Make no mistake, the 4 headed monster is firmly in control of SW Florida’s real estate market. To illustrate this, we’ll explain what the 4 heads are and how it affects the market.
1. Investors entering market. Investors bought property in SW Florida and around the state in record numbers. They weren’t traditional buy and hold investors who looked at rental rates, cap rates, cash on cash returns and such to make intelligent investing decisions. These investors were simply interested in the Flip method, buy today at any price and sell tomorrow at a higher price. This strategy worked for awhile, until someone was left holding the bag like a bad pyramid scheme. Prices eventually became too high and unsustainable by end users. Flippers were even flipping to other flippers, but with end users nowhere in sight, this was bound to run out.
What the investors did do was speed up the building process by several years, flooding the market with excess inventory. This inventory would have been OK over time, but because the investors sped up that process we now have too much inventory today. Had it come at a more normal pace and over the next few years, we would have been OK because we’d have normal inventory without the big runup in prices.
2. Investors left the market on a moment’s notice. We’ve established that they sped up the supply, but when investors left the market they took away approxiamtely 35% of the demand. This demand wasn’t normal demand, rather artificial demand. Many of these investors were not sophisticated. They simply heard about how their friend made $100,000 in real estate so they thought they’d buy something and the same would happen to them. They weren’t all doing their homework. Many took out equity lines of credit on their current homes to finance these purchases, and were financially ill prepared if everything did not go their way. These investors should have never been in the market, and are the most likely to lose money and face foreclosure.
3. Property Insurance rates have skyrocketed out of control. Insurers blame the rate hikes on increased risk and hurricane activity. We believe this is partly to blame. The other part of the equation is failure of government oversight. Insurance companies must get their rate hikes approved based upon need. What isn’t governed is the rates re-insurance companies can charge insurance companies. An insurance company can show how their costs have gone up, but what they aren’t telling you is their re-insurance costs have skyrocketed, and the re-insurance company is often their parent company raking in billions in profits. Re-insurance rates aren’t goverened like regular insurance rates are, so it’s a way for parent companies to pass along much higher costs to their subsidiary. State Farm Mutual can rake in billions while State Farm of Florida policy holders pay the difference. And we wonder why rates are skyrocketing. Government needs to close this loophole.
4. Property taxes are skyrocketing, not so much from higher rates but more from higher assessed values. Local governments have grown accustomed to much higher tax bases without cutting rates smiliarly to make up for the windfall. The result is much higher taxes. Adding to the inqequities is the unfairness with the Save our Homes Act.
Let’s take an example of two exact homes located next to each other. We’ll assume the home and land are exaclty equal in value. Let’s say home A has been owned by the same owner the last 10 years, and the taxes on it are $2,000 because the owner of home A has filed homestead exemption for the past 10 years and is shielded from more than 3% assessed value increases per year.
Home B is owned by a seller, and he/she wants to sell. Their taxes are also $2,000/yr. As soon as they sell, the new buyer will pay $9,000 in taxes, because the Save Our Homes Tax Act is out the window when the property transfers ownership. They buyer for Home B is moving across town, and is now currently paying $1500/yr in taxes, He’s willing to pay an extra $500/yr in taxes because he’s upgrading homes, but not an extra $7,500. So, he decides not to buy, and the seller of Home B still sits on the market.
Scenarios 3 & 4 all add to the total cost of ownership. Buyers cannot afford to buy. Home prices have retreated from their 2005 highs. It used to be home prices were holding buyers back. Now that prices have come down it’s property taxes and insurance holding them back. Goverment could fix both these issues, if they were motivated to.
The market will fix scenarios 1 & 2 on their own. It’s up to each of us to speak with our elected officials to fix the homeowners taxes and property insurance debacle. Tell your legislator you want them to enact Property Tax portablity, so any savings you receive under the Save our Homes Act travels with you so you can afford to purchase another home in the same area.