Are we experiencing a real estate bubble? By all accounts, the Florida housing market saw some vigorous activity in 2020. Some parts of Florida saw sales volumes increase over 50% year-over-year. Prices have moved up steadily during the period too. Incredibly, the pace has only increased in the first two months of 2021. Tempered only by the low inventory, it appears that the strong surge in market activity won't slow down anytime soon. With all of the disruption caused by Covid-19, many have opined that a crash, or at least a correction must lie around the corner. But does it?
The Florida Housing Crash of 2006
Yes, it's been fifteen years already since the Florida housing market reversed course and entered a freefall that would take five years to hit rock bottom. If you owned Florida real estate during the slide, I don't have to remind you how unsettling a ride it was. Fortunately, as Barbara Corcoran has said, "A funny thing happens in real estate. When it comes back, it comes back like gangbusters." And it did. Florida real estate regained its losses and then some fairly quickly.
So that's great. We're all good now, but nobody wants to ride that roller coaster again.
Are conditions similar now to what they were in 2006? Are we about to experience the same thing again? Are we actually witnessing the "irrational exuberance" that often precedes market collapses? Let's take a look.
There is never a shortage of pundits willing to predict the future. Forecasts of the Florida housing market run the gamut from doomsday scenarios to no-lose propositions. Perhaps the most solid case has been made for something in between. We expect a strong and stable Florida real estate market in 2021 and beyond. Why? Because several key contributors to the housing bubble bursting in 2006 are not present in 2021. More importantly, essential factors that will support the market now were absent then.
Rules governing mortgage brokers and appraisers have been instituted to prevent the widespread abuse rampant in the early years of the Millenium. In 2005, it was not an exaggeration to say that "if you wanted a mortgage, you could have one." Corruption in the mortgage industry was rampant. It wasn't unusual to see LTV( loan-to-value) ratios of 125%. Even crazier, banks offered loans that didn't require income supporting documents. "No-doc" loans were everywhere and for everyone. Finally, phony appraisals would seal a deal destined to fail. In retrospect, the crash was inevitable for one reason - no equity.
Without equity, homeowners had no skin in the game in 2005. They had no financial reason to hold on to their homes. As foreclosures rose and property values fell, walking away became the obvious answer for many.
These days, only 3% of U.S. homeowners are upside-down (have negative equity) in their houses. Despite the hard-hitting Covid shutdowns, the U.S. homeowner's equity is high. In some markets like Marco Island, equity rates are exceptional. This is continuing. The rate of new cash purchases has been strong in 2021 despite interest rates down in the 2.5% range. With equity like this, we're confident that the low-interest rates are not artificially inflating home values. Moreover, the high equity percentage will minimize foreclosures in 2021.
Foreclosures became so common between 2007 and 2012 that many Realtors sold little else. Banks were dumping more repos and short sales on the market every day back then. Property values plummeted in Florida. Some are predicting a similar fallout this year.
As of March 3rd, the foreclosure moratorium instituted during the Covid period is still in effect and will stay in place until at least June 30th. Does this mean a flood of foreclosures will hit the market when the moratorium is lifted? Currently, 12% of mortgages are in arrears. This number is usually in the 4.5% range. With delinquency rates nearly three times the norm, some have surmised that a surge in foreclosures similar to the crash is imminent. We think this is highly unlikely. Here's why.
There are two excellent reasons. First, as I mentioned, is the high equity rate. With skin in the game, homeowners will fight to hold onto their homes. The second reason that the foreclosure numbers aren't expected to be that bad is the banks. Banks make money by keeping loans rolling. Even with equity rates high, foreclosures are bad for them. They don't want them. They will most likely be modifying loans rather than foreclosing. Small delinquencies will be managed by temporarily raising payments. Big delinquencies will be corrected by adding the missed payments onto the end of the loan along with a penalty. Homeowners will jump on this.
So, for you guys (like me) dreaming of a flood of cheap real estate, don't hold your breath. We're wishful thinking. Besides, demand is so high, absorption of the foreclosures that do pop up will be so quick that it won't drag the market down.
On Marco Island, we haven't even seen the first sign of a distressed property bonanza coming on the horizon. Just the opposite, actually. We hear daily now from buyers who believe the stock market has much more downside risk than upside potential. They're looking at Marco Island's blue-chip real estate as a good alternative for short and long-term investments. This is yet one more factor putting positive pressure on the Florida home prices going forward.
So, what's the best strategy? Well, it's a seller's market and it's very competitive. Fortunately, prices aren't out-of-control yet. Decisiveness is going to be the difference between winning and losing. Time is of the essence.
Develop a plan with an agent that is successfully grabbing good properties for her buyers. One that knows how to avoid bidding wars when possible and how to economically win them when necessary. We've had great success with buyers making offers without physically seeing the properties. Of course, you have to trust your agent implicitly to pursue this strategy, but it is effective. We haven't had a buyer yet that was dissatisfied with their purchase.
Feel free to contact us to discuss the latest market news and to develop your plan to own Marco Island real estate.