Florida Real Estate Foretold European Market Woes

The seizure that gripped European financial markets of late can be partly traced to an unlikely place. Like a proverbial butterfly that flaps its wings and sets off a tidal wave on the other side of the world, Sarasota, Florida is at the center of a bust that sent waves through global markets.

The posh Gulf coast community seems an improbable setting for financial crisis. Pristine yachts bob lazily off an eight-mile barrier island as bronzed children play close to sea turtles in the sugary white sand.

The shoreline is dotted with a blend of exclusive beachfront homes and family-friendly condos that give it an all-American appeal and have attracted rich and well-known home buyers for years.

But along with bubble areas across America, the Southwest Florida housing market has seen its luxurious lifestyle shaken.

The Sarasota-Bradenton area has experienced the biggest drop in house prices in the country, with foreclosures spiking after falling almost 15 percent in the year to March.

Florida is the “canary in the cage” according to Jan Hatzius, chief economist at Goldman Sachs.

The precedent alarmed Wall Street economists tracking the worst U.S. housing slump in 16 years, as price falls in Sarasota have spread across the state and threaten to drag Florida into recession.

But what caused the Florida housing market bubble to inflate so dramatically and then just as suddenly pop?

It is tempting to point the finger at the rise in popularity of high-risk adjustable Florida mortgage products backed by new credit securities. Now now in distress and, in some cases, regarded by traders as worthless, the innovative financial instruments played a role.

But the accounts of residents, real estate agents and Florida mortgage brokers in Sarasota point to a more familiar culprit:

Good, old-fashioned greed.

“People were buying places figuring they would put in a new kitchen and then flip them. It was greed. We were all in the same game. We were selling a piece of paradise,” says Christina Neff, a real estate agent in Siesta Key. “Flippers are behind what is happening.”

Dorothea Sandland, a real estate agent with Remax, says: “A lot of buyers took out second mortgage loans, risky loans or even special bonds because they thought they could get rid of the property very quickly.”

Short-term speculative investments drove prices to unaffordable levels and it was this that eventually caught up with buyers.

Speculative buying is not always easily discernable in publicly available housing data, but the accounts of local market participants are backed up by research showing Florida home prices shot up and became increasingly unaffordable in the past two years.

Florida mortgage payments on a median-priced home in the state reached more than 30 percent of median state income last year, compared with an average of 18 percent in 2003 and a national rate of 23 percent.

This risk-taking by buyers willing to bet money they didn’t have that prices would keep rising has been a key cause of the global credit crunch now underway.

When house prices peaked and then faltered, many buyers were unable to sustain their expensive Florida mortgages.

They are now being pushed towards foreclosure, hastened by higher borrowing rates as once-popular subprime loans reset.

Continue reading this article by the Financial Times of Deutschland on the impact of the Florida housing market on the global economy …