Florida Housing Market Headed For Recession?

One thing is for sure in these trying Florida home loan times: views on how bad things are - and where they are headed - continue to differ.

First, there’s a piece by a Goldman, Sachs economist who believes Florida has a bigger housing bubble problem than any state in the nation. He thinks values here could drop 40 percent.

Then, there’s another story about growth.

Lastly, here are two economists, one from UCF, talking about the chance of a housing recession. The focus is the Tampa Bay housing market, but this applies to most of the state.

The economists are:
Jan Hatzius (Bear), Senior economist, Goldman, Sachs & Co
Sean Snaith (Bull), Director of the University of Central Florida’s Institute for Economic Competitiveness

Snaith, a member of advisory panels with both the Federal Reserve Bank of Philadelphia and USA Today, specializes in economic forecasting.

He’s a critic of the “housing bubble” school, preferring the term “housing souffle.” Real ingredients, not just speculation, fed Florida’s boom. But now the souffle has partly deflated.

Here are their comments:

Q: How serious have the bad credit Florida mortgage loan troubles been for the state’s housing?
Hatzius: The subprime mortgage market developed during a period of excess in the market. And now that the excess is coming to an end, the financially vulnerable borrowers are getting hurt. But it’s not that the subprime market collapsed and is causing the housing weakness. That mixes cause and effect.
Snaith: Subprime Florida mortgage borrowers, by definition, are people who have poorer credit and therefore have higher defaults. A lot of people were trying to make this into something more apocalyptic, like it was a contagion that would spread to the rest of the market. I don’t think that’s been true. But it adds to the malaise in the housing sector. It adds to the inventory of houses in foreclosure.

Q: How likely is it that the housing slump will throw Florida into a full blown recession?
Hatzius: I think it’s likely. The drag on Florida growth from housing looks twice as large as in the country as a whole. The rest of the country gets an offset from the strength of manufacturing. In Florida, it’s about 5 percent of its economy. Some of the slump may be offset by tourism but I don’t think it will be large enough.
Snaith: I don’t put a high probability on that transpiring. I think the worst problem in Florida is focused in the condo market. We really saw much more speculative behavior there. We had people gambling, effectively hoping to flip it before the condo was constructed. The rest of the economy is able to pick up and absorb the housing troubles. There’s plenty of growth in other sectors.

Q: How long will home price declines in the Southwest Florida housing market continue and how deep will those declines be?
Hatzius: Forty percent is the current level of overvalue in Florida. I would guess the area will have 10-15 percent price declines for a couple of years. Beyond that, my crystal ball doesn’t go. Incomes do go up over time. If people make more, they can afford more expensive homes, so it’s possible prices won’t fall as much.
Snaith: I think 40 percent is excessive. The worst will be over by mid-2008. A 10- to 15-percent price decline is the worst- case scenario. We’ve got a lot of long-term drivers in place that will support housing: Baby boomers retiring, 40-year-low Florida mortgage rates, high personal income, low unemployment.

Q: What shape is the West Florida housing market in compared to the rest of the state?
Hatzius: You’re already seeing quite a bit more price weakness in the Tampa Bay market, compared to the Miami housing market. In the single-family market, the biggest drops are likely to occur on the west coast of Florida where the excesses have been most pronounced. I’m no expert on the area, being in New York, but that’s how its looks from 36,000 feet.
Snaith: I think South Florida in general has to deal with the condo issue to a greater extent. But there will be pockets of pain throughout coastal areas of the state. Anywhere there was a rush to buy these condos will take some time. But remember, the baby boomers aren’t retiring to North Dakota. They’re coming to Florida, Arizona and Nevada.

SOURCE: Orlando Sentinel