The real estate market in Orlando has seen one of the worst declines ever in recent years, and many are wondering when the market will turn around. The market here needs to decrease the disparity between prices and rental rates, keep home prices affordable with local wages, slow the rate of price declines, and reduce the inventory to around 6 months of supply.
Buying a home begins looking attractive when the price to rent ratio or P/R is 15 or lower. Say you’re looking at a home that costs $300,000 and a similar home rents for $20,000, then your P/R is 15. As the P/R ratio falls, demand could pick up with more buyers coming into the market and price should stabilize.
The national average currently stands at a P/R of 12.5 and the P/R of 15 is just a general rule of thumb. It’s better to look at the P/R in years prior to the boom. The P/R stood at 11.6 in the year 2000 for Orlando, but currently stands at 22.2 which is a bit lower then its 26.7 peak. The 15 year average for Orlando is 15.5 which tells us that the real estate market here will stabilize somewhere between a P/R of 15.5 and 11.6.
By using this measure, we can make an attempt to predict stabilization of the market here. Of course it’s not the only measure to predict stabilization. There’s also the inventory to look at. Prices for real estate typically stabilize when the inventory reaches 6 months. The inventory here in Orlando currently stands at 18 months so it looks like we’ve got a long way to go.
There’s also the affordability factor based on wages. The good news for our market in Orlando is that the affordability index stands at 100% as of January 2008 meaning everyone that earns the median income of $51,335 can afford to buy a home. Wages have not risen all that much but the median price of a home dropping to $223,900 in January helped this figure.
Real estate prices have been declining on a rapid pace throughout the country according to the Case Shiller index, but prices have been actually increasing if you look at this figure on a month to month basis. Perhaps it’s a sign of stabilization here in Orlando.
Homes in Orlando are affordable and not declining in price so rapidly anymore, but the glutton of inventory and the disparity between price and rental rates remain as a damper on our march towards stabilization. It sure looks like we’ve got a long way to go, but we’re well on our way. I just hope gas price don’t get too out of hand.