The Party's Over

Higher consumer debt. Across the country, household debt levels are rising. Many Floridians have been refinancing their homes, taking out second mortgages or opening home equity lines of credit to buy investment properties. Today, the ratio of home equity to home value stands at near-record lows, says Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C.

Tighter credit standards. During the recent boom, lenders went out of their way to offer alternative and exotic mortgage products to buyers -- interest-only loans, negative amortization loans, 40-year loans, you name it. The goal was to reduce the initial monthly payments low enough for buyers to qualify for the loan -- and it succeeded. Nationwide, as many as 25% of buyers are resorting to interest-only and other non-traditional mortgages, according to the MBA. But with higher interest rates already increasing the risk of defaults and foreclosures, lenders are expected to adopt tougher standards in 2006, closing off the flow of "easy money" to some extent.

Increased home "operating" costs. After eight hurricanes in two years, Florida property insurance premiums will continue to rise as insurers try to reduce their exposure, making it more difficult to obtain sufficient coverage. And homeowners will foot the bill for hurricane recovery efforts, from higher utility rates and municipal taxes to special assessments from condominium and homeowner associations.

At this point, it's not clear whether the market will undergo a sudden readjustment -- the bursting of the bubble -- or a more gradual decline over the next three years. In either case, the state's real estate landscape will look very different by the end of 2006 as the wave of speculation recedes.

Today, buyers, sellers, investors and developers need to understand that the boom is over -- even though Florida's overall economy remains strong. The state will continue to attract working-age families, retirees and second-home buyers and generate large numbers of jobs.

"We continue to see strong employment growth and in-migration and are cautiously optimistic for the year," says Harry Posin, executive vice president of Minto Communities in Coconut Creek. "We've worked hard to limit speculation in our communities."

Certainly, the long-term outlook for Florida real estate remains promising. But the speculative mania for new Florida residences has run its course. Just as the day-traders gave up on dot-com stocks in 2000 when they stopped producing double- and triple-digit returns, Florida real estate investors will find another outlet for their money -- whatever they have left.

For developers, the key is to focus on the needs of end-users in their market -- not investment buyers. Well-designed and well-situated developments can be successful -- even at high price points -- if developers do their homework and cater to end-users.

Editor's Note: Lewis M. Goodkin, president of Miami-based Goodkin Consulting and a longtime Florida Trend contributor, has been designated a "fellow" of the London-based Royal Institution of Chartered Surveyors, the largest professional body for property, land, construction and related environmental issues worldwide. Goodkin is among an elite group of individuals selected as Royal Institution fellows.

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