Central Florida Housing Market Outlook: Hazy

Has the Central Florida real estate market deflated?

Stan Smith doesn’t think so. In a recent report to local Florida mortgage bankers, the finance professor concluded that while home prices are slowing, there appears to be no bursting of the bubble.

Unfortunately, however?

“One of the biggest problems with a bubble is that we may not know it is bursting until it happens,” said Smith, who teaches at the University of Central Florida.

For builders, analysts, buyers and sellers, the sure-sailing housing market of recent years is moving into uncharted territory. The region’s housing starts may have fallen during the third quarter for the first time in years. Builders who were stockpiling new-home orders a year ago are now running promotional campaigns to move excess inventory.

Existing-home sales are threatening to take home prices down with them after more than a dozen record-setting years in a row. Still, Smith has concluded that the numbers he analyzed “suggest that, in general, Central Florida housing markets are currently experiencing the soft landing that many had hoped for.”

Anthony Crocco sees signs that the landing may not be so soft. The Central Florida director for Metrostudy, which tracks new construction nationwide, Crocco spends much of his time counting housing starts in the subdivisions across the region.

Starts in the Orlando area were still up during the second quarter — 3.2 percent higher than in the same period last year. But the area’s new-home inventory grew nearly 20 percent during the quarter — and the fastest growth came in the “finished but vacant” category, up 136 percent to 6,787 homes.

In another clear sign of a slowdown, the total number of homes under construction during the quarter — 16,133 — was only 20 units more than a year earlier. According to Crocco, the buildup of home inventory continued during the third quarter, although exact figures won’t be tabulated for a few weeks.

“My guess is that we will see a pretty significant decline in [new-home] starts,” he said, as builders work off backlogs of orders stretching back to last year.

The big question is just how many financial quarters will it take before builders can clear those unsold homes and begin to boost housing starts once again. A lot may hinge on the direction Florida mortgage rates take between now and the end of 2007.

In predicting a soft landing for Central Florida’s housing market, Smith examined locally generated sales data as well as the Housing Price Index from the Office of Federal Housing Enterprise Oversight (OFHEO).

That index — favored by many economists, as it is based on repeat sales of the same properties, all financed with conventional home loans — shows that appreciation in Central Florida generally peaked during the second quarter of 2005.

They have trended down ever since, but have remained in positive territory when compared with the same period a year earlier. And the rate of decline in the Orlando housing market has not been as severe as across much of the rest of the state and country, Smith noted.

For example, home price appreciation in the U.S. averaged 1.2 percent in the second quarter and 10.1 percent during the 12 months that ended June 30. In Florida, prices were up 2.5 percent in the quarter and 21.3 percent for the year. But in and around Orlando, they were up 3.7 percent in the second quarter and 26.3 percent in the 12 months through June 30 — the fifth-best rate in the country.

By August, the inventory of single-family homes for sale by the Realtors in Greater Orlando (above) had ballooned to more than 10 months’ worth — the first time that has occurred since 1997. Indeed, new buyers are hard to come by in the region and across the state. But when Smith looked at the index for 1997, he noticed that Orlando-area prices that year still rose more than 5 percent despite the huge backlog of unsold properties.

If such history is any indicator, he said, “house prices may continue to increase, even with a relatively high inventory of homes.”

Also on the plus side: Most forecasters don’t expect a large increase in long-term interest rates within the next year or two — Florida mortgage loans slipped to their lowest levels since March last week — and Central Florida’s population and employment base are expected to continue growing.

Smith cautions that both the record inventory of existing homes and the incentive-driven discounting of new homes bears watching because of the effect they could have on sales and prices. The more discounts of this nature we see, the greater the chance that downward pressure on prices will spread.

“The situation may change,” he said.