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Industry Outlook 2006 - Real Estate: Homes
The Party's Over
'Flipping' will run its course this year as the face of Florida's real estate landscape changes.
From downtown Miami to the Panhandle beaches, new condominium projects have been "selling out" almost as soon as they are announced as developers take reservation deposits on units they won't have to deliver for 18 to 36 months. But in some fast-selling multifamily projects, more than two-thirds of the people putting down reservation deposits have been investors and speculators, hoping to "flip" their units to a new buyer when the development nears completion.
END OF THE LINE: Higher construction costs, overvalued properties and rising interest rates are just a few factors that will dampen home appreciation rates. |
? Overvalued properties. Speculation has dramatically driven up the cost of both new homes and resales. According to the PMI U.S. Market Risk Index, homes in Miami and Tampa are overvalued by at least 20%, and Fort Lauderdale and Orlando are not far behind. These higher prices have made homes unattainable for many who actually live and work in Florida. Higher home prices also can choke off economic growth as employers look to locate their facilities in more affordable regions.
? Higher development costs. Developers must pay more for everything involved in their product -- land, materials and labor -- a situation exacerbated by Hurricanes Katrina and Wilma. The increased costs are squeezing developers' margins, and some may find themselves unable to complete their projects.
Rising interest rates. All signs point to continuation of a slow but steady increase in interest rates by the Federal Reserve in 2006. If traditional fixed-rate mortgages move up to the 6.75% level, more households will be squeezed out of the market unless there is a corresponding downward adjustment in pricing.
Too many adjustable mortgages. Higher rates spell trouble for Florida homeowners who have "stretched" their monthly payments by using adjustable rate mortgages. Statistics from the Mortgage Bankers Association show that ARMs accounted for 46% of all loans by dollar volume in the second half of 2004. Higher-risk interest-only mortgages constituted 17% of the total loan volume, and traditional fixed-rate loans were 37% of the total.