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Real Estate Reality: Reading the Market

Higher interest rates and prices, easier mortgage financing and more inventory lie ahead.

By Jack McCabe March 31, 2015

by Jack McCabe

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DURING THE PREVIOUS DECADE OF DECADENCE, Florida became the incubator and epicenter of the historic U.S. real estate boom and bust that caused the global “Great Recession.”

As a Florida-based real estate analyst and consultant, I had the strange and fascinating opportunity to investigate, research, study and participate in one of the most dynamic markets in the world at a time of historic rise and disastrous fall.

In 2011, Florida’s five-year residential real estate crash bottomed out, as price reductions of 40 percent to 65 percent decimated the state economy and forced hundreds of thousands of Florida property owners into foreclosure and financial ruin.

Today, eight years after the initial wave of foreclosures hit the court system, Florida is still No. 1 in the U.S. for foreclosure cases adjudicated, open foreclosure cases, non-performing mortgages, and homeowners “underwater” on their loans, owing more than the market value.

In the last three years, residential market values have increased 35 percent to 50 percent, a once again sky-high rate of appreciation, opposite of a “normal market” and more consistent with the boom years of 2004 through 2006.

Hedge funds and high-net-worth individual investors from around the world, but primarily based in the U.S., Canada, Latin America and Europe, and, more recently, Asia have driven prices artificially skyward in several Florida markets and other targeted areas in the country. South Florida, Tampa, Orlando and Sarasota have been at the top of massive hedge funds’—like New York City-based BlackRock­—and other investors’ lists.

Consumers who have not been property owners or lost homes to foreclosure have been relatively shut out from participating in the recent run-up in real estate prices.

One change that’s different from last decade is Florida real estate markets shifted from attainable but unaffordable to affordable but unattainable. Last decade, anyone with a pulse could qualify for multiple mortgages despite poor income and credit.

In 2007, the state had 72.2 percent residential homeowners. At the end of 2014 only 62.6 are homeowners, while rental demand continues to increase every year.

During the most recent boom, mortgage interest rates have been at historic lows, yet due to ultraconservative qualifying criteria, only the most affluent or those with the highest incomes have been able to qualify for financing.

In essence the only buyers able to acquire financing are those that don’t need it. Cash-laden hedge funds and outside-of-Florida high-net-worth investors have dominated the state’s residential marketplaces, pushing even those who can qualify aside by bidding above market values. In some Florida markets, including greater Sarasota, the funds and investors have bought a majority of homes and more than 70 percent of transactions have been all cash.

In 2015, drivers of Florida real estate markets and values are fluid and changing. The hedge funds and investors have slowed or terminated acquisitions. It’s possible many of the funds and investors will switch from buyers to sellers and reverse the current low inventory trends.

Already Sarasota and Manatee counties’ inventory of listed homes has increased over last year. Obviously, any surge in inventory while demand is subsiding will equate to lower prices. If many of these firms decide to sell their portfolios of single- and multifamily housing at the same time it would create some extreme downward pricing pressure in those markets.

Mortgage money is being raised by large insurance companies, institutional investors and hedge funds. Flight capital (money from international investors seeking a safe haven) continues to pour into the U.S. More readily available and attainable mortgage financing is in the works, but expect interest rates to increase as well as other mortgage financing and transaction closing expenses.

Down payment requirements are being lowered and more creative financing is again on the horizon this year.

This is the first of the regular columns I will be writing about real estate and the Florida economy for Biz(941). Future columns will include a look at the commercial and residential markets, economic data and analysis, opinions and predictions.

Most importantly, I want to write about topics that are priorities to readers. I’ll look

for future column ideas from your questions and comments. Contact me at [email protected]. ■

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Jack McCabe is chief executive of McCabe Research & Consulting LLC in Deerfield Beach and a founding member of the Carnegie Group think tank. He is an independent economist, housing analyst and consultant, author and speaker.

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