Southwest Florida Housing Market to Bounce Back (in 2009)

Sarasota is not ground zero, and the housing market slump in Southwest Florida is as much a symptom of the problem as you think.

That’s the take of economist and author, formerly chief economist of the National Association of Realtors. The cause of the problem lies elsewhere, and it predates the Southwest Florida housing market woes.

Three things to know about this financial crisis:

The market has consistently underpriced risk. In the housing market, this took the form of bad credit Florida home loans and gimmick ARMs.

But it has also showed up in a shrinking premium of risky corporate bonds over more conservative investment, like Treasuries.

In both cases, the market assumed away palpable risks in favor of revenues from transactions. Now, all those chickens have come home to roost.

For many homeowners, foreclosure has become real. For many others, their high Florida mortgage bills will reprice this year and next to the point that they will be financially stretched or worse to retain their homes.

For banks and other holders of high-risk securities, the market disappeared when potential buyers woke up to the fact that these were bad investments. And all this shaped up over five years - not when the Florida real estate market went south.

The major pain has occurred in New York.

The fortunes of financial market traders rise and fall with activity. The more trades they make, the more they make in commissions.

When markets rise, most financial market executives see their incomes rise with large year-end bonuses. But when markets slow down, so does their income. Most are in New York, as are most important media.

So the traders complain to the media and the media trumpet their pain. It’s no crime that investors suffer losses; that’s the way the market works.

There’s not an awful lot the Fed can do. Federal Reserve action is the most often mentioned solution to the problem. If the Fed would only pump money into the system, the markets would revive and the crisis would pass.

And the Fed did this, adding $62 billion in liquidity on August 10, just as it added liquidity to keep markets afloat in 1970, 1987 and 2001.

But this has a side effect. The extra money in the system will put upward pressure on inflation, further jeopardizing Florida home mortgage holders and applicants.

This may ultimately cause the Fed to raise interest rates, with mean higher Florida mortgage rates, slow growth, slower housing recovery and fewer jobs.

In the end, the middle class will have paid for the corporate welfare represented by the Fed’s bailing out of the financial market.

The problems in both the financial and housing markets will likely get worse before they get better. This brings us to the housing market in Southwest Florida.

Here we can probably apply the inventory accounting principle of first in, first out. This area’s sales volume and prices have fallen the fastest and the farthest of all regions since the housing market boom ended.

The correction has happened here more quickly than in other areas, so it will be 2008 before we begin to see consistent improvement in the markets of Southwest Florida, and home prices will lag sales volume.

But the demographic and employment trends suggest that the markets will be back to their normal growth pattern by 2009.

SOURCE: Sarasota Herald-Tribune