Nationally, home sales have slowed, and prices have slid at a time of rising inflation and mortgage rates. Yet changes in Florida’s housing market are more moderate, and some parts of the state have seen unwavering increases in prices — buoyed by an influx of new residents outpacing supply growth. Why the disconnect? Has Florida housing always opposed the national trend, and should we expect that it will continue to do so?

A study recently published in Real Estate Economics examines the interaction between movements in the national and regional and state real estate markets. The article, titled “Nature of Comovements in U.S. State and MSA Housing Prices,” was written by Alan Tidwell, Yan (Olivia) Lu, Junsoo Lee, and Piyali Banerjee. They analyzed the seasonally adjusted monthly house price index data, collected by Freddie Mac, from states and 382 U.S. metropolitan statistical areas (MSAs). The time series data included single-family detached, planned unit development and condominium transactions from January 1975 to March 2020, ending just as COVID-19 came on the scene.

National factors such as the S&P 500, Consumer Price Index, M2 money supply, U.S. unemployment rate, mortgage prime loan rate, and consumer confidence level, as well as regional factors across eight geographic regions establish the economic conditions. The model incorporates state and MSA-specific shocks, measuring responses to the corresponding factors.

The authors evaluated the relative contribution of each factor to the variation of housing prices over time, specifically focusing on the proportion of the contribution from each of the national and regional factors. This methodology allowed the study to view the time-varying contributions of each factor on the movements in housing prices, while accounting for the heterogeneity between states and MSAs, volatility of housing prices and the correlation between prices within and across regions.

National factors

Initial results using a dynamic factor model concluded that national factors were the most dominant determinant affecting house price movements from 1975 to March 2020. On average, national circumstances contributed to 79% of the variation in state-level housing prices across regions. This contribution was relatively consistent ranging from a low of 74% in the West to a high of 88% in the Great Lakes area. Supporting the finding that national factors tend to dominate local market prices, regional and state-specific factors accounted for only 7% and 11% of the variation in house prices, respectively.

The findings support the idea that the national economic and real estate conditions are the primary contributors to both state and MSA-level housing prices, and the effect proved larger during times of price volatility. Overall, the study found that, in the early 1980s there was a low correlation of about 20% of house prices in MSAs across nearly all regions. The data suggests that, moving through the 1990s, the correlation in prices increased.

A “synchronization effect” among states, MSAs and national factors was also established. Using time-series regression analysis of state and MSA housing price index on calculated national factors, the results produced an estimated R-squared value that serves as an indicator of how each state- and MSA-level housing price tends to move with national factors.

Focusing on the state-level analysis, the synchronization effect varied widely. In other words, the extent to which each state’s real estate market moves with national economic factors depends highly on the state’s economy and general housing prices. States such as Arizona, California, Florida, Maryland, Nevada and Virginia, revealed high synchronization effects of 67% or more. Rural states like North Dakota, Oklahoma and West Virginia had values lower than 14%, indicating less correlation with the national market. The U.S. average was 41%.

We see that the synchronization effect varied on a state-by-state basis across the entire 1975-2020 study period. But are the results consistent between periods of economic strength and periods of relative weakness? Not exactly. And this may be an indication of what we are seeing in Florida in the current market. When examining specific, shorter periods of time since 1975, marked by varying economic conditions, the paper found that the overall effect of national factors increased in periods of greater price volatility, such as boom and bust periods.

Focus on Florida

Turning our attention to the movement of housing prices in Florida, the study again showed a high degree of correlation with the national factors. In fact, during boom periods, Florida had the highest correlation with a value of 92%. Virginia (90%), Maryland (89%), California (82%), Hawaii (82%) rounded out the top five states that were most highly correlated to the national real estate market factors during prosperous times. Note that the average across all states was only 37%.

It is the relative synchronization result during periods with less prosperity that is most interesting for Florida. During periods referred to as busts, the average correlation value increased from 37% to 42%. Yet, the connection between Florida and national factors decreased by nearly 20 percentage points to a value of 74%. Even though the Florida effect is still higher than the national average, it is a marked decrease compared with boom periods. In other words, while we can expect housing prices to track national trends in an almost direct manner during boom economies, the correlation decreases significantly during downturns in the economy. This contrasts with the Southeast region, which displayed a considerable link between prices and the national market even during economic downturns. The correlation between national economic factors and real estate prices in the Southeast was 97% and 90% in boom-and-bust economies, respectively.

Additionally, the overall effect of the national trends on the Florida real estate market appears to be decreasing over time. The extent of the correlation between the national market and Florida real estate has decreased in recent time periods to about a third of what it was measured in the boom periods.

There are limitations in trying to extrapolate this study to current economic conditions, and to current house prices in Florida. A primary limitation is that the study only examined data through March 2020. Due to COVID-19, the national, regional, and state economic conditions have changed significantly and may have altered the house pricing relationship. The effects of the pandemic on national housing relationships will not be fully studied for years to come.

This “Comovement” article still sheds light on how Florida real estate prices may move in relation to national economic factors. How might the study results relate to the current observation of a strong Florida housing market in the face of national uncertainty? The study suggests that Florida has been highly connected to the national housing market in general, but the relationship is stronger during expansion and slightly weaker during contracting economic conditions. Perhaps incorporating the current period results into the model will further widen this gap. It is possible that Florida housing rides the national wave and then separates before the wave hits the shore. In any event, the state’s housing market seems to be more integrated into the national housing market than might have been expected.

Sources: Federal Reserve Economic Data (FRED), Florida Association of Realtors, The Market Distillery

The results also appear to be in line with what Florida is currently experiencing in terms of housing prices in 2023. As interest rates increased and the economy has slowed, the country has experienced a reduction in house prices in many areas. Yet, prices in Florida have not decreased at the same rate as many other locales. (See Figure 1.) And in some areas of the Sunshine State, prices have increased over 2022 values. It will be several years before we can determine the extent to which this phenomenon is unique to the current market conditions, or a pattern in the growth of Florida real estate.