The problem is that this percentage seems just right through the lens of historically low mortgage rates. With rates rising – and they surely are – home will start to look expensive very soon. Once rates reach 6 percent and homes continue to appreciate over the next year, a typical homebuyer can expect to spend roughly one fourth of her monthly income on a mortgage payment – considerably more than buyers are used to spending in Miami metro historically. Given the above discussed inventory constraints, the problem is that most homes currently available on the market are most of the time more expensive than the median, so many potential home buyers are being priced out of the market.

Rents

Unfortunately, the news for renters isn’t much better. In fact, it is worse. Rents have been steadily climbing and while this would not be a problem in and of itself, incomes have not kept up. Since the beginning of this century, income growth has been roughly half as fast as rental appreciation. Furthermore, more recently rental appreciation has picked up considerably. In June of 2015, rents in Miami county are up 4.8 percent annually with the city of Miami seeing rents climb at a pace of 6.5 percent annually. Miami Beach rents are up a shocking 10.9 percent annually – an expensive market all around with home values appreciating at 9.7 percent annually – being only 3.8 percent off from its bubble peak in 2006.

As Florida was part of ground zero for the foreclosure crisis, many homeowners were displaced out of their homes into rental properties, heavily increasing rents. Furthermore, more household formation is now taking place on the rental side as opposed to the for-sale side and renters are staying renters for longer. Millennials are delaying their decision to purchase homes and many are facing considerable hurdles when wanting to become homeowners. All of these factors mean that demand for rentals is sky high and not enough homes – especially middle of road and low income – are being built. This supply/demand imbalance will continue to pose a problem for years to come.

New Construction

A possible solution to Miami’s affordability woes is building new homes – both for sale and for rent. The problem is that this isn’t a quick or easy fix. Currently, there are about 8 percent as many condos being built in Miami count as they were building in 2005, and only 20 percent as many single-family residences. While we don’t want to return to the days of excess construction, population growth has to be accommodated. Furthermore, the mix that is being built – with almost half (47 percent) of construction being top tier, only 37 percent middle tier, and a mere 16 percent bottom tier – does not address inventory shortages across the value spectrum.

We look forward to using this data as a foundation for our discussions next week in Miami. We hope you can join us!