Data May Mask Florida Housing Market Crisis

Here’s a scary thought about the Florida housing market:

Things may be far worse than what’s already being revealed by the troubling government and industry statistics.

At issue is what goes into sales price data and what does not.

When those numbers are crunched, many of the incentives that sellers are using to lure buyers - including cash rebates - aren’t being included.

That suggests Florida home prices may be falling faster in many markets than is now being reported.

The same goes for Florida mortgage application indexes that don’t account for the implosion of home loan lenders.

That could have the effect of masking a drop in demand, which is why the Florida housing market could be in for rough sailing much longer than most anyone anticipates.

Not long ago, the Florida housing market was leading the economy’s growth.

But the business has slumped over the last two years in many parts of the country - including South Florida, with sales of new and existing homes plunging.

The home loan business is also under intense stress as borrowers with weak credit increasingly default on Florida mortgages.

Since what happens in housing has a far-reaching effect - it has rattled financial markets, caused dramatic tightening of lending standards and shaken consumer confidence - every bit of data is scrutinized for hints of whether a recovery is near or more trouble lies ahead.

There certainly has been plenty of bad news, but it might not even be giving a full picture of how difficult things really are.

For instance, the Commerce Department reported last week that the median sales price of new homes fell 0.9 percent in May, after tumbling 10.9 percent in April.

But those numbers don’t include thousands in lavish incentives like pools, cars and closing costs that sellers are increasingly using to woo buyers.

That means a home selling for $600,000 gets reported for that price even though all those extras technically are reducing the net sale price.

Miami-based Lennar Corp., for instance, has offered to purchase furniture for buyers. Sales incentives at Lennar, one of the nation’s biggest home builders, averaged $43,700 a home in its second fiscal quarter, up from $24,700 in the similar quarter last year.

And it isn’t just builders piling on the incentives. It’s spilling over to the existing-home and Florida mortgage markets, too.

Earlier this year a Weston home seller plunked down $5,000 for a 52-inch flat screen television and offered it to anyone who would buy his home.

In Miami Shores last year a home seller promised a Jaguar X-Type 3.0 sports car to anyone who would take his asking price.

“In effect, they are reducing the new sales price but that is not showing up anywhere in the actual sales data,” said Peter Schiff, who runs the investment firm Euro Pacific Capital in Darien, Conn.

Another report with some distortions is the Mortgage Bankers Association’s weekly survey of mortgage applications, which has long been considered a reliable indicator for new and existing home sales.

Over a decade, the year-on-year change in the MBA’s “purchase applications index” has shown a 76 percent correlation with the year-on-year growth rate of the combined new and existing single-family home sales, lagged by one month, according to Goldman Sachs.

That might not be holding true now, since the index fails to account for some of the turmoil in the Florida mortgage business.

The purchase applications index is now showing a 9.5 percent rise for June from year-ago levels. For one, the MBA survey refers to mortgage applications, not originations, which legally bind borrowers to the Florida mortgage loan.

That is not a problem when lending standards are stable, but in times when lax underwriting standards are tightening - as they have in recent months - more applications are rejected, and therefore, originations fall, too.

Another problem is the survey represents about half of all Florida home loan applications, but Goldman says that sub-prime is slightly underrepresented.

Lenders who have gone out of business - a regular occurrence in today’s markets, with dozens of bad credit Florida mortgage lenders imploding in recent months - might not be included in the sample.

That could overstate its results.

The MBA acknowledges that its survey includes lenders offering loans via retail branches, and most lenders that have gone out of business aren’t in its sample because they were primarily subprime lenders relying on mortgage brokers.

They also weren’t included when Florida mortgageapplications were soaring a few years ago, notes the Washington-based MBA.

He also points out the six-week to two-month lag time between home mortgage applications and a closing means the jump in May’s applications might not be reflected until the June home-sales data are reported in July.

“We have to wait until then to see if there is really a decoupling,” Brinkmann said.

How that plays out could tell much about the state of housing today, and whether the problems in that market are a lot more troubling than appears on the surface.

SOURCE: Miami Herald