Just a few short years ago, Florida was the primary benefactor of an unprecedented housing boom. As residential construction and housing prices reached new highs, state coffers flourished, population soared and employment rose dramatically. But housing peaked in 2005, and the severe housing downturn that began in 2006 continues to seriously trouble the state’s economy.

The soft economy and plummeting housing market have resulted in a slowdown in Florida’s population growth. According to the University of Florida, the state’s population grew by 331,000 in 2007, nearly 100,000 less than in the previous year. While in-migration remains high compared to national rates, the University’s forecast predicts that peak population growth rates will not return in the foreseeable future. Slower population growth means a slowdown in the demand for all types of new construction. In fact, the value of Florida’s construction starts peaked in 2005 at $72 billion. After declines in 2006, starts fell by 23% in 2007 to just $49 billion. These declines marked the first back-to-back annual drop since 1990.

The 2005 peak can be easily encapsulated in one word: housing. Residential construction’s share of total construction starts that year was a remarkable 73% (compared to the national average of 57%). Consequently, the steep decline since 2005 has been the result of the state’s downward spiral in housing.

During 2007, some of the intense declines in residential construction were offset by relatively robust nonresidential and infrastructure spending. Pronounced gains in hotels, sewer and water treatment, electric power, and stores/shopping centers helped to contain the declines in total construction. But the story has changed in 2008. Although the declines in multifamily and single family housing starts are expected to soften modestly, neither public works nor nonresidential construction will provide offsetting support. As a result, total contracts will tumble another 23% this year to just $38 billion.

Housing Downturn Continues
Florida’s housing market is still working through the excesses generated by the historic boom during 2001-2005. Speculators and investors devoured thousands of units during those years, and “flipping properties” for a quick, easy profit was widespread. This insatiable investor-driven demand drove rapid and intense price appreciation; South Florida in particular became the epicenter of the buying craze, as prices skyrocketed. In fact, the S&P-Case/Schiller price index estimates that home prices rose 157% in Miami and 109% in Tampa between 2000 and 2006. Developers responded to the zealous demand and soaring prices, inundating the market with new construction. This buyer and construction frenzy culminated in nearly $52 billion worth of housing starts at the peak in 2005.

In hindsight, Florida’s booming housing market was predicated on unsustainable demand and questionable lending practices. With both demand and lending availability all but dried up, unsold inventory is now at a record high. In April 2008, Orlando’s supply of unsold single family homes rested at 22 months, while in Ft. Lauderdale inventory sits at nearly three year’s worth based on current sales. This year will notch another double-digit decline, as total single family construction starts fall an additional 32%. Single family spending value is expected to rest below $16 billion this year, just 30% of 2005’s peak.

The story is not much brighter on the multifamily side of the housing market. Miami’s condo market in particular is suffering the after-effects of excess supply and overzealous investment activity, and sales have become extraordinarily weak. According to the Florida Association of Realtors, Miami’s existing condo sales are in steep freefall. Only 333 condos changed hands in March 2008, compared to peak sales of over 1,500 condos just three years ago. As of early 2008, over 25,000 condos were for sale in Miami-Dade County, the equivalent of over five years of supply. Not surprisingly, the value of multifamily construction in Miami dropped 56% in 2007 and another double-digit decline is expected for 2008. Statewide, multifamily construction fell by an estimated 39% in 2007 and activity will fall another 23% in 2008 to $5.4 billion—a marked change from the peak of $13.2 billion in 2005.

More in-depth information on the construction outlook for Florida can be found in McGraw-Hill Construction’s new Exclusive Report: Florida Construction. To order a copy, visit www.analyticsstore.construction.com. For further information about the Florida construction market or other MHC forecast information, contact McGraw-Hill Construction’s Research & Analytics Group at 800-591-4462.