What is Your Home Worth?

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This is another question we get asked a lot and the quick answer is value is in the eyes of the beholder.  It also depends on who you ask.

If you ask the seller, they’ll tell you about how they personally built the house, what kind of insulation is in the attic and walls, how many screws are holding up the shelves in the kitchen pantry, how they clean the solar panels on the pool twice per month for maximum longevity, how they just cleaned out the dryer vents, the fact that they imported fruit trees from Malaysia for maximum fruit yield, and the date and time each fruit tree was planted.  All of these things carry emotional value to the seller and should equate to monetary value in the seller’s eyes.

Value is in the Eye of the Beholder
Value is in the Eye of the Beholder

The lender wants to know how sound the buyer is, if the homeowners association is fiscally sound, and the opinion of value from the appraiser.

The property appraiser looks at value from last year and tells you what they think your home used to be worth last January 1 based upon sales from last year.  This is done on a mass-appraisal system because the property appraiser cannot possibly do a full-blown appraisal on all parcels in the county.  While this is a monumental task, the property appraiser is at a big disadvantage ascertaining actual value on any one particular property because of the scope of the task.  While we would never rely on the property appraiser’s assessment of value due to these issues, we are amazed at how many times they do a good job of getting in the ball-park or close to value, but they are subject to error because the values are based upon a previous time frame and done on a mass scale.

This brings us to the last two people in the equation; buyers and appraisers.  Buyers look at several homes and size them up against one another.   Buyers are always on the lookout for property that meets their needs, and presents the best value to them.  Typically they’ll make an offer on the best value property that meets their needs.  They don’t often waste time by offering on over-priced properties; they go straight for their favorite and offer there.  Only when negotiations fail on their favorite do they typically move on to their second choice, so over-priced sellers remain the bridesmaid instead of the bride.

Lastly the appraiser becomes involved.  Since May 1 there has been a new governmental rule in effect called the HVCC (Home Valuation Code of Conduct).  It was intended to improve the appraisal system and provide more accurate appraisals, but as is anything government related, it’s been a disaster.  Appraisals have been far from accurate, and you could easily argue that the mass appraisal system the local property appraisers system uses has been far more accurate than some of these appraisals.

The HVCC setup a management company to act as a middle-man so to speak.  Costs to consumers have gone up, and turn around times have increased.  The lowest priced appraisers have gotten many of the orders, so consequently many appraisals have been handled by out-of-town appraisers unfamiliar with our local values.  The management companies give appraisers little time to do their work-typically 2 days, but appraisals take sometimes weeks to receive back because the middle-man has to review them.

FHA accounts for 70% of the financing today, and if you get a bad appraisal you’re stuck with that value for 6 months under FHA.  We’ve seen many properties under-appraising by $70,000 and more.  The sad thing is the buyer wants to buy the property, and the sellers wants to sell, but the faulty appraisals are preventing not only the current buyer, but also future buyers from purchasing the property.  It is literally forcing many properties into foreclosure.

You can literally blame the Federal government since May 1 for wrecking our market.  Oh, we can’t blame them for all the faults leading up to May 1, but we’re in serious recovery mode right now and the new HVCC system is preventing prices from moving when they should, and sales from occurring when buyers and sellers want to do business.

The banks are powerless.  Even though they want to lend money to a qualified buyer, the faulty appraisals are preventing it, and appealing the process is almost futile.  A loan officer cannot speak with an appraiser, and the appraiser has total control, even when facts are presented clearly showing value is present.

We recently had an appraisal done where the appraiser would not use a comparable two houses down, but preferred to use a foreclosure two neighborhoods over.  The neighborhoods were not the same.  The appraisers are so afraid a bank may come back on them later that they’ve gotten too conservative, and many times use poor condition and gutted properties against good condition properties.  Appraisers should be worried buyers could sue them to level the playing field, and in fact one state has introduced a law stating just that.

Congress really needs to step in and fix this mess.  The government created it through additional regulation, and the unintended consequences are wrecking the market, and this market needs help, not an outside entity kicking it when it’s down and trying to get up.

Are SW Florida Real Estate Prices on the Rise?

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The most asked question I get, both in daily business and on Facebook is, “Are prices about to spike up?”  People are reading that inventory is shrinking, and buyers are buying all the foreclosures faster than the banks can bring them to market.  People assume the foreclosure pool is diminishing and we’re about to run out, and of  course they want to know how fast and how much prices will rise once that happens. 

It is true, to date buyers have been soaking up the incoming foreclosure inventory and whittling down the existing inventory.  Banks have been allowing short sales to some degree for qualified sellers, and in some sub-markets we are running low on inventory.  The chatter these days seems to be that prices are headed up in a big way, so let’s explore what’s really going on in the market today, and what may happen in the future and why. 

Median single family home sale prices have gone up for two straight months, but only marginally, up 1.25% in July and up .34% in August.  The median sales price now stands at $89,300, up from $87,900 in June.  Are all prices going up?  The answer is no.  The definition of median sales price is that half the sales occur over the stated number and half occur under, which now stands at $89,300. 

Median Home Sale Prices SW Florida Real Estate
Median Home Sale Prices SW Florida Real Estate

What is actually happening is the bottom has firmed up, and it’s getting tougher to find some of the bargain basement deals.  Homes in Cape Coral under $90,000 are getting harder to find, as they were somewhat plentiful last year. The bargain deals have swung to Lehigh. 

The other interesting phenomenon is that mid and upper priced homes are falling in value.  As these homes become bargains to their selective buyers, they are selling.  As these mid and upper priced homes sell, they actually pull the median sales price up, even though those home prices are falling.  Remember back to the definition of median sales price. 

In a few months people will start reading that prices are on the rise, when in fact prices are falling in the mid to upper tiers, and prices are rising in the lower tier.  Very soon the median sales price may begin to rise as it gets hit from both sides of the curve, however when you read that prices are rising, you have to remember that all real estate is local, and even Lee County has submarkets that are different. 

In some cases properties are cash flowing for investors at today’s prices, which was unheard of in years past, even before the run-up.  We believe now is an unprecedented time to be buying real estate in SW Florida as prices are so far below replacement cost that builders cannot compete, so building has been silent. 

We believe there will be more mid to upper priced foreclosures coming to the market in the next year, as more Alt-A mortgages are foreclosed on as scheduled interest rate resets take effect.  We’ve seen most of the sub prime loans already come and go from the market, so the next wave should be the Alt-A and the  economy driven foreclosures as regular people who have lost their jobs due to the falling economy. 

As you can see from the chart, median home sale prices are back to 1993 levels, but replacement costs to build are still at 2003 levels.  Our market won’t fully take off until we reach equilibrium on a broader scale reaching not only the bottom tier, but also the mid to upper tiers as well. 

So the answer as to when will our market spike up to where it was at the height is complicated.  The answer is it may never spike up to where it was, as those numbers were irrational and not supported by any sound financial basis.  However, the opportunities that lay before us may also be unprecedented, and because of the over-correction of the market dues to the financial crisis, foreclosures, credit becoming scarce, and over-supply, prices in many sub-markets are already on the rise.  Prices in the mid to upper markets will rise again; after they potentially fall some more, and the opportunity for home buyers to purchase at affordable prices and potential investment opportunities have many insiders excited. 

Remember the herd mentality.  When prices are at their height, most think it’s the time to buy, and when prices are at their low, most believe the sky is falling and time to run for the hills.  The smart money is back in, selectively, and they’re buying.  The opportunities today exceed perhaps any other time in the last 40-50 years.  

So when you read, prices are falling, or prices are rising, be sure to dig deeper and analyze what it really means.  Chances are, both statements are right, but in the analysis lies the true opportunity and wisdom.

 

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Pent-Up market

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You’ve probably heard the term pent-up demand bantered about over the years.  Pent-up demand is a term used in business to describe consumers who have held off purchases, bolstering savings accounts in uncertain economic times, and waiting for consumer confidence to increase before unleashing purchasing power. 

We’ve certainly seen pent-up demand unleashed in the last 12 months as the 4th qtr of 2008 was nearly an all-time record in home sales in SW Florida, and the 1st and 2nd quarters of 2009 have been all-time sales records.  We talked extensively how 1st time home buyers and investors have driven sales to record levels, but one thing that has been lacking is upward pricing pressure that usually accompanies a downward trend in inventory levels. 

In order to assess what future pricing trends may hold, we first must assess what is selling now, who is selling now, and what potential inventory lurks on the horizon, and intermix that with current economic conditions. 

As you can see from the attached chart, distressed sales accounted for 86% of the Lehigh Acres resale market, 71% of the Cape Coral market, and 66% of the Fort Myers market.  These sales all occurred in the last 3 months.  Distressed sales have actually fallen in Lehigh Acres and Cape Coral, and have risen about 4% in Fort Myers. 

 

Distressed Sales Single Family Lee County Florida June-August 2009
Distressed Sales Single Family Lee County Florida June-August 2009

To answer the Who is selling, the answer quite simply is banks who have foreclosed, and home sellers who owe more than what the property is worth, and with the assistance of their lenders by agreeing to a short sale.  Banks don’t always agree to a short sale unless the borrower has significant financial hardship, and even then these deals are tenuous at best. 

In answer to what is selling, primarily the foreclosures have been entry level homes at bargain basement prices.  We have recently seen some higher priced foreclosures, and we think more are in the pipeline.  We have also seen some intermediate and slightly higher priced short sales selling, with a trend also to higher priced properties of late. 

Let’s turn to what is Not selling.  Many sellers cannot afford to sell due to depressed property prices, but they do not qualify for a short sale because they don’t have the necessary hardship to qualify.  Other sellers cannot sell right now because they would not qualify for a new mortgage under current underwriting guidelines, so it’s best just to stay in their existing home and ride out the market. 

This leads us to the reality that we also have pent-up supply.  Due to record sales, our listed inventory has steadily been going down; however I think there is a lot more inventory that could be on the market if prices were higher.  Because prices are low, many sellers who don’t need to sell won’t and will wait out the market.  The only downfall with this strategy is that whatever these sellers would like to purchase to replace their existing home is also low right now, but will go up with the market.  Sellers waiting for higher prices to replace their existing home will be paying a higher price for the home they purchase, negating any financial gain by trying to take advantage of bargains today. 

Sellers today are in a no-win situation, unless they’ve owned their home for a significant time or put a lot down when they purchased.  If you’re going to trade up you have to do it within the current market.  As the market goes up and down, so does what you are selling, and what you are buying.  There really isn’t a great way to time the market, unless you have the wherewithal to buy a bargain home now and either rent out the new home or your existing home, then sell one when prices are better. 

Everyone wants to know when prices will return to what they were at the height of the market.  The answer is they may never return to the frenzied level that wasn’t sustainable.  If inflation returns like some think it will, tangible assets like gold and real estate typically do well.  However, if inflation returns, those price gains may be down the road because inflation in the short term can stifle home sales. The other wildcards are the job market, the overall health of the economy, and the biggie might also be pent-up supply. 

How much pent-up supply is out there?  Nobody really knows, just as it was hard to know how many of the pre-construction homes were actually sold to speculators who said on their loan applications they were primary borrowers. These so called speculators would later lead to foreclosures and the mess we are in today.  The builders may have had an idea when one person was buying seven homes, but there was no way to tell with all the people buying just one home back in the run-up. 

The real test will be when everyone who wants to sell feels like they can, and what the supply and demand factors are at that time.  Until then we have an artificial market, and any time you have an artificial market, artificial economic rules apply.  This market is a lot like the Price it Right Game show.  You don’t know what’s behind each door, and the only rule that applies is you must price it right to sell.

SW Florida Real Estate Inside the Numbers

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We’ve been researching and studying the SW Florida real estate market ahead of official releases due out next week, and our preliminary research tells us we expect sales numbers to increase approximately 100% or more over last August sales numbers.  The third quarter of 2009 is setting up to be another record quarter, and keep in mind 2008 numbers were near record numbers to begin with. 

Lee County single family inventory levels are on the decline again and pending sales are remaining strong.  The chart attached shows single family home inventory for Fort Myers and Cape Coral Florida. Listings in Fort Myers and Cape Coral fell by over 100 units as home buyers snapped up more property last month than came to the market. Separately, Lee County levels fell almost 200 units, suggesting buyers are buying faster than sellers and banks are bringing property to the market.

 

Fort Myers Cape Coral Listing Inventory Chart
Fort Myers Cape Coral Listing Inventory Chart

In the last several weeks we’ve addressed who is buying these properties, predominantly first time home buyers and long-term investors seeking to rent them out until the market improves.  At today’s low prices, properties actually cash flow, and we have lots of renters who have been displaced from properties. 

Now for some interesting observations we’re noticing that you won’t see in this chart.  We think home sales will be down about 11% from the previous month, which is normal due to seasonality.  Again, sales should be up about 100% over last year’s August, and last year’s August was down from July as well due to seasonality of the market, so no big surprises here. 

Foreclosure inventory increased 4.14% in the past month and foreclosure sales fell 13.82%  We’ve been saying for the past month or so banks are ramping up foreclosures for the next year and we expect double the write-downs banks will take, although because many of these properties will be in the higher price ranges it doesn’t mean we’ll see a doubling of foreclosure inventory.  Foreclosure inventory and sales will definitely be something we want to keep an eye on going forward and may tell the story of how our market is doing. 

Another trend we’re tracking is short sales to see if banks are cooperating more and agreeing to see short instead of taking back in foreclosure.  Even though total sales are down about 11%, and foreclosure sales are down about 13%, short sales are up about 3.76%.  This would suggest banks are cooperating more and our experience has been this is true; however it is still a very daunting process and not one a homeowner can reasonably attempt on their own.  In fact, it is so daunting that many agents won’t deal with short sales either.  If you’re going to attempt to buy or sell a short sale, make sure you’re dealing with an agent with lots of experience, preferably a CDPE (Certified Distressed Property Expert.)   

Distressed sales accounted for 70.04% of Lee County home sales in August, up slightly from 68.6% in July.  Distressed sales are here to stay for awhile.  In Fort Myers, 66.45% of the sales were distressed, while in Cape Coral the number is 68.87%  Lehigh Acres has far more distressed sales at 84.27%  County wide, distressed sales percentage remained stable over the previous month. 

Inventory levels fell in Fort Myers, remained fairly constant in Cape Coral, and increased about 2.35% in Lehigh Acres. So what’s the bottom line?  We believe median prices may increase some over time as banks bring higher priced foreclosures to the market.  Banks allowing more short sales may also increase the median sales price, but that doesn’t mean all homes are going up in value.  If this occurs like we think, it simply would mean the bottom has formed in the lower price range, and we’re still seeing erosion in prices in the mid to upper price ranges, and as they become more affordable buyers switch “on” and buy them.  

All real estate is local, and you can’t judge the entire market by a single statistic like median sales price.  This is why we take so much time to really study the market and explain what is really happening with hard facts.  We’ll keep an eye on the distressed end of the market, as these latest trends will offer us signs as to where the market actually is and where it’s headed. 

Until we flush out the distressed properties, normal market assumptions do not apply.  Supply and demand still rules, it’s just that it’s hard to get a grasp on supply without having a thorough understanding of what the banks are doing with foreclosures and short sales.  Until then we’ll keep tracking it for you and reporting the trends.

Seasonality of the SW Florida Real Estate Market

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You’ve heard the expression Tis the Season, and in real estate season can mean many different things depending on where you live, and what type of product you’re referring to.  Let’s talk about the Seasonality of the SW Florida Real Estate Market. For many years in SW Florida condo sales were highly dependent on seasonal sales, and in many tour developments that is still true.  However, even with condos there are differences.  Some condos are located at the beach; some can be rented weekly Vs monthly, and so on.  There are only a few golden rules in real estate; Location, Location, Location, and Price.  If you over price a home in this market, chances are good it will not sell, and we all know location makes a difference, although some would argue it’s still a function of Price.  The better the location, the better the price, but that’s the old chicken and egg theory we’ll stay away from today.

Today we thought we’d illustrate some seasonal trends in single family home sales throughout the years. For many years we’ve told people single family home sales traditionally peak in the summer months, perhaps because kids are out of school and that’s when the relocations tend to take place, and perhaps that many of our buyers over the years were move-up buyers and they had more time to look after the Season their business just had.  For years we didn’t have large companies employing hundreds or thousands of people, so many of our buyers worked for or owned small business, and they were busier in Season than out of season.

 

Seasonality of the SW Florida Real Estate Market
Monthly Sales Graph since 2005 Showing Seasonality of SW Florida Real Estate Market

We have attracted a few large employers, although a few more would be welcomed by all here I think.  Our market has been in turmoil since 2005, so we weren’t sure the charts would show the traditional rule of thumb that home sales tend to peak March through end of summer.  Upon further study of the home sales graph, it does seem to hold true even in this time of change that home sales peak in the March through Summer time frame, and as we enter the fall one might expect home sales could decline.

This year may or may not be like recent past years as we have a first time home buyer tax credit in play that expires November 30, artificially low interest rates as the government has been buying treasuries at least through October, and artificially low property values due to the distressed nature of the market.  Put all this together and you’ve got a Perfect Storm for record sales, and we’ve seen that for the past year.

So what could speed this train up or slow it down going forward?  In a few weeks interest rates could head up if the government doesn’t decide to keep them lower.  If so, rates could shoot up over 6% almost overnight like it did a few months ago last time their decision was about to expire.  Additionally, the first time home buyer tax credit could go away, thus taking some motivation out of new buyers in the market.  How the public reacts to the overall economy, health plans, stimulus money, bailouts, etc. could also affect public confidence about the direction the country is headed, and affect purchasing decisions.  All these could slow the train down.

The train could also gain momentum if the government enacted a tax credit for all buyers, not just first-time home buyers.  Nationwide we’ve been lacking the move-up buyer, and that’s certainly true here as well.  A tax credit for everyone would spur a recovery in the overall market, and may decrease pressure on banks.  As tax payers we either spend it here or spend it there, however if we help save the banks and spur home sales we also help the economy and increase jobs at the same time.  It would also help if the government keeps interest rates low by buying treasuries allowing the market more time to heal itself.

A reform of the newly enacted (May 1) appraisal rules would also help the market, as new rules intended to help have actually hurt, and have not increased quality of many appraisals.  We would argue the new government program has increased costs, increased inefficiencies, and spurred out of town appraisers who don’t know the market’s intricacies, but what would you expect when you put the US government in charge of local property valuation rules?

Some banks are getting better at evaluating and approving short sales when they make sense and some have gotten worse.  How banks make decisions today will affect future foreclosure inventory.  We believe foreclosures coming to the market may increase in the next year, which will help sales because inventory has been shrinking, and this will bring more affordable housing to the market to replace dwindling inventory.  We don’t see rapid price increases on the horizon until we see job growth, and even though we have artificially low sales prices, we are seeing sales because they are bargains.  I’m not sure we’d see anywhere near the sales volume if these bargains went up significantly in price overnight, and this is why I don’t think prices will jump dramatically when inventory contracts until the overall economy heals with the housing market.  And this is why we are in favor of a home buyer tax credit for all, so we can heal both simultaneously.

SWFL Real Estate vs. Other Florida Markets

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Official real estate sales numbers were recently released so we decided to take a look at how the Fort Myers/Cape Coral market fared against the top markets in the state.  Cape Coral/Fort Myers is considered a metropolitan statistical area (MSAs) Our MSA includes Bonita Springs, Estero and all of Lee County Florida.
 
Let’s start off with the bad news and get that out of the way, which will lead us to the good news.  The bad news is the Cape Coral/Fort Myers MSA led the state in median sales price decline year over year for July.  Lee County was down 43% to $89,000 in July 2009, down from $154,900 in July of 2008.  This isn’t new news as we’ve led the state all year as SW Florida was perhaps the most over supplied market in the state for single family homes.
 
This leads us to the good news. Our area also leads the state in sales increases in transactions.  Because SW Florida was quicker to react than other markets, we were quicker to post sales gains.  The Cape Coral and Lehigh Acres areas have been the focus of news reports on NBC Nightly News, the Today Show, Wall Street Journal, and many other worldwide media outlets which has led to an awareness of the bargains available in SW Florida.  You’ve heard the old saying, “Even bad press is good press.”  Well, it’s certainly true as Lee County has drawn the attention of northerners, Canadians, Europeans and Germans among others looking to buy a piece of paradise at a decent price.
 
While we have seen many northerners buying second homes in our area, most of the single family home sales have been first time home buyers and investors.  My friend Jeff Tumbarello with the SW Florida Real Estate Investors Association recently did a study and found recent sales were 64% cash buyers, which is an indication investors have found SW Florida and realize it is a bargain.
 
Cash buyers can also be a sign that the new government appraisal rules are not working and are limiting many home sales.  The new program is called HVCC and stands for Home Valuation Code of Conduct.  This new program creates a middle man and increases costs to borrowers, and it prohibits communication from loan officers and appraisers.  At first glance this may sound good, but in reality it has increased pressure on appraisers to turn around appraisals quickly, while at the same time slowing down appraisals getting to the lender.  Imagine that, a government program increasing costs, increasing pressure and slowing things down.
 
The worse news is buyers are shopping these bargains, finding them, making offers and applying for financing only to be told that an out of area appraiser doesn’t think these homes are worth it.  The buyer wants to buy, and the seller wants to sell, but neither can, so it goes back on the market and is sold to a cash buyer for less because regular buyers can’t get financing.  Many of the foreclosures go to cash buyers because bank asset managers know it’s tough to get financing buyers through due to appraisal issues.
 
Fannie Mae and Freddie Mac back most of the loans other than government FHA and VA loans, and both have adopted the HVCC which was put together by regulator Federal Housing Finance Agency (FHFA), so we’re stuck with appraisal rules whether they’re good or not.  We can blame our government for keeping home prices artificially low and preventing many qualified buyers from purchasing a home they wish to buy.  I’m sure there are some good aspects to the rules, but the reality of the results is wrecking the market and changes should be adopted quickly.  Rules should not dictate market value, the market should.  These new rules will actually fuel further foreclosures from sellers who cannot sell.
 

Fort Myers-Cape Coral Sales Trends
 
The statewide average of home sale growth was 37%, and you can see Fort Myers/Cape Coral blew that average away at 104% The next closest was Miami at 64%.  As you can see, many metro areas are experiencing home sale growth which is encouraging, and this growth would have been much better both here and statewide if the appraisal issues were corrected.  We expect foreclosures to increase this year over last year.  The good news is buyers have absorbed all the foreclosures and eaten into existing inventory.  The sooner we fix the appraisal mess the government created, and complete the foreclosure cycle, the sooner our market will be back to normal.  In the meantime, enjoy the higher sales volume and the bargains as our market heals itself.

Video Explains 1st Time Home Buyer Tax Credit

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A new video has been released that explains the First Time Home Buyer Tax Credit. It is called RE/MAX Agents Know $8k Tax Credit

It explains what the following:

  • Definition of a first time home buyer
  • The difference between a credit and a deduction
  • How to get up to $8,000 refund on your taxes
  • Income Limits to Qualify
  • If you don’t owe taxes, Can you get the credit back?
  • Deadlin Coming up Soon
  • Time is Running out, so call a Realtor today

What Price Ranges Are Hot?

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You’ve heard reports that listing inventory has been coming down for many months.  This is true, and not only have buyers absorbed all new inventory coming onto the market, they have also helped to purchase a backlog of existing inventory as well.  We wondered if inventory levels relative to home sales were declining in all price segments, so the first thing we did was looked at what the month’s supply of inventory was back in January in our State of the Market Report.
 
We decided it would be interesting to compare inventory levels from about 8 months ago to where they are today and sort them by price range to see which price ranges are hot and which ranges are not.


 
SW Florida Real Estate Inventory by Price Range
 
The results are in and you can tell by the graph that the most dramatic changes are in the 0-$100,000 range and the next one up at $100-$200,000 ranges.  Months supply of inventory fell dramatically in the entry level markets, down from over 20 months to just over 4 months.  First time home buyers and investors are scooping up these bargain properties as quickly as they enter the market.  The 100-$200k range has also done well, declining from 12 months supply to 7.82 months supply just since January.  As we reported last week, the first time home buyer tax credit is helping first time home buyers in the entry level market and this graph supports that. However there is nothing in the tax code that helps the broader market and perhaps this is why we haven’t seen the move-up buyer.  In fact, we have seen many first time home buyers buying short sales and foreclosures. As we know the banks won’t be buying anything after the foreclosure sale and short sale sellers won’t be buying for a while until their credit is repaired.
 
This is why we’ve advocated an across the board tax cut for all buyers.  The real estate market is 26% of GDP and has led the economy out of each recession. Our economy would be better served if we invest in strengthening the entire real estate market and it will lead us out of this recession.  We’re not in favor of all these government bailout programs. However, if we are going to invest money it would make sense to spend it in areas that actually may work vs. what our government has been doing.  We’ve seen TARP money for the banks, a stimulus package that so far hasn’t produced jobs as advertised, and a bailout for auto companies.  The cash for clunkers was a success in that it spurred car sales. If spurring across the board home sales helps get our economy back on track, it might be worth looking at.
 
Once we get to the $200k+ range the numbers begin to look eerily similar to what they were in January.  There is improvement, and I’m sure all SW Florida home sellers will take improvement where they can find it.  We are not seeing improvement in sale prices and in fact sale prices are still falling in the $300,000 + ranges.  We have seen a bottom form in the entry level home prices, and certain waterfront property seems to be holding its own as well.
One bit of good news is we are seeing northerners buying second homes in SW Florida as prices have dropped to affordable levels.  Northerners are afraid these bargains may not be here in a few years when they’re set to retire and in many cases they may be right.  Prices are below replacement cost and this will not last forever once inventory is absorbed.  While there is pent-up demand for bargain properties, there could also be pent-up supply from home sellers who would like to sell but just can’t today due to the prices.  Once the market levels out across the spectrum, it will be interesting to watch and study those forces.
 
For now, we see another year of banks shedding bad loans.  We expect several of the large banks to essentially double the foreclosures.  All you have to do is study their SEC filings to see that this coming year most banks are budgeting twice as much in write downs as they did last year then do the math.  The good news is our market is absorbing that inventory.  The bad news is that pent-up supply of home sellers who would like to sell may be put off in time.  Let’s just hope enough can hold on until we adjust through this next wave, and let’s hope Congress addresses strengthening the entire real estate market, not just the entry level.  As you can see by the graph, home sales aren’t trickling up.  If we strengthen the entire market, there will be less bank foreclosures, more families will stay in their homes, and the economy recover sooner, thereby creating jobs again.

Is First Time Home Buyer Tax Credit Helping the Market?

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I recently attended the Star Power convention in Denver where the presidents or founders of RE/MAX, Prudential, Coldwell Banker, and Keller Williams spoke about where the market is today and where it’s going.  Dave Liniger from RE/MAX stated that nationwide we have a market fueled by investors and first time home buyers, but we’re lacking the move-up buyer in this market.  Jim Gillespie from Coldwell Banker agreed, and shared some interesting stories from Capitol Hill on his efforts to change the First Time Home Buyer Tax Credit to help the entire market.

It’s well known that tax codes effects home buying activity.  Look no further than the interest deduction and you can see why whatever Congress does impacts the entire market.  We can also look at the cash for clunkers program as an example in another industry.  The problem with only offering the credit to First Time Home Buyers is they will buy, but there’s no incentive for anyone who is selling to sell and move up.  So we end up with a bottom forming on entry level homes and stagnation in the mid level and secondary home market, which arguably needs more help than any other segment in SW Florida.

Percent of Distressed Sales in Fort Myers, Cape Coral, Lehigh Acres
Percent of Distressed Sales in Fort Myers, Cape Coral, Lehigh Acres

As you can see from the attached chart, 87% of Lehigh Sales and 74% of Cape Coral home sales have been distressed in the last 3 months, as this is where the majority of entry level speculator homes were built.  Fort Myers to a lesser extent stands at 62%, and that number grew last month.  By distressed we mean either a short sale or foreclosure sale.  This has put pressure on median sale prices, and illustrates that first time home buyers and investors are the majority of the buyers right now.

Jim Gillespie and others are lobbying Congress for a $15,000 tax credit for all buyers.  The $8,000 tax credit for First Time buyers is set to expire December 1, but we’ve heard this may get extended in October if the economy doesn’t pick up steam by then.  But what about helping the overall market, not just one segment?  We’ve helped solidify to some extent the entry level market, and we’ve done nothing for the mid market on up.  We’re talking $200,000 market and up in Lee County, the same market that used to be $400,000-$600,000 a few years ago.  Yester year’s prices aren’t coming back, as the market has done a reset.  However, we could inject infusion into this segment as well and keep it from further declines and get this economy moving again.  Real estate has led the US economy out of each recession, and it stands to reason it will do it again.  21% of the nation’s GDP is real estate related.  If the economy is the #1 issue right now, then what are we waiting for?

Could you just imagine the new activity that would occur if there was a $15,000 tax credit for all buyers?  Imagine how many people from up north could come by a 2nd home in Florida, or how many move-up buyers might pull the trigger and move, especially with today’s bargains.  A recent study showed nationwide a real estate sale generates $63,101 back into the economy.  This is based on everything from new carpet sales or to look as new, appliances, commissions, closing fees, plus the propensity of money at about 1.5%, meaning when you go out and spend, the vendor you just bought from also goes out and spends into the economy.

The truth is investors and first time home buyers were already buying in SW Florida before the tax credit.  Our buyers were limited to first time home buyers and investors only because the properties they’re buying were such great deals, and we’re happy the first time home buyers are getting a tax credit on top of a great deal.  I’m sure it has spurred even more buyers off the fence.  We would like to see all buyers benefit, and if we speeded up the recovery of the real estate market, not only would the economy benefit and we’d get people back to work, but we’d also protect banks from more foreclosures going forward.  We know foreclosures are about to pick back up again, and many will now be in that mid market and upper range.  Come on Congress, let’s make this happen, protect our banks, and get people moving again and get this economy and real estate market on solid ground again.

Current Market Index Predicts the Future of SW Florida Real Estate

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About 8 years ago the Ellis Team created a market index that accurately predicts the SW Florida real estate market. It helped us in 2005 warn the public that the local real estate market was about to turn.  Later in the fourth quarter and on into 2006 people began to realize the train had run out of steam.  We named it the Ellis Team SW Florida Current Market Index.  Since unveiling this index, the National Association of realtors came out with a similiar index called the NAR Pending Home Sales Index, which also predicts future closing activity, but it doesn’t measure the overall health of the market.  

Current Market Index SW Florida Real Estate by the Ellis Team
Current Market Index SW Florida Real Estate by the Ellis Team

 Our local index measures pending sales, but also takes into account listing inventory and measures the overall health of one against the other.  It tells us if properties are moving relative to overall supply.  This is important because in a good market, it may actually be more of a seller’s market than people realize.  In a hot market, sales are held back by the supply, meaning if there were more supply, chances are, there would have been more sales. 

 

The CMI Index numbers peaked out in January of 2008, and back then we started telling the public sales were about to pick up and inventory would start declining.  Sure enough, that’s exactly what happened throughout 2008 and into 2009.  Our Index was at it’s lowest in April of 2005 and at it’s highest in January of 2008.  The higher the index number, the more of a buyer’s market it is and the lower the number, the more of a seller’s market we have.  Back in July of 2005, the overall Lee County Index stood at only 1.07.  As we know all too well, that was about to change drastically.  The numbers shot up to 2.11 by September 2005, and 3.44 by October.   

So what do the numbers tell us today?  Our index hit 3.72 in April and stands at 3.80 in July of 2009.  This tells us inventory levels have been decreasing as predicted and pending sales have been increasing, as predicted.  In fact, last month we sounded the alarm that June sales could reach record levels, and they did.  July’s numbers when released should be strong as well.  Don’t confuse this with rising prices just yet.  The market is strong in sales volume, but we’re in a new market that has reset, and prices aren’t going back to 2005 levels.  We are starting all over from scratch and 2009 is the new baseline, and as the market heals, the baseline will have room for future price appreciation, with moderation. 

We update this graph each month on our Blog, blog.topagent.com and we look forward to providing this insight to News Press readers in the months to come.  Its one thing to have a Feeling about what the market is doing, however really studying the actual facts and charting trends helps to better understand what the market is actually doing, and where it may be headed.  Nobody can know with absolute certainty what will happen in the future, so we look to statistics to give us our best guidance.  Statistics are our radar so to speak.   

We really try to look at the data with an unbiased eye, meaning we’ll let the data speak for itself and tell the story, as opposed to hypothesizing what the story should be and trying to prove it.  We’ve been right, and we’ve been wrong, and the point is we’re not attached to the outcome of our predictions.  We simply lay it out there and let you decide based upon the best facts we have at the time. 

We’ll be running a new batch of numbers soon, but the July Index appears to show a strong market going forward for the next few months.  It looks like July and August sales numbers should be in good, and we look forward to the release of official numbers on August 21.  We won’t be surprised if July’s numbers are big, perhaps up as much as 100% or so, but down slightly from June’s record numbers.

As printed in the Fort Myers News Press August 15, 2009