By Attorneys' Title Insurance Fund, Inc.
Lower prices, tighter loan policies will impact buyers and sellers
By Attorneys' Title Insurance Fund Inc.
When you're sinking, there's only one sensation better than breaking the surface: Touching the bottom. It signals that there's nowhere to go but up, which is the forecast for the Florida housing market in 2008, according to one of the state's top economists.
The Florida housing market slowed in nearly every county analyzed in the 2008 Fund Real Estate Forecast published by Attorneys' Title Insurance Fund Inc. (The Fund). Parts of the state, however, have already touched bottom and could start a market recovery as soon as 2009, said economist Hank Fishkind, who prepared the forecast by using The Fund's extensive online system of deed data for more than 30 Florida counties.
The complete forecast and region-specific reports can be found at www.MyRealEstateStory.com.
Despite loose lending practices and inflated home prices that led to a real estate "meltdown" midway through 2007, homeownership records were set in 2007 and many consumers benefited from increased wealth.
"Some perspective is useful," Fishkind said. "We've had a huge run-up in home prices. [Then] we had some reduction in home prices form a somewhat lofty and perhaps unsustainable peak. But home prices are still up a great deal from where they were three years ago, and so we've created a tremendous amount of wealth."
"Yeah, we've got some indigestion now, but housing markets will return to normal over the next few years. The damage for some is significant, but in the aggregate, we've had some very significant growth from this period."
A correction in the housing market was "inevitable" following the five-year boom, said U.S. Treasury Secretary Henry Paulson. During that period, sales rates and home prices eclipsed records in Florida and across the country.
"After years of unsustainable price appreciation and lax lending practices, a housing correction is inevitable and necessary," Paulson said.
JOB GROWTH KEY TO SKIRTING RECESSION
Nationally, many economists forecast that real estate will suffer another down year in 2008. How far the slide goes is contingent on whether the country enters a recession, classically defined as two consecutive quarters of negative economic growth. One of the heaviest drags on the market is the number of homes for sale - an inventory greater than 10 months. About 2 million of those properties are vacant.
Fishkind forecasts the country will "just barely skirt" a recession during the first half of 2008, acknowledging there is "a lot of downdraft" that could tip the scales toward recession.
Fishkind also projected national job growth - at about 100,000 a month - should keep the U.S. economy out of recession. That pace, however, wasn't sustained according to a report released in December that showed U.S. employers added just 18,000 jobs - the smallest addition in more than four years. The unemployment rate hit 5 percent, the highest rate in two years.
"Florida has done very well," Fishkind said. "It's been one of the leading states for job creation in the nation and has outperformed the rest of the country - even with the meltdown of the housing markets that has occurred in many parts of the state."
While the government jobs report doesn't mean a recession is inevitable, it definitely represents "a major warning shot that the economy is in trouble," said Joel Naroff, head of Naroff Economic Advisers.
Throughout the Southeast, places like Atlanta, Charlotte, N.C., Orlando, Jacksonville and Miami all continue adding jobs. Job growth in Florida will be fueled by tourism, health care and education, Fishkind said.
FLORIDA MARKET "CLEARLY AT THE BOTTOM"
With population and employment continuing to grow, parts of the state's housing market can begin to climb out of the hole. With prices flattening in many parts of Florida, a recovery is possible in a year for some areas, but longer for other areas.
"We're clearly at the bottom of the cycle. The data is telling us we're at the bottom," Fishkind said. Other economists are more pessimistic than Fishkind on how quickly the Florida housing market will recover and whether the nation's economy will dip into a recession.
Some less optimistic economists point to the population slow-down in Florida that has caused would-be residents of the Sunshine State to buy less expensive homes in Georgia, North Carolina, South Carolina and Tennessee, while other analysts note the national decline on spending in business equipment, the lowest auto sales in a decade and some of the weakest manufacturing results in four years. Some think Florida's economy may already be contracting - along with California, Nevada and large portions of the Northeast corridor.
"Consumer spending is off considerably in Florida," said Mark Vitner, director and senior economist for Wachovia, responsible for tracking U.S. and regional economic trends. "Retailers say they're much closer to plan if you take out Florida and California."
Vitner said the Florida housing market probably would not "see a meaningful correction until the latter part of this decade & it won't return to conditions that a majority of people would recognize as strong until 2012 or 2013."
EACH LOCAL MARKET IS DIFFERENT
As buyers and sellers consider their next steps, they should research their particular markets of interest. While the overall trends indicate a national correction, consumers will find that the market may be hitting bottom in the community next door to where they're looking - not in the one where they are searching, says economist Naroff.
"The problem for buyers is that there is no such thing as 'the market,'" said Naroff, who forecasts a stable national market in 12 to18 months. "Every community is its own special market, and each different submarket will bottom out at a different time."
So it is in Florida, where the market outlooks are very different depending on which area you are in. Some of the more extreme markets include Orlando, Miami-Dade, Fort Myer and Cape Coral, and Tallahassee.
- Orlando is one of the strongest markets for both jobs and housing, according to the 2008 Fund Real Estate Forecast. Orange County, the largest in metro Orlando, experienced very little speculative excess in 2007. The market retained equilibrium as housing starts remained in line with growth in new households and the dip in demand was matched by a reduction in housing starts. The area has reached the bottom of the cycle, meaning "we'll probably see Orlando climbing out toward the second half of '08 - full recovery probably not till 2009, 2010," according to Fishkind.
- Miami-Dade has a more perilous outlook. The pace of economic activity peaked in 2004 and has decelerated since, according to The Fund forecast. Miami-Dade experienced speculative excess in its residential housing markets in the past several years, and housing starts remained above household growth between 2004 and 2006 as a result. Household growth, however, is projected to be above housing starts in the coming years. "Miami-Dade County is going through the worst condominium boom and bust cycle that this state has seen since 1975," Fishkind said. "It's just going to be a terrible problem for many, many years."
- Fort Myers and Cape Coral are among the weakest single-family markets in all of Florida. Speculative investing in Lee County occurred between 2003 and 2005 and resulted in housing starts plummeting in 2006 and 2007, according to the 2008 Fund Real Estate Forecast. "It will take several years for that to be absorbed," Fishkind said. The market for new single-family homes bottomed out in 2007 with about 1,400 new-home closings, a 75 percent decrease from the 5,500 closings in 2005. The average cost of a new single-family home is expected to remain flat in the coming years. The existing-home market bottomed out since the 2005 peak of 41,000 closings and a rebound is not projected to occur until the end of 2010. Prices are projected to remain flat through 2010.
- Tallahassee and its surrounding areas will be - like Orlando - a stable market. In November, Leon County's unemployment rate was 3.2 percent - well below the statewide rate of 4.3 percent. A rebound is forecasted to begin in 2008 for the existing single-family homes market.
The increase in prices has consumers - especially sellers - thinking the climb will last forever. The reality has sunk in slowly.
In and around Tallahassee, where the market escaped much of the speculative building and investor purchasing that inundated many coastal areas of Florida, owners of single-family homes have enjoyed 70 percent appreciation since 2001. The average price for a single-family home in Leon County now is $216,000 - up from $127,000 in 2001.
Tallahassee Realtor Don Pickett, the owner of Tallahassee Real Estate N Data Services, which tracks trends in the area, tells the story of one woman who listed her house for $400,000. After several weeks of inactivity, her Realtor suggested she cut the price to $340,000. She balked, reasoning that she'd be losing $60,000.
What she failed to take into account, Pickett said, was that she paid $240,000 for the house just two years ago. The difference between her purchase price and the Realtor's suggested adjustment still represented a 42 percent appreciation.
"Sellers who had bought in 2004, 2005, 2006 and paid more think the price is still zooming up," Pickett said. "We're seeing a new era in real estate," Pickett said. "The easy market is over."
IMPACT FOR CONSUMERS
As owners homes slipped in value, some owed more than their houses were worth and defaulted on their loans. Defaults coupled by the drop in home prices combined to produce massive losses for financial institutions. Banks like Barclays, Citigroup and UBS have had to find capital infusions from the Middle East and Asia, raising $35.6 billion in recent months.
At the same time, lenders also tightened their mortgage requirements, making it harder for home buyers to qualify for loans. Washington Mutual Inc., Wells Fargo & Co. and other lenders and banks have cut back on the money that they loan to applicants with questionable credit. In an October survey by the Federal Reserve, half of the senior loan officers who participated said they had instituted stricter mortgage requirements since July.
This means that more consumers will be competing for more moderately priced homes as they'll find it more difficult to qualify for loans on more expensive houses.
More than ever, credit history impacts affordability - how big a house a consumer can buy and where it can be purchased.
Programs that paid for 100 percent of a home have dissappeared, as have no-document applications and loans aimed at consumers who struggled to pay debts on time. Those kinds of changes are felt acutely by potential buyers in Florida, Arizona, California, Nevada and Manhattan - places where three of every five mortgages relied on those kinds of practices.
"Housing affordability has changed in dramatically different ways for different borrowers," said Douglas Elmendorf, an economist at the Brookings Institution.
Buyers should focus on saving for down payments as lenders now require a least 5 percent down for a purchase (that's $5,000 for every $100,000 in sales price). Buyers should also look at ways to increase their credit score: Forget opening new lines of credit, like car loans or new credit cards. Instead, pay bills on time and wipe out as much debt as possible.
Sellers should concentrate on curb appeal - making the house sparkle on the inside and tidying up the lawn and shrubs on the outside. Paint in neutral colors and let light flow inside. A dramatic step might include becoming a lender in the sale of your home - securing the loan against a buyer's asset. This can be tricky, however, so be sure to consult your real estate attorney. Some builders are offering extra incentives, like fancy watches or cars.
It's easier to convince sellers to stage their homes and paint in neutral colors, especially since days on the market have at least doubled, even in strong markets like Tallahassee, said Pickett, the Realtor.
"Sometimes sellers keep the lime green paint or the Pepto-Bismol pink," Pickett said. "But most of the savvy ones know that you have to stage a house."
Stamina will be needed to get through this part of the cycle, but with the housing market near the bottom, you can't help but look up.
Attorneys' Title Insurance Fund, Inc. (The Fund) is the leading title insurer in Florida and the sixth largest title insurance company in the country. Acknowledged as the Florida residential real estate expert, The Fund has been in business for more than 50 years and supports a network of more than 6,000 attorney agents statewide who practice real estate law. The Fund, based in Orlando, Fla., underwrites more than 300,000 title insurance policies for owners and lenders in Florida every year. For more information, visit www.myrealestatestory.com.