The Party's Over
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.
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.