Has the SW Florida real estate market bottomed out yet? One noted economist thinks so, others are not so sure. This is one of the questions we hear most, perhaps second to "what’s my property really worth?" To put the SW Florida real estate market in perspective, let’s visualize a championship boxing title fight for a minute.
The "Champ" is the SW Florida real estate market. It’s been the champ for many years running, easily since the 80’s. The "Challenger" is the market correction since mid 2005. The challenger has surely gotten his punches in, scoring many, many times. In Rd 1, (Sept-Oct, 2005) the challenger rocked the champ before the champ even knew what hit him.
By Rd 2 (Jan-Mar 2006) the champ rebounded, trading punch for punch with the challenger. The challenger didn’t realize that the champ had a few unknown punches up it’s sleeve (price reductions from educated sellers). This champ was far more experienced than the challenger, and yet the challenger had youth, energy, and resilience.
The challenger scored knock-downs in Rds 4 and 7, stunning the champ with a series of upper-cuts (low ball offers) and body shots (Actually walking away from counter-offers). The champ hit the canvas, and each time picked himself up, dusted himself off, and returned to boxing. This was the champ after all, and no smart-mouthed inexperienced challenger was going to take his title away, at least not yet. The champ has experience, and remembers back to 1991 when recession hit and sales were slow. This time seemed different though, perhaps a little harder. Is the challenger stiffer competition now, or was the champ just soft and fat from the good times. Time would tell.
The fight would wear on, and both would exchange blows. The champ would bounce back and rock the challenger, and vice versa. At times it looked like the challenger was about to put the champ away and other times it looked like the champ was about to foil the challenger’s bid to become champ. Each fought mightily, heroically, without reprieve.
How does this fight end? Right now the champ is on the ropes, staggering. The champ is not defenseless, but it is growing weary. The champ didn’t realize it was in for this much of a fight. The champ hadn’t trained for this. The champ had many handlers, and not all were in the best of shape. Some had become lackadaisical, complacent, and content. The champ needed new blood, but blood with experience and know-how. Many of the champ’s trainers have left the business. The champ is leaner, meaner, and angry. We’ve identified 10 key areas that will decide this title fight, and we’ll tell you what they are here:
1. Demand- Demand has held fairly steady. This market would really be in trouble if demand fell due to economic conditions, layoffs in a community, etc. In fact, we believe there is pent-up demand from nervous buyers who have been waiting for prices to come down. See NAR Pending sales outlook, and SW Florida Homes Closed Chart. You can also look at July Current Market Index. August Index due to be released tomorrow, (Advantage Champ)
2. Supply- Supply has fallen each month from all-time highs set back in April of 2007. We’ll be posting new Current Market Index numbers tomorrow once we pull the new data. Supply is still considered very high, and we will not see any price appreciation until we eat into these high levels. (Advantage Challenger)
3. Interest Rates- Interest rates are historically low, but have been rising in recent months. Each rise in interest rates works against buyer’s purchasing power. Buyers on the fence should purchase now. If they don’t, they may be squeezed out of the property they wish to buy. (Advantage Champ)
4. Insurance- Insurance costs affect total cost of ownership. As insurance costs rise, buyers purchasing power is lessened. The Florida legislature passed sweeping legislation designed to lower insurance premiums in 2007. Results have been mixed. Some rates have fallen, other rates have still risen. Had the legislation had the intended affect of lower premiums across the board, we would have put this category in the champ’s column. We just cannot do that today. (Advantage Neutral)
5. Taxes- The Florida legislature did pass legislation that will lower taxes for many, and provided a constitutional amendment that if voted and approved in January 2008, would really help new homebuyers afford taxes in their new home. Essentially new homebuyers were subsidizing long-term residents. Even long-term residents complained because they felt trapped in their existing homes and could not afford to move due to tax consequences. This new tax system dramatically lowers property taxes on purchases, and could spur a frenzy of buying activity once enacted. (Major Advantage- Champ)
6. Oil and Economy- Oil prices have retreated, and the national economy is actually doing very well. Unemployment is low, and the economy is growing. Inflation is still a risk, but overall the economy isn’t much of a factor one way or the other. A significant change could affect our local real estate market. (Advantage-Neutral)
7. Terrorism- Terrorism incites fear of safety. The fact that the US hasn’t really seen a terrorist event on US soil since 9/11 bodes well for the war on terror. Ironically, the real estate market shot up after 9/11 because people decided family was important and they decided to "bunker" the event. "Bunkering" refers to people investing more in their home and traveling less, and developing a sense of home, family bonding, and safety. (Advantage Champ)
Here come the 3 Big Wild Cards:
8. Buyer Confidence- It seems every day buyers read how bad the market is, both locally and nationally. Each day so called experts proclaim the market will fall, prices could plummet, the sky is falling. Simple economics of supply/demand are in play here, but we’re dealing with people’s emotions. Sellers are emotional, as are buyers. Newspapers sell headlines, and experts make names for themselves by predicting this and that. These predictions have served to knock some sense into stubborn seller’s minds, but not all national stories have properly educated buyers as to what’s really happening.
Sensational headlines don’t make every seller reduce their prices so it will sell, because in fact not every seller can reduce to where the market is even if they wanted to. Sellers need to be educated in this market, and that’s true in any market. Certain people will always be greedy and think whatever they own is worth more than it is. Most sellers we meet with do understand the market is down significantly from its highs and they see their neighbors For Sale signs go up and not come down. Most sellers are tuned in, some are not and will never be.
Sensational headlines do scare buyers though and destroy their confidence. Buyers mistakenly low ball homes that are a real bargains when they shouldn’t, and cause some to sit on the fence when their best deal is in front of them. Destroying buyer confidence hurts both the buyer and the seller. Buyers need to be educated just as sellers do. Buyers should not assume All properties are over-priced, or that there aren’t bargains out there when there clearly are if you know how to find them. Buyers should only look at the homes that are priced at or below the market and leave the above the market properties alone. (Advantage Challenger)
9. Foreclosures-Foreclosures are at an all time high, and it remains to be seen how the banks will respond. Traditionally banks have been slow to respond on price. It’s taking banks longer to acquire property through foreclosure because the banks and the system are backlogged. While the properties sit in foreclosure proceedings for many months, bad things are happening. Lawns are not being mowed, air conditioners, appliances, and doors are being stolen, and the home can be vandalized, not to mention all the routine upkeep that’s not being done. The foreclosed property is usually a blight on the neighborhood, and some neighborhoods have more than one foreclosure in process. Nobody knows the full effect foreclosures will have on the market, but we can say this situation will linger for some time as banks acquire and dispose of these eye sores. (Advantage Challenger)
10. Lending- Buyers with pending contracts are about to find out that their loan comitment may not be as secure as they thought. Banks and Wall Street are tightening up. See Mortgage Market Mayhem article. Much of the sub-prime lenders received their financing money through Wall Street, and Wall Street is under intense scrutiny for these investments. Mortgage brokers who specialized in getting alternative financing for people without verifiable income or marginal credit are seeing their lending sources squeezed to almost nothing. Money for these types of loans is drying up fast. Banks still have money to lend, but you may not get it unless you have excellent credit, verifiable income, or are putting substantial down. Too many fraudulent loans occurred in recent years, and SW Florida was a hotbed for such illegal activity. Lenders are scrutinizing SW Florida deals, and banks are taking a hard look at all appraisals, especially whereby the buyer has little down or less than perfect credit.
Banks have raised minimum credit scores for making loans. We predict we’ll see a comeback in the government FHA and VA programs. We had a falloff because simply it was easier to receive one of these other types of loans in the past. Not any more. Buyers, if you’re sitting on the fence waiting for a deal, you might want to go find one of the deals that are out there now and get the financing while you can. It could be that you may not qualify 6 months from now for the loan on the house you wanted, and you could miss out on buying at or close to the bottom. (Advantage Challenger)
We apologize in advance for the length of the article. We could have said so much more, so we tried to bring you the bare minimum as to what’s affecting our market. Whether the Champ wins or hits the canvas once more is up for discussion. We’re not into painting a one-sided picture. We’re not tied to the outcome. We’d rather present you with the facts and let you make up your own mind.
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