Friday, May 23, 2008

Rob Rose Interviewed by Wall Street Journal on S. Florida Real Estate

Brett Arends is in south Florida for a week writing a series of articles on the real estate market. Rob spent two days with Brett as he visited Miami, Fort Lauderdale, Delray and Palm Beach. Here is his first article on the market in SW Florida.

Florida for Sale!
May 22, 2008 7:18 p.m.

NAPLES, Fla.-- You can hardly escape the real estate crash down here. Even the young woman who checked me into my hotel just lost her home.

So if you are looking to buy a place, someone is going to make you a deal.

The surprising twist: It isn't just at the bottom end of the market. As my colleague June Fletcher noted in March1, there have been huge price drops in areas where foreclosures are at record highs. But you also see deep discounting in the snazzier parts of town. For three years, Americans have been using Web sites like Zillow to rubberneck the biggest real estate crash since the Great Depression and, maybe, to scout for values. But there's only so much the Web, or the statistics, can tell you. So I decided to come down here to see it up close. I'll be writing a series of columns over the next few days to tell you what I've learned.

WSJ's Brett Arends shows some high-end homes in Florida that are selling at cut-rate prices.

And who knows? I'm not really in the market for a winter home here. But you never know...

What I'm finding so far?

The market's even worse than you hear. Which means, if you're a buyer, it's even better.

The biggest price drops haven't fully shown up in the official data because that stuff isn't selling at all.

Some condo developments out in alligator swampland -- excuse me, on 'pre development golf courses' -- have gone dark.

Meanwhile, hard though it is to believe, plenty of others in the market are still in denial.

Brokers will tell you about homes still being offered vainly at $899,000 long after identical units in the same building have sold for $500,000.

This extends to some brokers too. When I called around before flying down, a remarkable number told me, "Gosh, I'm just the busiest I've ever been! The market's really picking up."

I guess they were gambling I hadn't read a newspaper in, oh, about three years.

But the good news is that there are deals around in the kinds of places you might actually want to buy.

Realtor Craig Jones of John R. Wood in Naples showed me a two-bedroom, sixth-floor co-op near the beach that probably would fetched more than $600,000 at the peak. Today it's on the market for $498,000. And Ms Jones whispers you can probably get it for $425,000.

That' a big price cut. The apartment has spectacular Gulf views and is a five-minute walk to the beach.

According to official data, this unit sold for $480,000 back in July 2002. So in some cases we are back to those prices, maybe even earlier. That's pretty much pre-bubble.

Zillow, for its part, says this co-op was last worth about $425,000 in 2000 --2001.

Incidentally, Zillow now thinks this property is worth $740,0002. And the Web site says the value has risen by $200,000 in the past year.

So much for relying on the Web. What's actually happening in these markets isn't always showing up right away.

Meanwhile, a one-bedroom condo near the beach just sold for $237,000. At the end of 2004 the owners bought it for $370,000.

It's the same elsewhere along the west coast. On Siesta Key, near Sarasota, a corner condo right on the water is on the market for $500,000, and you could probably get it for $450,000. Realtor Raul Elizalde, at Michael Saunders and Associates, says that at the peak it sold for more than $700,000.

There are other deals on the island. It looks more interesting than snooty neighbor Longboat Key, where the lawns have been trimmed with toenail scissors, and former Florida Congresswoman Katherine Harris has a home.

Along the coast there are gorgeous, brand new homes on the water down from $3.1 million to $2.1 million; and the broker whispers you can get them for $1.8 million.

Bill Earls in Naples is showing a waterfront mansion with a boat dock for $9.9 million that "would have sold for $12 million, maybe $ 14 million, a few years ago." Sure, he's a broker; he would say that. But it's not implausible.

I was tempted to buy it and put it on my expense account. But the place was a little ornate for my taste.

Mr Earls largely deals with the high end and the very high end of the market. But he says the rich are as reluctant to buy as anyone.

Write to Brett Arends at brett.arends@wsj.com3

Barbara Corcoran Sites Fort Lauderdale Among 6 Scariest Markets

Barbara Corcoran was on the Today Show last week and sited Fort Lauderdale as one of the top 6 scariest markets.Here is what she says:

Fort Lauderdale, Fla.

One in 73 homes is in foreclosure in Fort Lauderdale, about twice as many as this time last year. The median home price is $345,900, down 5.7 percent from last year. Unemployment is slightly below the national average at 4.3 percent.

There are some factors here that are keeping prospective buyers on the fence. One reason is that there's too much candy on the shelf. Between standard listings, foreclosures and short sales, there is entirely too much product from which to choose. Media reports predicting that real estate hasn’t neared bottom yet encourage buyers to try to time the market. Sellers reluctant to come down to reality are still holding on to peak market prices. But brokers say buyer confidence here is improving and that they’re seeing increased activity over the past six months as people realize they have a terrific opportunity to get a great value in a home in the current market.

Friday, May 09, 2008

Has the Market Bottomed Out?

Here is an article from the Wall Street Journal that is good news for the housing market. I am finding that I am super busy with buyers who suspect it is time to buy.

The Housing Crisis Is Over

May 6, 2008; Page A23

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.

The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.

When the rate of house-price declines halves, there will be a wholesale shift in markets' perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.

More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.

A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy.

We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.

Mr. Moulle-Berteaux is managing partner of Traxis Partners LP, a hedge fund firm based in New York.

Tuesday, May 06, 2008

How the Market has Changed

I’ve received lots of feedback on the lead story in my last newsletter in which I lamented the current state of the real estate business in south Florida. Although it felt great for me to vent about my frustrations, I realized the article was not especially helpful to the very people I have dedicated my business to serving: prospective buyers. The fact is, many people from around the country view this as an unprecedented occasion to buy into what remains one of the nation’s most desirable communities. And I’d like to help them. Beginning with this newsletter, I am going to offer some insight about the current environment and some practical suggestions for buyers who are serious about getting the most from their real estate investment – and their broker – during tough times.

Many of the people seeking to buy real estate in and around Ft. Lauderdale today have had prior exposure to the market. Maybe they invested in property and sold it shortly after purchase for a significant profit. Or they came close to buying but decided to wait until prices came down. Or maybe they have spent time here over the years and decided they would like to buy a second home or a place for retirement when the time is right. In order to get the best deal -- and the best service -- in this environment, it is important for buyers to understand the ways in which the market is the same as they have experienced in the past and the ways in which it is has changed.


Diverse Properties

Ft. Lauderdale offers a wide range of Florida traditional and contemporary homes, condos and apartments at prices to suit every buyer.

More Inventory

Real estate development has outpaced recent growth and significantly more people are selling than average, so there are many more properties available.

Motivated Sellers

Divorce, relocation, and settling estates are among the life changes that motivate some sellers to try to sell their properties quickly and price them accordingly.

Different Motivations

Today, some of these sellers are more likely to be motivated by financial hardship and are reluctantly selling real estate to help regain solid financial footing.

Pricing Factors

To fairly price real estate today, sellers and their agents still take into account time-tested factors, including quality and condition of the property, location, and recent comparable sales.

Off-Market Deals

In addition to properties openly listed for sale at market-tested prices, there are now other opportunities that are not widely promoted including foreclosures and short sales.

Financing Options

Qualified buyers will find responsible and responsive lenders willing to offer a range of financing options.

Focus on Highly Qualified Buyers

Reputable lenders are now more risk averse and will only consider prospective buyers with excellent credit history.

Complex Transaction

The process of buying real estate is time-consuming and complex and requires buyers and sellers to have professional counsel and to maintain focus.

Emotional Transaction

Real estate transactions today are often highly emotional, with all parties feeling somewhat compromised by the process or the ultimate deal.

Solid Long-Term Investment

Ft. Lauderdale real estate has shown solid growth over the long term and remains a good investment today.

Short Term Risk

Buyers who purchase now will need to wait longer for properties to appreciate and they may face some risk of short term decline.

By understanding the changes in the market, buyers are in a better position to go into the process of buying real estate in south Florida with realistic expectations. From my perspective, the more my clients know about the market dynamics we’re going to be dealing with as a team, the easier it is for me to help them navigate the new environment and find just the property they’re seeking.