This Florida housing market used to be the hottest in the country. Now the wild party is cooling off

July 2, 2022, 11:00 AM UTC
A boat on the canal of Cape Coral, Florida.
As of May, Cape Coral reigned as the hottest housing market in America, posting a year-over-year gain of 36.9% in median prices.
Getty Images

For years, I’ve been hearing about the underappreciated, great-boating-meets-bargain-homes allure of a little-known city on Florida’s Gulf Coast from my longtime buddy John “Johnny O” Oliveri. Johnny O is a New Jersey entrepreneur who built a thriving franchise selling truckloads of dirt that seals landfills of toxic waste, and unloaded his winnings to build a bayfront house at the Jersey Shore crowned by a rooftop hot tub, as well as acquire Mustang Shelbys, Shelby Cobras, rat rods, and a Lamborghini he so prizes that he named his golden retriever “Lambo.” “I’m having a July Fourth party for 50 people to watch the fireworks from the deck three stories up,” he declares. By sea, he captains a 35-foot Spectre Cat that spews whitecaps traversing the Barnegat Bay at 120 mph. But Johnny O always wanted a Florida beach-and-fun getaway spot for winter, so starting in the mid-aughts—deploying the same foresight that led him to lucrative but grimy businesses the MBAs eschew—he began buying lots and houses in one of the Sunshine State’s then-least-glamorous coastal locales, featuring supercheap housing, Cape Coral.

As usual, Johnny O’s compass was right on. According to data from the American Enterprise Institute (AEI), as of May, Cape Coral reigned as the hottest housing market in America, posting a year-over-year gain of 36.9% in median prices, following increases exceeding 30% in every month since November of 2021. In May, no fewer than six of the nation’s top 10 performers lined Florida’s coastlines, including two others on the Gulf of Mexico, Tampa (26.3%), and second-ranking North Port (33.1%). But in a sudden reversal, the boom is cooling fast in Cape Coral, located a two-hour drive south of Tampa and an hour north of Naples. “Until, say, early April, the market was insane,” says Alison Gesuele, a broker at Royal Shell Real Estate in Cape Coral. “I’d put a house up for sale and have five to seven bidders the next day. Most of the homes were selling over the asking prices that kept rising. It was a fantastic two-year run starting in April or May of 2020.”

Now, she says, the big, quick rise in interest rates (they’ve almost doubled to over 6% since late 2021) and uncertainty about the economy’s future is keeping buyers on the sidelines. “The desperation of people from the Northeast or Midwest to buy homes here has fizzled a bit,” she says. “People are getting nervous. Many are exhausted after losing out in bidding war after bidding war.” Now, she says, those folks are waiting in the wings, thinking they may soon secure a deal for what they offered before or even less, sans facing a horde of rivals who crave the same canal-front ranch or Mediterranean.

Johnny O’s housing fortunes tracked the roller-coaster course of Cape Coral real estate. He first bought in the 2006 bubble, watched the value of his home collapse in one of the worst wipeouts for any region during the Great Financial Crisis, then made two purchases before the takeoff, one where he sold too early, leaving the big gains to the new owner who subsequently flipped, and a second on a trophy property he still owns, and where he’s scored big-time. Like most homeowners who bought prior to the recent liftoff, Johnny O will probably keep most if not all of his gains. But the zigzagging history of home prices in Cape Coral shows how quickly an interlude of fast appreciation can vanish, and how at most times in a modestly growing economy, prices wax in the mid-to-low double digits. That could well be the speed we’re heading toward, or even slower, for this housing speedboat that was still roaring like Johnny O’s Spectre a mere 60 days ago.

Water water everywhere and low prices: Cape Coral’s appeal

Cape Coral is a large thumb of land that juts southwards from Florida’s western coastline toward the Gulf of Mexico. Across bridges to the south lies Fort Myers, and framing its shoreline are super-tony Sanibel and Captiva Islands. The area was sparsely populated until 1957, when two developer brothers from Baltimore bought most of the land that now covers Cape Coral for $678,000 and began constructing a giant preplanned community. Today, Cape Coral owes its cachet to the vision of the founders, who installed networks of canals and eight man-made lakes; on the west, it’s flanked by the wide Caloosahatchee River flowing southwest into the Gulf. Cape Coral boasts 400 miles of navigable waterways, more than any other city on the planet, according to Wikipedia. The city of around 200,000 covers 120 square miles, five times the area of Manhattan, and three-quarters the size of Venice, Italy. A major attraction versus other coastal cities is the huge proportion of properties on canals, lakes, and the river where owners can dock their boats. The most expensive houses tend to be those with the quickest access to the Gulf of Mexico, while those on canals or lakes far from the Gulf, or separated by bridges that don’t allow sailboats to pass, are less pricey.

It’s important to recognize that though this is Cape Coral’s biggest explosion, it’s not the first. Indeed, its market outpaced even the gangbusters national gains in the 2003 to 2006 period. “Then a tornado struck in the financial crisis,” recalls Gesuele. “People who’d bought brand-new homes with no equity just walked away.” Johnny O made his first purchase in 2006 for $510,000. “I had a $250,000 mortgage,” he says. “Two years later, Cape Coral was a ghost town. There were tumbleweeds in the streets. Every other house was for sale. People were giving their houses back to the banks.” Johnny O estimates that his home’s value had collapsed to $150,000—less than the value of his mortgage: “I was about to hand the house back like my neighbors, but then the bank called and said, ‘Just give us $100,000.’ So that’s what I did, and kept it with no home loan at all.”

The great liftoff

Cape Coral staged only a long, slow recovery. From Q1 of 2012 to Q1 of 2020, single-family home prices rose from $207,000 to $288,000, or 39% and just over 4% a year, trailing the 60% and over 5% annual gains for the U.S. as a whole. By the dawn of the pandemic, Johnny O’s manse probably hadn’t rebounded to the $510,000 he originally paid. The moonshot started in Q2 of 2020. By the end of this year’s March quarter, the median price in the AEI “overall” category had jumped from $288,000 in Q1 2020 to $403,000. But the market remained on fire in April and May; by Fortune’s estimates, the current average is more like $440,000, meaning prices have spiked by 53% in just over two years. In the higher “move-up tier,” values have notched comparable gains in that period, rising from $404,000 to a projected $620,000.

Of course, new retirees and snowbirds like Johnny O were already flocking to Cape Coral before the steep ramp-up, as new construction more or less kept pace with the influx. Driving the big shift in demand are people from New York, Chicago, Minneapolis, or even Los Angeles and dozens of other cities who can work full- or part-time in Cape Coral. They can sell their property in a suburb with frigid winters, bank hundreds of thousands of dollars, and work from a bigger home on the water in sunny Cape Coral. “It’s part of what could be called ‘the great arbitrage,’” says Ed Pinto, director of the AEI Housing Center. In late 2020, Microsoft granted permission for remote work to 14,000 employees—and such moves are a gift to places like Cape Coral. On LinkedIn, Cape Coral ranks as the top work-from-home city in America, featuring the largest share of applications for remote employment on the site.

Another magnet: Cape Coral homes are greatly fancied by renters. Hence, many people who couldn’t otherwise afford second homes are purchasing here, then leasing at figures that enable them to cover most or all of the monthly mortgage and tax payments. Many owners post on Airbnb or Vrbo. The city sets the minimum rental period at seven days; at peak times in January through April, some homes earn as much as $900 a night. According to Gesuele, whose Royal Shell has its own department for rentals, many homes command $100,000 for the high season. “That’s a great solution for a couple in their fifties who want to retire to Cape Coral in five years,” she says. Gesuele sold two homes in the $1.8 million range to cousins from Nebraska who vacation in Cape Coral just a couple of weeks a year, and lease the rest of the time. “So they have the option of retiring here, and the home’s not costing anything while they wait,” she notes. “The ease of renting is a stepping-stone to living full-time in Cape Coral.”

A couple of years ago, Cape Coral’s northwest area seldom garnered prices over $800,000, mainly because its waterways are much farther from the gulf than in the city’s southern neighborhoods so cherished by boaters. But that relatively lowly area also offers water frontage and docks, and is a gateway to beautiful beaches and islands to the north. As the market tightened, buyers were suddenly paying never-before-seen prices for those qualities. In September of 2019, on the cusp of the bonanza, a three-bedroom, three-bath, 2,250-square-foot house at less than a quarter acre on a canal sold for $655,000. On April 8, a new purchaser paid $1.625 million, $35,000 over the asking price. The seller had added a dock and other amenities, but still collected a windfall approaching $1 million. “The owner was from Michigan and used the house as a vacation home,” says the broker who handled the sale, Brent Garrett of #1 Real Estate Services. “But when the market got so hot, he decided to take the money.”

By contrast, Johnny O in a rare misstep let a racer slip away, though he’d later ride a winner. In 2014, he paid $1.1 million for an ultra-luxe villa on the Caloosahatchee. At 3,400 square feet, it features a canopied, amoeba-shaped pool, two waterfront patios, ceiling fans, chandeliers, and an air-conditioned 3.5 car garage. Its two-slip dock accommodates a 40-foot boat and two Jet Skis. Still, Johnny O didn’t like that the rough river tides made it tough for friends to park their boats, and the traffic often prevented him from lowering his vessels from the lift for outings. So in April of 2019, he sold for $1.25 million. In January, just over two and a half years later, the new owner sold the property for $2.4 million, banking $1 million more than he paid.

The slowdown has arrived, and it happened overnight

The deceleration that started in April is now apparent in two key metrics: growing inventories, and the ratio of asking price reductions to increases. These numbers are from a multiple listing service (MLS) that covers much of Southwest Florida, but reflects the scenario in Cape Coral. Gesuele provided the numbers from the MLS. “Since March of 2021, we had far more asking price increases than decreases month after month, and inventory kept dropping by the month,” she notes. “But in the last few weeks, the market has shifted.” On June 28, brokers registered just 22 price increases and 142 reductions, and the numbers for the trailing seven days were 75 up and 923 down. On June 28, new listings jumped by 121, four times the pace at the market’s peak. “The multiple bids are gone, and we’re already seeing times on the market expand,” says Gesuele. Stephanie Harne of Berkshire Hathaway HomeServices Florida Realty notes that of the 195 homes for sale now priced at over $1 million in Cape Coral, 54 have been sitting on the market for 60 days. “During the last three months, the average time on the market was far less, around 20 days,” says Harne.

How about the lower end? During the boom, the pace of sales was extraordinary. In Cape Coral, 2,256 homes priced at below $1 million sold between April and June, and of those, 94% closed within 60 days of going on sale. But now, inventories are growing. The volume lying unsold for two months or more now stands at 151 out of 967 active listings. That 16% is triple the ratio in March, showing the pace of the slowdown.

Still, Cape Coral has two propellers buffeting the current of falling demand. First, the numbers of homes for sale, though growing, remains extremely low versus history. According to AEI stats, as of May, the inventory was so minimal that all homes on the market were selling in an average of 0.8 months. In May of last year, the figure was 1.4 months, and in the strong, pre-COVID market of mid-2019, it took over four months to clear the shelves. By Pinto’s reckoning, a “balanced” market where prices rise in the mid-single-digits is around six months. Cape Coral is still a long way from that benchmark.

Second, despite appreciation of 50% or so since mid-2020, this boater’s paradise remains amazingly affordable. Just take the average “move up” price of an estimated $640,000. That’s 65% of the ticket for the same category in New York and Seattle, around 50% of Los Angeles, and one-third of San Jose. Remember, the house you’ll get in Cape Coral at those price points will be a lot bigger, and you’ll get a pool and dock, and join a mosaic of waterways where you can motor just about anywhere nearby without turning a car key.

The slowdown in buying that struck so fast will indeed swell the time it takes to sell all homes on the market, that crucial “months of supply at current selling rate” measure. The question is whether price increases will subside to say, something like the low single-digits prevailing from 2012 to 2020, or if values will actually turn negative. A reduction in asking prices isn’t the same thing as a fall in the numbers for similar houses on newly signed contracts. The brokers I spoke with said that contract prices are rising much more slowly than earlier this year, but haven’t fallen. Once again, it’s highly possible that remote-work revolution will keep demand strong enough to sustain modest increases. The big news, however: The big boom is ending, and ending fast.

Johnny O is faring just fine. The first house he bought for $510,000 in 2006 is now worth over $800,000 according to neighborhood comps, and he’s renting it for $3,000 a month. Not a bad deal after all, since he had only $350,000 invested after the bank discounted the mortgage. And in 2019, before the craziness, he bought a lot on a canal with quick access to the gulf for $300,000, then spent another $550,000 to build a pleasure dome that’s now completed. “I can get to Key West in two hours!” says Johnny O. Comparable houses in the neighborhood are fetching around $1.7 million, so he’d book a tidy profit if he sold. Most of all, he loves the lifestyle. “I’ve got a big pontoon boat with a flat deck where I can have parties for 15 people and Lambo can hang out,” he says. He thought about buying a Tesla, but shelved the idea. “They’re cool-looking, but the silence is not for me. I love the noise of a hot rod,” he says. Johnny O likes the profit from finding Cape Coral early on, but it’s mostly about the fun. Just picture the Jersey skipper at the pontoon’s helm, piloting a moveable bash, stopping to join revelers partying on the docks and boats along the canals, borne on Cape Coral’s currents.

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