Posted on Tue, Jul. 26, 2005
HOUSING: Keeping an eye on the bubble
By Judy Stark
St. Petersburg Times
ORLANDO - From talk among economists to cocktail-party chatter, it's Topic A these days: When will the real estate bubble burst?
If we knew the answer, we wouldn't be standing around talking about it. We'd be out getting rich quick and getting out of the market.
But in the absence of a date we can circle on the calendar, two Florida economists last week offered a list of red flags to watch for: Developments in the economy that are cause for concern.
"I don't like to use the term 'bubble' because there are different concepts of what it means," said Brad Hunter, director of the South Florida division of Metrostudy in Miami, which tracks housing. "But do we have an excess of speculation? Yes. We're near the top of the ability of individuals to buy and make a quick buck."
Hunter and Stanley P. Geberer, an associate with Fishkind & Associates in Orlando, offered this watch list at the Southeast Building Conference. The annual gathering attracted 15,000 builders and others involved in the housing industry in 10 Southeastern states.
• Too many investors. When 50 to 100 percent of purchases are by spec investors, "that's too high. Speculation is not a sound economic decision," Geberer said. Fully 100 percent of the buyers of luxury condos under construction in Miami Beach are investors, he said.
• Ask the builders who's buying. Here's the scary scenario: Last month a builder had 30 people on his "lottery list" to buy the homesites he was ready to sell, and he sold all 10. This month he had four people on his lottery list and he sold all 10. Fewer buyers scooping up more housing - an investor-dominated market.
• Watch the closings in county records. When volume starts to drop, it's a sign of a slowdown.
• Look who's buying. Your waiter. Your dentist's wife's sister's nanny. When such a person pulls $60,000 in equity out of his or her home and puts $20,000 down on each of three luxury condos in Miami Beach, it's time to worry. These highly leveraged, unsophisticated investors will get hurt when the economy weakens. They don't have the deep pockets to wait out trouble.
• Look around the globe. Prices have been higher in Great Britain than in the United States during the past 10 years, but now they're lower. Time to wonder what's going on there that might happen here.
• What happens in Vegas. The booming market in Las Vegas hit the skids in the fall of 2004. When sales slowed, several builders cut their base prices by $100,000 or more, Geberer said. Among them: Pulte, which slashed prices from 5 to 25 percent. Now the resale market has come back. In the first quarter of this year, Las Vegas ranked second out of 100 metropolitan areas with an increase of 33 percent in median existing home prices.
Another example, reported this week by the New York Times: Homes in Denver were increasing in value at a rate of 17 percent annually, but in the first quarter of this year that slipped to a 3 percent annual increase in the median existing home price. What happened? The loss of 74,000 jobs, about 6 percent of the job basis. That meant longer market times, slashed prices, and builder and seller incentives (free upgrades and appliances).
• Still for sale: Metrostudy counts finished, vacant inventory - houses that have been completed but are unsold and unoccupied. "When 275 of 500 units are vacant, you have a problem," Hunter said.
• Bye, bye, buyer: The two economists look to 2007 and 2008, when many of the condo projects being announced now are completed. That's the time when investors will seek buyers. "Those end users will determine what a unit is worth and how many we need, and the market speaks with its feet," Hunter said.
The panic buying of today - "I'll miss my chance, I've got to get in now" - may be replaced by panic selling. Investors are typically the first out the door at the smell of trouble. Will an investor who paid $545,000 for a condo be able to sell it for $575,000? Or will a glut of resales on the market mean the seller has to drop the price to $505,000 and throw in a washer and dryer? Buyers will have lots of options. They'll shop around. This is the dangerous time when the waiter and nanny investors take a hit, selling for less than they paid or at least not for the big profit they anticipated.
The end users will show up eventually, Hunter said. Each year 400,000 people move to Florida, so there's reason to think all those units will be sold, though not necessarily at the sky-high prices investors might like.
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