Flipped in Florida -- Selling in a Housing Bust: John F. Wasik
By John F. Wasik
March 26 (Bloomberg) -- There's something about Florida residential real estate that attracts speculators like an alligator to an easy meal.
Abundant sunshine has been known to distort investors' perception of the laws of economics from the 1890s to the present. With tens of thousands of properties languishing on the market, the quick profits seem to have evaporated.
The experience of Beth and Fabrizio Faieta, who have bought five homes in the Fort Myers-Naples area over the past few years, provides a tale of what happens when home prices sour.
The Faietas aren't your typical Florida ``flippers'' who had hoped to buy and sell properties within six months of purchase, though. They said their holdings were intended to be long-term investments. Yet as the market stalled, buyers were scarce and expenses rose, and they were forced to sell.
Homes are plentiful in southwest Florida. There are for-sale signs on almost every other property on the most desirable road that embraces the graceful, white-sand beaches of the Gulf of Mexico. Local newspapers carry four or more sections of real- estate advertising.
When the Faietas arrived in the Fort Myers area from Massachusetts 2 1/2 years ago, homes were in high demand in the Sunshine State. ``We had to put in offers the same day we saw them or they were gone,'' says Beth, who was a part-time real- estate agent in Massachusetts.
Lower Asking Price
One of their investments, a three-bedroom home in Bonita Springs, was bought from an owner who had to sell. With 4.62 percent financing in September 2004, they bought it for $260,000. The house originally listed for $395,000.
Although they have had no problem renting the Bonita home -- my family and I leased it -- with the slack market, they have had trouble selling it on their own. They recently signed on with a local real-estate agent and have reduced the asking price of almost $400,000 to $359,900.
Like so many formerly torrid markets, southwest Florida home prices are in retreat. Prices fell 2 percent in the fourth quarter of last year in the Naples area and more than 1 percent in Fort Myers after more than doubling in value over a five-year period, according to the Office of Federal Housing Enterprise Oversight, the watchdog agency for the mortgage companies Freddie Mac and Fannie Mae.
``We purchased the house with the thinking that we would like to keep it long term,'' Beth says. ``I am not happy to sell it. I am also not happy that we are putting our other properties up for sale.''
Boom-Market Curse
When buyers abound, few investors think about the long-term costs of holding properties. Yet a rapidly rising market that brakes suddenly, combined with unique local conditions, presents pitfalls.
In Florida, as in most coastal areas in the southern U.S., the wave of hurricanes in 2005 led to skyrocketing homeowner insurance premiums. Some insurers even stopped selling policies and dropped coverage in storm-prone states.
For the Faietas' Bonita property, that meant an initial premium of $999 for their single-level house about a mile from the Gulf rose to $1,407. Beth expects it to climb even more in August. Another home they own in Naples had rates rise from $2,400 to $7,400.
A boom market also translates into higher assessed property values, which push up real-estate taxes.
Economic Pressures
The Faietas paid a bargain $1,200 in property taxes for their Bonita house in the first year of ownership. Last November, the levy was $3,768. The dramatic increase in taxes is front-page news for all Florida residents now, particularly those who were originally drawn by the lack of a state income tax and relatively inexpensive housing costs.
As if skyrocketing insurance and taxes weren't enough to give Florida home investors cold feet, the market is glutted with properties.
Within sight of the Faietas' property are three similar homes for sale. According to the Naples Area Board of Realtors, there are 11,000 houses on the market -- an 18-month supply -- and more than 2,900 homes under construction in neighboring Lee County.
The flippers who at one time accounted for as much as 50 percent of purchases in the Fort Myers-Naples area have largely retreated to the sidelines, responsible for no more than 2 percent of sales, according to Homesmartreports.com, a home information service in San Juan Capistrano, California.
Quadruple Whammy
A combination of slower sales, higher mortgage rates, large inventories and cash-strapped flippers being forced to sell is tilting the balance to buyers now.
Doug Brunner, a real-estate agent at Downing-Frye Realty Inc. in Bonita Springs, says: ``Two years ago, it was common to see sales contracts written at 90 percent of the original list price. Now it is common to see listings reduced by anywhere from 20 percent to 33 percent before an offer is made.''
While housing starts and existing-home sales both unexpectedly rose in February, don't expect a quick turnaround. The supply of homes for sale increased almost 6 percent last month, creating a supply of 6.7 months, according to the National Association of Realtors, a Chicago-based industry group. With almost 3.8 million homes on the market, that's still a hefty inventory to be absorbed.
Nationwide, the possibility exists that as many as 1.5 million more homes will come on the market from foreclosures of sub-prime mortgages.
In the interim, that means healthy discounts for patient buyers, and more pressure on long-term investors such as the Faietas to sell their properties.
This is a pattern being repeated all over the country from California to Massachusetts as investors who piled into the home market discover the painful realities of the supply-demand curve.
(John F. Wasik, author of ``The Merchant of Power,'' is a Bloomberg News columnist. The opinions expressed are his own.)
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