The Current Real Estate Dilemma (Part 1)

Here on the Treasure Coast of Florida we are being bombarded by a continuing series of bad news articles about the state of real estate and how bad things are. How did we get into this mess? Was it hurricanes? Taxes? Insurance?

With this article, I’m going to attempt to give you a little history and explanation of how we ended up in the current state of affairs.

The real estate market was coasting along very smoothly in what many consider to be a ‘normal’ market through 2003. By normal, I mean we had ‘market equilibrium’, meaning supply and demand was roughly equal. For every seller there was a corresponding buyer, whether it was new construction or re-sale. Prices were moving up a the historical normal of between 3% to 8% per year.

Around the end of 2003 because of a number of circumstances such as a little stock market glitch, the availability of very inexpensive mortgages at great rates and a perceived real estate boom the market started to have an unprecedented price spiral. The buyers far outnumbered the sellers. Many of these buyers were not end users (meaning they never intended to occupy or use the properties they were purchasing) but investors betting on quick gains. Estimates are that 25% to 40% of these buyers were strictly investors. Most of these buyers saw the rising prices and saw what others were making in short term real estate investments and more and more investors joined the fray and exasperated the continuing upward price spiral. Builders and developers were more than eager to supply units to this frenzied demand. But, in real estate some one has to move in and use the property as intended. Sooner or later this ‘bubble was sure to burst’.

The preliminary warnings came from Fed chairman Alan Greenspan as early as 2004 about the frenzied price spiral and the Fed began a series of rate increases in 2005 to try to dampen the speculation by increasing the cost of borrowing. The sub-prime mortgage market was so aggressive during this boom that even the rate increases had little effect on the low cost of borrowing. It wasn’t until 2006 that problems with the overly aggressive sub-prime mortgage industry began to surface.

Those investors that never planned on moving into their new homes or condos soon realized that they weren’t in a position to carry the debt they owed. All of these investment properties came back on the market for sale. Demand quickly started to fall off as supply just continued to increase and the price escalation quickly turned into price declines.

Most investors coming into the market near the end of the speculation frenzy (late 2004 to 2006) ended up owning properties worth less than what they paid or owed on their mortgage. Some pre-construction buyers simply walked away from their deposits and didn’t close. Others that didn’t realize what was happening, or those that waited too long were now getting into trouble.

The big rush was on to sell and supply rapidly outpaced the demand. Thus prices started down and are continuing the downward spiral today. In part 2 of this article I’ll write about the effects of current and future foreclosures on the market and when we can expect to see the market equalize again.

(Part 2 coming next week)

Any questions or comments please contact me through my website.

Gabe Sanders
Real Estate of Florida

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