Real Estate, mid 2010 update

When we started designing this web site, the major motivation was the depressed housing market and the growing inventory of unoccupied houses, several of which were on our street with more coming. We couldn’t believe prices were so low. For example, two blocks away a house with three bedrooms, two baths, a (rare) three car garage, and 2300 square feet sold for $105,000. Four years old with nothing major wrong with it. It’s not on water and has no swimming pool.

That was ten months ago. The market is still bouncing along on a bottom. Prices for a more typical two car garage house with over 1600 square feet are in the $80,000 range in Cape Coral.

There have been no more foreclosures on our street and a couple of the vacant houses now have “For Sale” signs out front. That’s progress.

It seems to me there are two or three stages (or causes, if you like) to a depressed market like this:

• First, the people who bought at the top, with mortgages they couldn’t truly afford in the long term, defaulted on those loans. This happens once in a while even in the best of times. Down here, the housing downturn accompanied seriously increased unemployment, as high as 15%… and that represents those actively looking for work, not the ones who moved away or just gave up. Foreclosure was inevitable for this group once the real estate market dried up.

• Second, those who were sitting in a home with a mortgage that was sometimes four times the market value of the house, just walked away. Moved to Tennessee or wherever. They may have had money or maybe not. (This is usually not wise in Florida because the lender can get a deficiency judgment against the borrower for the difference between the sale price of the property and the amount owed. Bankruptcy can discharge these debts).

• Third are those folks who had adjustable rate mortgages (ARMs) that reset, typically, in one, three or five year intervals and at a higher interest rate. If that ARM was for an amount close to the sale price at the top of the market and the market at the time of the reset has declined over 60%… well, welcome to either group one or two above. Because so many of these mortgages were written within a relatively  brief time span, when these people default, it causes a wave of new foreclosures to hit the market. Thus, one sees spikes in the foreclosure rates in the years that these things reset.

In 2010 and 2011 most, if not all,  of the remaining five year ARMs ought to be filtered out if the borrowers haven’t already been awakened and got out from under them. I don’t know how many of these are out there and I’ve been unable to find reliable statistics. All I can tell you is that houses are selling in Southwest Florida for less than what it would cost now to build them. And not by just a little, either; somewhere between 30% and 50% less.

I’m not in the fortune telling business, but I’d say we’re entering a period during which we’ll see an increase in housing prices. I don’t think it will dramatically spike upward, just a long, slow recovery from here. There simply are too many houses in the inventory that have to be cleared out. You can get an idea about how this is working out by checking a real estate site specializing in the area that interests you. Real estate agents all ought to have a pretty good idea how long it takes to sell a house and what its market clearing average price might be. A decrease in the number of months a house is listed and an increase in the market clearing price are suggestive of improving conditions if you are a seller.

As we noted in the Real Estate section, waiting to buy until a bottom is reached is likely futile. Market bottoms are only evident in hindsight. There is never any assurance in real time that a market may not dip even further.  Or for that matter spike severely up. About the best anyone can do is buy at a point where the future appreciation will push past the “buy point” within whatever time frame is appropriate to that person. With houses, a five year or longer time frame is appropriate if you’re going to live in it even part time.

If you want to buy, repair/renovate, and quickly sell the property (“flipping”), then you worry about the total cost of all of that being less than the current market clearing price. In other words, your time frame is considerably shorter. In a less depressed market, renting out the property can save your investment while you wait out the market. This is problematic in several areas of Southwest Florida because the number of vacancies has driven down the rental return rates.

If you are considering this area as a retirement location or as a spot for a second home, I doubt you’ll see a better opportunity than right now. Things are turning around however slowly that may be. Find a good real estate agent and do your own research. Remember that Cape Coral, Naples, Punta Gorda, Ft. Myers are all separate markets: what is true for one may not be true elsewhere.

By the way, if you’ve got further information about the real estate market down here and/or feel we’ve left out something, then drop us a comment in the Real Estate section. We really do read them even if we don’t necessarily post them. Sometimes we save up ideas for future revisions. You won’t get credit for it if we do but that’s how it goes. Just remember that the definition of plagiarism is stealing from one person: stealing from several is research.