Insiders Predict the Future of the Florida Housing Market

As sales slow down and the Florida housing market remain stagnant, experts are predicting what the future will hold.

“The current downturn should last two to five years,” housing analyst Jack McCabe said.

Meanwhile, Bradley Hunter of Metrostudy says new home sales will pick up in 18 months; the National Association of Home Builders says new home prices will drop until at least 2008. David Berson of Fannie Mae says prices will perk up in 2009. And Mark Zandi of Moody’s Economy.com says the worst of the downturn “is at hand.”

As you can see, opinions are mixed.

“If it’s priced reasonably, you can still sell,” said Brett Handler of Dreamstar Custom Homes in Palm Beach Gardens, who builds new homes in the Ibis Golf & Country Club in West Palm Beach.

It was just August 2005 when the chairman of Pennsylvania-based Toll Brothers, which builds million-dollar new homes in Palm Beach County and the Treasure Coast, could barely contain his glee at the glut of luxury buyers.

“We’ve got the supply and the market has the demand,” Robert Toll said at the time. “So it’s a match made in heaven.”

In August of this year - as he announced a 19 percent drop in third-quarter profit - Toll had this to say:

“It would be difficult to characterize the position of home builders as other than in a hard landing.”

Florida housing market sales/prices

Such anecdotal evidence is strong, but no one tracks local new home sales or prices. Analysts say the rise and fall of local new home prices is generally aligned with existing-home prices, which rose 181 percent in Palm Beach County and 178 percent in the Treasure Coast between 2000 and 2005, the bookends of the boom.

The run-up, fueled by the lowest Florida mortgage rates in more than 40 years, spawned a frenzy in flipping that saw cabbies exchange real estate tips with New York venture capitalists. Sure, that oft-told tale might be urban legend, but given the tenor of the times it just might be true.

“Speculator investment in new single-family homes has been between 25 percent and 40 percent of the sales since 2003,” said housing analyst McCabe, who is head of Deerfield Beach-based McCabe Research & Consulting.

But investors, who drove the boom’s unprecedented success, also provided the seeds of its decline.

“Because of investors - and the greed of builders who sold to investors - we have a huge oversupply,” said Pete Hegener, president of Core Communities, the developer of massive St. Lucie West and Tradition, both in Port St. Lucie.

Kolter Communities’ Julien agreed.

“We had a whole bunch of builders overbuilding,” he said.

Julien and Hegener addressed an Urban Land Institute conference in West Palm Beach last month where the backlog of unsold new homes and lack of Florida mortgage loan demand was a hot topic.

“It’s no secret there’s incredible speculative investment,” said Jeffrey Shulman, senior vice president of AmSouth Bank in South Florida. “That’s not bad, but it got out of hand.”

Meanwhile, builders did what builders do: They built new homes for buyers so eager to own their own piece of the boom they camped out overnight at sales centers to get the homesite they wanted.

“The single-family inventory is the big issue,” said David Seiders, chief economist for the National Association of Home Builders. “Demand might stabilize before long, but there is a lot of inventory that needs to be worked down.”

More on future of Florida mortgage, new homes

Analysts warned of a slowdown in the housing market as Florida mortgage interest rates began to creep up and home prices reached levels that simply could not be sustained.

In the end, there has to be an end user, more than one economist cautioned. And yet, when the slowdown started - in the middle of 2005, most agree - it seemed to take many by surprise.

“I don’t believe any of us were prepared,” said Kevin Lawler, managing partner of development company N-K Ventures in West Palm Beach.

A lot of speculators got caught holding the bag - or, in this case, the unsold house, for which they most likely paid a record price. About half of the 991 vacant finished new homes in the Palm Beach housing market developments in the third quarter of this year cost more than $500,000, according to housing consultant Metrostudy of West Palm Beach.

“As home builders responded to increased investor interest by building homes at a pace far in excess of household growth, many investors - unable to rent the homes at all, or for an amount that covered their mortgage payment - decided they wanted to sell the homes previously bought on spec,” said Thomas Lawler (no relation to Kevin Lawler), a former longtime Fannie Mae analyst and president of Lawler Economic and Housing Consulting.

Others simply walked away from their deposits.

“I have been receiving a lot of calls from buyers who want to default and walk away, and wonder if they can get their deposits back,” said John Pankauski of the Pankauski Law Firm in West Palm Beach.

Canceled Florida mortgage contracts, for-rent signs and for-sale signs have become signs of the times.

“We heard last year that builders had put anti-speculator clauses in their agreements - that they weren’t selling to speculators,” McCabe said. “I and most other analysts believed them. But when you drive through new-home neighborhoods, there’s as many for rent as there are drapes in the windows.”

All those for-rent signs, or even a lot of for-sale signs planted in yards, can change the character of a single-family neighborhood - and not for the better, thoughtful observers contend.

“Investors turned neighborhoods into pump-and-dump pyramid schemes,” Realtor Mayhew said. “The nature of the single-family house has been gutted. Actual residents are now surrounded by renters.”

Luring in new buyers …

To lure buyers back to new-home developments bulging with unsold inventory, 75 percent of builders nationwide have offered incentives, the National Association of Home Builders estimates. Locally, perks included a year’s free homeowners association dues, a free stainless-steel kitchen appliance package, marble baths and the ever-popular granite countertops.

A third of all builders nationwide cut their prices, the association’s Seiders said.

Nationwide, new home prices plunged 10 percent in September compared with the same month a year before - the steepest drop in 30 years - as builders slashed prices to move inventory. Sales had jumped from August, the Commerce Department report showed, but remained 14 percent lower than September 2005.

Prices for new single-family homes will come down another 20 percent to 25 percent, McCabe estimates. Seiders estimates the figure at 30 percent in the South Florida housing market.

Driving prices down, of course, is the huge inventory of homes for sale.

“What’s interesting is that across the country there are now more existing homes and condos in the MLS than at any time previous in our history,” McCabe said, referring to the Multiple Listing Service. “There are also more new single-family homes that are complete, and more new single-family homes under construction that are unsold, than at any other time in history.”

Not until this historic oversupply dwindles will prices start to go up, McCabe said.

But he has some very good news , too: “Once we get to that point, we will see prices appreciate - and we will never see prices drop again.”