Distressed Market Update SW Florida

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This week we’ll focus on freshly updated numbers for the distressed segment of the Lee County real estate market.  It’s important to study this segment of the market as it has been responsible for a large chunk of sales, and has influenced pricing in the market. 

As you can see from the chart, distressed sales in Fort Myers have fallen precipitously in the last 3 months, down from almost 73% in July to 58% in September.  Short sales in Fort Myers have increased about 20% and foreclosures have dropped 35% while overall sales have remained relatively constant.  This tells us that banks are working to sell properties as short sales in Fort Myers as opposed to acquiring the property through foreclosure and selling later on at much lower prices. 

Distressed Proeprties in SW Florida July-Sep 2009
Distressed Proeprties in SW Florida July-Sep 2009

Cape Coral on the other hand has seen about a 15% drop in overall home sales since July.  Distressed sales have remained relatively even, hovering around 70% all 3 months.  Foreclosure sales have dipped almost 26% since July while short sales have increased 9%.  This tells us that the demand in Cape Coral is directly tied to the bargain, meaning as the distressed inventory has fallen in the Cape, so have overall home sales.  Statistically, buyers in the Cape are all about the bargain, and as home prices have increased in the Cape, home buyers have moved to Fort Myers and potentially Lehigh Acres for the bargains. 

Lehigh Acres has seen a slight fall in distressed sales, down from almost 87% in July to 82% in September.  Lehigh Acres is still far and away the distressed capital of Lee County.  Overall home sales in Lehigh Acres have fallen almost 13% from July to September.  Foreclosure sales in Lehigh Acres are down 18%, while short sales in Lehigh are down 17%.  This is why home sales are down overall about 13% as Lehigh Acres, along with Cape Coral are both proving to be price sensitive markets led by first time home buyers and investors. 

Fort Myers seems to be much more stable at this point in time.  We are seeing a trend towards more expensive properties coming to the market via foreclosure, so it will be interesting to see where these properties are located and how it affects demand and pricing in each of the three major markets in Lee County. 

Congress has extended the first-time home buyer tax credit to purchases made through April and closed by July, and added a provision for existing home owners who have owned their home for at least 5 years.  Unfortunately, in this sagging market it doesn’t give them much time to sell their home and close on a new one to take advantage of this provision, so only a select few may be able to purchase a new home before selling the older home. 

We think Congress could have done a much better job writing this bill.  They did add to income eligibility limits, but again the bill limits who can take advantage by July.  This may further fuel the bargain end of the market assuming the president signs this bill, which has not been done at the time this article was written.

We’re concerned that this bill won’t fuel a total real estate recovery and will continue to spur demand at the lower end of the market.  To pull this economy out of the doldrums, a broad based real estate recovery would have served a better purpose, but I guess we’ll take whatever help we can right now.

We’ll also monitor the trend of banks accepting more short sales.  To date banks have been ill equipped to deal with the magnitude of requests.  Recently Bank of America adopted a policy to use its online foreclosure system of working with approved real estate agents called Reotrans and opened it up to short sales.  This will allow approved agents to more efficiently move Bank of America short sales through the system. 

Sellers wishing to sell their home via a short sale should seek out experienced short sale agents who are also familiar with Reotrans.  Because they are adding more than just bank REO’s (Real Estate Owned) they are changing the name from Reotrans to Equator.  This may revolutionize the way banks handle the massive short sale process and speed up many of these sales.  It will also help that they are using agents familiar with the Distressed Sale process. 

If you’re a seller considering selling as a short sale, it’s almost impossible to go it alone.  We recommend hiring a seasoned professional familiar with the intricacies of a short sale.  You might seek out a CDPE (Certified Distressed Property Expert).  If you’re a current Bank of America customer, you might also seek out an agent who uses and is approved on Equator.  This could be a trend that other banks go to as it will ease the communication stream and handling of the data among various agents, negotiators, and investors.  This online system could do for short sales what it has done for bank foreclosures, which was to make an online system whereby many authorized people could all work on a file simultaneously and get things done instead of pushing paper from one desk to the next. 

Stay tuned, as the market is always in flux, and we’ll report interesting changes and how they may affect the market.

It’s Official-3rd Quarter Sales Sets All-Time record

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Last year we told you 3rd quarter sales were very strong, which led up to an almost record 4th qtr in 2008.  Official numbers are in, and 3rd qtr sales in 2009 blew past last years big numbers and surpassed 2005 record numbers by a mile.  To put this in perspective, last years sales numbers were up 72% over 2007 numbers.  This year’s numbers were up 109% over last year.  2005 was the biggest sales number year we had ever seen, and 2009 was up 35% over 2005.

All you read or hear about is how bad the market is, and there is some truth to what you hear.  Rarely though do you hear the whole story, and sales numbers tell a compelling story.

Our market has gone through a predictable healing process.  It’s a process nobody looked forward to, but sometimes you have to hit bottom before you can go back up.  Simply put we had too much inventory and phantom demand.  The demand we thought we had was investors flipping to other investors like musical chairs, until one day the music ran out.  We had high employment because builders were building at warp speed, and we needed mortgage brokers, closing agents, not to mention appliances, carpet, etc.

Then one day when it became apparent the demand was phantom, building stopped as speculators stopped buying from one another.  That led to a severe market correction that was inevitable, which further led to job losses throughout SW Florida.  These further job losses created a downward spiral, which increased foreclosures from not only investors who walked from deals, but regular people who lost their jobs.

The only solution unfortunately was to begin a healing process of selling these homes, which of course was going to be at a price much lower than the high’s of 2005.  The prevailing questions were always, how low would prices have to go, and how long would it take.  And the answers are related.  The higher the prices, the longer the process would take.  Because SW Florida led the state in price drops, it also led in the healing process.  Our prices dropped faster than any other area as evidenced by pricing reports on our website at www.topagent.com under housing statistics.  Thus we have set record sales levels even surpassing the 2005 levels.

Single Family Home Sales By Qtr Lee County Florida Real Estate Market
Single Family Home Sales By Qtr Lee County Florida Real Estate Market

Many people think that because we’re setting record sales levels, prices should rise, and they are partially correct.  However, we’re not done yet with the healing process.  Prices coming down from unsustainable levels was only the beginning of the process.  Prices won’t rise dramatically until we bring back employment to the area.  Oh, we’ll see some rising prices as snow-birds flock to the area this season not wanting to miss out on a great deal.  This won’t lead to massive price increases though because we still lack a driving economic force, which are jobs.  And jobs is not just a SW Florida problem, it’s a nationwide problem.

We’ll also see some price increases as less entry level foreclosures enter the market and we swing more to mid and upper tier foreclosure price points.  Again, these are just statistical numbers.  Median prices may rise, but prices in certain neighborhoods can actually fall due to more foreclosures and distressed sales at higher price points.

The good news is SW Florida has cleansed itself pretty well comparatively speaking.  It’s kind of like a company with lots of inventory in a down economic cycle.  The company can place the inventory on sale and blow out the old inventory, and when the economy rebounds that company is well positioned to capitalize as they are not saddled with high inventory coming out of a recession.

Our market has done a good job of discounting and selling the inventory.  What’s out of our hands is the national economy.  We have sunshine and good weather, but we’ve always had that as an advantage.  We either need the national economy to improve, or we need to steal some jobs from another city and have them relocate to SW Florida.  This may sound bad, but it’s done all the time.  GM just relocated some plants from one state over to IN.  Indiana’s gain was another state’s loss.

So let’s pray the economy gets better soon as it’s good for our real estate market and good for jobs.  And if our local leaders have a few tricks up their sleeves to lure businesses to our area it would be great.  I think our area has suffered and we deserve some good news.  If a company is looking to relocate, it might as well choose SW Florida vs. some other state.  It would be good for their employees to move to a nice place like SW Florida where we have a good work force, decent schools, great weather, and wonderful things to do year round.  If you’ve ever been cooped up for months during a miserable winter, you know the advantages of living here.

So let’s hope our Economic Development Council will be announcing some exciting news soon.  We could all use some good news.  Until then, let the healing continue.

SW Florida Real Estate Current Market Index

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It’s been a few months since we’ve reported numbers for the Current Market Index, so here is the update.  The Fort Myers-Cape Coral area index now stands at 4.02, up slightly from 3.86 in September and 3.81 in August.  The lower the index numbers the better the market for sellers.

This is a result of slightly rising inventory numbers, but very much in line with inventory numbers back in August.  We’ve seen continuous dips in inventory for quite a few months leading up to October, and this is the first month we’ve seen a slight increase.  Pending sales are down ever so slightly as well, however nothing that is statistically significant.

Current Market Index SW Florida Real Estate
Current Market Index SW Florida Real Estate

Existing sales are holding up nicely and still showing healthy gains over last year.  Buyer interest from around the country is strong.  In fact, our team has so many buyer leads coming in that we need to hire 4 more buyer agents to keep up with the activity.  We think season this year is going to be very strong.  Temperatures up north have been unseasonably cold this fall and it’s looking like they could have a long and cold winter.  Traditionally this is always good for the Florida market as snow-birds look for a tropical escape and potential property purchase.

The snow-birds we’ve talked to are already motivated to purchase.  They witnessed first hand that some properties are up about 20% in price over last year as the pickings are getting slim in certain segments.  They realize this season may be the last season to pickup many of these bargain basement priced properties.

We’re seeing waterfront properties in the Cape for example bouncing off their bottom last year for entry level direct access properties.  We’ve also seen a bottom in Cape Coral for entry level homes, especially pool homes.  This has fueled an increase in sales in the Fort Myers and Lehigh Acres market. Fort Myers home sales in September increased by 6 sales. Cape Coral lost 35 sales versus the previous month.  Lehigh Acres gained 7 sales versus September.

As sales potentially shift from the Cape over to Fort Myers and Lehigh Acres, we could see a bottoming in prices there as well.  You’ve heard the term that water seeks it’s own level.  As prices get too high in a given area, buyers shift their focus to other more affordable areas.  Many have preferred to live in Cape Coral over Lehigh Acres, but in the run-up back in the early 2000’s, prices in the Cape got so far ahead of Lehigh Acres that buyers shifted to Lehigh for the value, and thus a boom began in Lehigh.  As foreclosures hit hard, many buyers scooped back into the Cape for the bargains and preferred the Cape over Lehigh all else being equal.  Because we’ve sold many of the Cape foreclosures, the bargains are not there like they used to be, so we’re seeing this shift to wherever the bargains are.

We’re still in a bargain market for the time being, but that could change.  Northerners are starting to fear that the bargains are drying up and they don’t want to miss out, so this season could get very exciting.  It’ll be interesting to watch where the money goes, and what happens when the foreclosure well starts to run dry.  How will that affect the overall market?

Speaking of foreclosures, it appears banks are cranking up the process on a whole new batch of foreclosures.  Some have speculated that banks purposely waited until the end of 4th qtr which ended Sept 30 to file these new lawsuits so their books would look better.  Wall Street has a history of doing this for earnings and results.  A friend of mine has even speculated banks are keeping losses off their books this year to pad their earnings so they can collect bigger bonuses.  There may be some truth to that.

Last year we saw a spike in Lis Pendens filings for precisely the same theory.  We’ll have to watch the November and December filings to get a feeling if this is another Wall St accounting trick of holding back what they can, and thus the October spike, or if this is a long-term trend.  If this is a long-term trend, then it will stall increase in prices.  If this is merely a short-term blip like last year, we could see fewer bargains and more actions from northerners fearful for missing out on one of the best buying opportunities in awhile.

Just like back in 2005, you cannot calculate the absolute top of the market until it’s in your rear view mirror.  Timing the bottom of the market is much the same way, and in fact we’ve seen a bottom already in certain segments.  The entire market doesn’t always move in unison.

Our advice to buyers is simple.  Regardless of whether this is the absolute bottom, we’ve already seen the bottom, or we have a little bit more to go, prices are bargains right now.  You may not want to miss this general time period, because one day soon we may look in the rear view mirror and kick ourselves for missing the buying opportunity of a lifetime.  All the bank’s misery and misfortune can now become your gain.  Somebody is going to capitalize on this misfortune.  Why not you?

Next Wave of Foreclosures

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A few weeks ago we stated here that 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 begin to stop paying.

We based this upon a graph in our State of the Market Report published last January. You can view this graph in greater detail and in color on our Blog at http://ellis.realty-buzz.com or visit our Fan Page on Facebook at www.Facebook.com/Ellisteam As you can see by the chart, Option Arms are scheduled to reset at their highest point about August of 2010.

Reset Schedule of Mortgages by Type
Reset Schedule of Mortgages by Type

A feature of the Pay Option Arm is that borrowers are allowed to pick a payment, meaning they can pay any one of several payment options.  These loans began with low teaser rates, and one of the ways they allowed borrowers to minimize their payment was by allowing the buyer an option to make a payment less than the “Interest Only” portion of what the loan would have been.  These types of loans are called “Negative Amortization” because each month the borrower is losing equity.

Pay Option Arms were used primarily by borrowers who wanted to maximize their purchasing power by leveraging as much as the banks would lend with the absolute minimum payments.  These buyers didn’t worry that they were getting further behind each month as they figured the home would appreciate faster than the negative equity would accrue due to the loan.  Most of these borrowers planned to “flip” the property and make a fortune, then repeat the cycle all over again.

In this cycle of irrational exuberance, few thought about when the musical chairs would run out.  It seemed like that crazy market would last forever, until one day when the music died.  You could see the train wreck that would one day ensue.

Simultaneously, the value of the property is in free-fall and the loan amount is increasing by the month.  You’ve heard the terms “Upside Down” and “Getting Hit at Both Ends”.  This pretty much sums up what happened to Option Arm borrowers in heavily concentrated investment areas like many new subdivisions here in SW Florida.

Have you ever wondered why certain established neighborhoods held their value fairly well through the downturn, while newer communities seemed to take it on the chin?  The answer is investors and speculators flocked to newer construction, as this is where the perceived pre-construction deals were back in 2003-2005.  The problem is we had too many speculators.  Investors can be quite healthy for a market, but a speculator just drives up prices for the sole purpose of Flipping to another buyer.  The only useful purpose this would serve is providing the capital to speed up construction to provide much needed supply due to high levels of demand.  The problem is, we had phantom demand.  Our market sped up the supply side without real end users.  There’s something not quite right when the end user is another speculator buying to flip same property for a 3rd or 4th time to another speculator.  Eventually the music dies and the musical chairs run out, except this is real life and not fun and games.

The rest of us have been picking up the pieces from this sad game, and we’ve all paid a price.  Construction jobs have left, values have plunged, banks have failed, taxpayers have paid for a bailout, and just about everyone that played the game is sorry.

Many of these Option Arm’s have already defaulted as the speculators learned early on they couldn’t flip the property for a profit, so they quit making payments.  We do believe there are some regular buyers who also used the Option Arms to purchase more home, and some have been hanging on for as long as they can because they can’t afford to sell their home.  Once these payments reset, we could see another round of foreclosures hit the market.  These buyers tended to buy the mid and upper tier homes.  This is one reason we predict you’ll see more higher priced homes coming out of the foreclosure pipeline.

We’ve seen the foreclosure pipeline growing in the past few months, and due to processing delays, we expect several foreclosures to start hitting the market this month.  Filings are down, so the foreclosures coming out now were backlogged from back in December and January.  The resets in 2010 and 2011 will also take awhile to work their way through the system, so bottom line is we’ll see a certain amount of foreclosures for the next several years.  The sooner we clean them up and ship them out the sooner we’ll be on our way to a normal market, so I say bring them on without delays, so we can all get back to listening to the music.  Leave your chairs at home.

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.