Foreclosure Flood
Parts of the Florida condo market are teetering on collapse. Other housing markets nationwide may follow
Hurricane Helene, a massive Category 4 storm, struck Florida last week, bringing catastrophic devastation to the Southern States. Despite the increasing threat from natural disasters, Florida continues to experience significant growth. However, beneath this boom, the state's aging condo market faces a crisis due to stringent new safety regulations, which are pushing older residents on fixed incomes toward financial hardship or forced sales. This situation may serve as a bellwether for broader real estate challenges across the U.S. amidst rising climate risks.
WASHINGTON—Hurricane Helene made landfall last week in Florida. It was a massive Category 4 storm nearly 800 miles (1300 km) wide and 1,000 miles (1600 km) long, bringing a storm surge of up to 15 feet (4.5 meters) in some areas that destroyed buildings and lives and washed away mobile homes. Its impact was felt across the Southern States, too, causing widespread and catastrophic devastation. Helene was the eighth major hurricane to hit Florida in the past twenty years, and it’ll take years to rebuild the affected areas.
Despite the growing threat of natural disasters like Helene, people keep moving to Florida (and in droves). It’s the fastest-growing state in the union, and according to the Census Bureau, it was home to four of the nation’s top five fastest-growing metropolitan areas and three of the top ten that gained the most people from 2022 to 2023, reflecting continued population growth across the Southern States. Major companies, like Citadel, are moving their headquarters there. Others, like Disney, Microsoft, Amazon, and Apple, are expanding their footprints thanks, in part, to Florida’s business-friendly tax code.
In Miami, just 350 miles southeast of where Helene made landfall, the skyline is brimming with activity, like most of the state. New ultra-luxury condo buildings are rising just above the Biscayne Bay, co-branded with likes of Bentley and Porsche. By all appearances, Miami and this state are booming.
“Over $2,500,000,000 in large-scale condo construction loans have closed this year in the greater downtown Miami area and Fisher Island,” According to Omar Morales from Berkadia, a multifamily and commercial real estate firm. “We’re seeing condos pre-selling anywhere from $2,000-4,000 per square foot, depending on the project.”
But all that glitters isn’t gold. Just beneath the shiny veneer of a city on the rise, a ticking time bomb is about to go off in the residential real estate market. And, perhaps, without much surprise, the people who are impacted most are older retired homeowners on a fixed budget.
Trouble on the Horizon
Perfect storms are rare, especially in the housing market. The last time we experienced one in the United States was during the 2008 subprime mortgage crisis, which led to the Great Recession, an economic contagion that spread worldwide. However, for some Florida homeowners, the perfect storm is coming. For others, it has already arrived.
Following the collapse of a 12-story beachfront condominium in the Miami suburb of Surfside, which resulted in the deaths of 98 people, serious concerns were raised about the safety of older buildings, especially along Florida’s coastline, prompting a statewide review of condominium oversight and maintenance regulations. Governor Ron DeSantis and Florida lawmakers passed a law in May 2022 that introduced stringent requirements for condominium associations and property owners. The reforms include:
Mandatory Inspections: All condo buildings three stories or higher and at least 30 years old must undergo structural inspections every ten years. Buildings within three miles of the coast must be inspected after 25 years, with subsequent inspections occurring every ten years after that.
Reserve Funding: The reforms also require condominium associations to maintain a fully funded reserve for major repairs. Prior to this law, condo associations could waive reserve funding, which often led to deferred maintenance. The new law mandates that these reserves be properly funded and used for necessary repairs and upkeep.
Transparency and Accountability: The legislation demands greater transparency from condo associations. They must regularly provide detailed reports of inspection results to their residents and make information about the building’s structural integrity available to potential buyers. This ensures that owners and buyers are fully informed of any risks or required repairs.
These reforms aim to prevent another catastrophe like Surfside by ensuring timely repairs, adequate funding, and accountability for condo boards, which was nearly nonexistent before. However, the financial impact on condo associations and owners, particularly in older buildings with older residents, is too much for some to bear. The looming December deadline for compliance has pushed some owners to put their properties on the market.
“There are buildings where the assessments (for repairs) may be a few thousand dollars or others where they are $100,000 or more,” according to Darren Fewell, a luxury real estate advisor for Keller Williams, a residential real estate brokerage. “Some people, especially older people on fixed incomes living in older buildings, have little choice but to try to sell their condos. Some may be forced into foreclosure.”
On September 19, Governor Ron DeSantis held a roundtable in Pinellas Park to discuss condo regulations, focusing on safety concerns and the rising costs associated with new building requirements. The governor emphasized his commitment to improving condo safety, referencing the 2022 legislation. He also proposed calling a special legislative session to address the "condo crisis" and explore potential relief measures, such as 0% interest loans to help condo owners manage costs associated with new safety standards.
No concrete actions have yet been taken, and without relief in place, the condo market for older buildings is responding. Fewell noted that condo sales are down a third (33%) from last year, which he attributes to buyer resistance to increased fees and interest rates. He also shared that there’s been a 56% increase in condo inventory year-on-year, mostly for properties older than 25 years. The number of condos on the market for over 100 days has jumped by nearly a third (32%).
In addition, Florida property owners already pay more than four times the national average for home insurance, up from triple the national average just last year. On average, homeowners insurance costs increased by more than 40% in the last year, and according to the Insurance Information Institute, homeowner's insurance has more than doubled (102%) in the last three years.
Bellwether
Florida is highly vulnerable to the impacts of climate change, particularly rising sea levels, hurricanes, and flooding, which significantly affect property values and insurance premiums. As climate-related risks become a bigger concern nationwide, Florida’s experience might offer insight into how markets elsewhere could respond to increasing environmental risks.
“All eyes are on Florida,” Fewell told me.
Florida’s regulatory changes are already influencing the supply-and-demand balance. However, they might also serve as a bellwether for nationwide regulatory shifts aimed at addressing aging infrastructure, potentially raising costs for condo owners and homeowners in other states, especially those along the coasts. Given the nature of a storm like Helene, which decimated inland towns as far north as North Carolina and Tennessee, it’s hard to imagine a future where other states don’t look toward storm-prone states, like Florida, for what’s to come.
“Florida’s housing market is a tale of two states,” wrote Evan Wyloge, a data journalist at Realtor.com, earlier this year. “On the coast, condo prices are falling with residents being driven out by high insurance costs and assessment fees, while inland, the cost of single-family homes is holding steady.” The same could be true in the coming years for low-lying, waterfront, or water-adjacent areas in interior states versus those at higher elevations.
But this is also about the growing chasm between the rich and others with lower incomes. Local experts agree that the soaring insurance premiums and rising assessment fees under the state regulations have disproportionately affected older condo owners on fixed incomes, raising questions about where they go if their property values are underwater. Rich residents and developers are, unsurprisingly, more resilient to increasing costs.
“Buyers, especially cash buyers, are not subject to any lending constraints, and they’re in a better position to negotiate with current owners,” Fewell shared. “They’re either paying the new assessment themselves or negotiating with the seller to pay them at closing.”