Sellers Remorse Hits Miami Real Estate Market

If this headline about seller’s remorse strikes you as a little bit of a non-sequitur, you wouldn’t be alone. With the turmoil in South Florida’s active adult and real estate market, you would think we should be talking about “buyer’s remorse”. That’s the affliction that comes when people who bought a few years ago are under water with their mortgage - they owe more than what their home is worth.

Rafael Diaz could tell you all about it. Two years ago this Miami builder listed a brand new home near the University of Miami for $979,000. Today’s listing price - $599,000. What’s worse is that he turned down an offer of $770,000 just a year ago. What he told the New York Times says a lot of sellers remorse, “I should have taken it. … I guess I was a little cocky….”

The problems are understandable. Sellers are still thinking about prices in hot real estate markets. None was hotter than Miami, where home prices rose without interruption for 21 years. So they hang on to their asking price longer than today’s market will tolerate. The biggest problem in Florida, Nevada, California, and other former real estate hotbeds these days is that instead of yesterday’s bidding wars, short sales are setting prices. A short sale is when the asking price is less than the remaining mortgage, and the lending institution is willing to forgive the rest.

Unfortunately, even with massive discounts buyers are not biting. One realtor told the Times that “there are more qualified buyers on the sidelines than in the 35 years I’ve been doing this.” Buyers, who are afraid prices will drop further, are making the rental market hotter than it has been in years - in fact more deals are rentals in South Florida right now than are sales.

When home inventories get back to normal levels and the rate of foreclosures slows down prices will finally stabilize. But for now, the market remains fearful, except in the high end, where properties valued for more than $1 million are selling better than lower priced homes.

Is Now the Time to Buy into a Retirement Community

June 27 — Identifying the bottom of a real estate cycle is a trick that is just about impossible to master. We at Topretirements have been exploring this question for over a year now, wondering if it is finally the right time to buy into a retirement community or active adult community. Unfortunately, there is no definitive answer in sight. Today’s New York Times article, “Retirees Find the Time May Be Right to Buy“, examined this question, profiling the experiences several retirees had as they explored the retirement community real estate market.

The common thread in their adventures is the effect dropping real estate prices have in their view of the market. According to Case-Schiller data, prices in 20 of the top U.S. markets were off 15% in April vs. the year ago April. Prices in the first quarter of 2008 were off 14% vs. the same quarter of 2007. Fueled by foreclosures, prices in Miami, Phoenix, and Las Vegas dropped over 25% in April vs. year ago. Prices in these markets have now been diving steadily for over 2 years.

One reason for buyers to finally emerge from their bunkers is that, given the relentless price drops, there are now properties coming on the market at what look like reasonable prices. And when a serious buyer senses a bargain and a seller who is open to negotiation, sales start happening.

A good thing about the U.S. economy is that all markets in the U.S. do not behave the same. Some cities, notably Charlotte, did not see the big price run-ups as other areas, and as a result are not experiencing significant declines. Even in Florida, which has not been experiencing as much retiree immigration as it used to, there are real differences. Northern and middle Florida saw less excess, so these markets have been much more stable than much of South Florida. In Miami and Fort Myers there was too much building and too much speculation - in these areas inventories are too high and prices continue to fall. The disparity in markets is another factor that makes it hard to know if prices have reached a bottom in the markets you are interested in.

The main retiree interviewed in the Times story, Franke Watson, recently purchased a home in Prescott, AZ. The house was listed originally for sale at $430,000. When Mr. Watson saw it the price had been lowered to $349,000. He offered $300,000, and he and the owner eventually agreed upon $309,000 - a 28% discount from the original listing price.

The Sarasota Herald-Tribune had a recent article, “Have Home Prices Hit Bottom?“, with one of the more interesting ways of looking at home prices. Their analysis assumes that the average annual increase in home prices has traditionally been around 6-7% a year. Obviously in 2005 and 2006 the hottest real estate markets in the U.S. got seriously out of hand. In Sarasota, home prices increased 32% in 2005 alone! Since then prices are down in the hot areas. The article points out that if you assume a 6-7% annual price increase from 1999 on, the current prices are, after the correction, pretty close to where they should be.

The biggest problem facing many retirees right now is the inability to sell their current home. They do have an advantage over most other real estate buyers, though, and that is that they generally have plenty of equity. According to the Times article, many of those folks are taking the plunge, or at least thinking about taking a big step. Their rationale seems to be their estimate that their house will eventually sell, so why not take advantage of the current bargains to be had now.

Active Communities - Better to Rent or Buy?

May 30 — For as complicated a question this is, it is amazing how strong the opinions are. The one thing that is clear is hindsight - if you lived in the markets hardest hit by the housing crisis over the last 2 years (Phoenix, Las Vegas, South Florida, and parts of California), renting would have been the superior option. Your living costs would have been lower, and you wouldn’t have lost any capital.

Articles in the New York Times and Seekingalpha.com explored the issue this week. The Times article on “Committed Renter Decides to Buy” used the concept of rent/purchase ratio to try to get a handle on the question. The ratio is basically the price of a typical house divided by the annual rent - and the higher the number the more you should consider renting. In Miami, for example, the peak ratio was a whopping 28.2. In Pittsburgh, by contrast, the ratio is a humble 13.6.

Seekingalpha’s “Renter Versus Buy” story had a slightly different method - it compared the cost of renting vs. the cost of owning. Generally, whenever the cost of renting is lower than the cost of owning, the more you should consider the renting option.

So how does that apply to the market for active adult or retirement communities? In general retirement real estate has been part of the brighter side of the recent real estate market. That trend depends on location of course - south Florida active adult communities have been particularly hard hit.

Our opinion is that the same principles apply - if the ratios or cost relationship between renting/buying is out of whack - go with the cheaper option. If the ratios are unclear, renting for a year or two in an active adult community might be the smarter thing to do. For one thing, you get to sample the neighborhood at lower risk. You also get to scope out the community - if you do decide to take the plunge and buy there, you will know the best locations and types of housing. You might miss out on the market bottom with that approach, but you also could avoid a further slide in housing prices or choosing the wrong community.

Foreclosure Action Brings Higher Sales and Lower Prices

May 20 — The National Association of Realtors announced that home prices slid over 7% in the first quarter of 2008 compared to the year earlier period. Although sales volume is down as most buyers continue to stay on the sidelines, there is one category of sale that is hot right now - foreclosures.

In Southern California almost 38 percent of overall sales in April were from foreclosures. These increased sales will probably benefit the overall real estate market, including homes in active adult communities. The sales gains are clearly coming from lower prices - as banks take action to get non-performing assets off their books, prices go down. In fact there are reports that certain funds are taking big positions in buying foreclosed properties, often for cents on the dollar.

All of this foreclosure activity, while painful in the short term, is probably good in the long term for the market. For one thing, lower prices are getting buyers into the market again. For another, prices still have yet to go below the inflated levels of 2004 and 2005 in many markets. As foreclosed sales set the baseline for what properties are worth, unwilling sellers will finally have to take their medicine and adjust prices to the new reality. According to Ned Davis Research, prices are still 15-20% higher than what they should be when measured against consumers’ income levels. Consensus of many experts is that the market still has to get a little bit worse before it can get better - perhaps in 2009.

The NAR’s figures show the worst price decreases in what were often 2005-6’s hottest markets - Sacramento (-29%), Riverside/San Bernadino (-27%), Fort Myers (-17%), and Phoenix (-14%). Binghamton (NY), Peoria (IL), and Spartanburg (SC) however, actually showed over 10% price increases, showing that real estate really is local.

Finding Opportunities in Slumping 55+ Communities Market

New home sales fell 8.5% in March, according to the Commerce Department. The vacancy rate for homes is at 2.9%, the highest level recorded since the Census Bureau started keeping track in 1956. Over 18 million U.S. homes were empty in this year’s first quarter. Sound like bad news?

Not everybody thinks so. There are those who believe that the bottom of the real estate market is either here, or will be here soon. The optimists, on whose side Topretirements rests, believe that the mismatch between inventories (still way too high), demand (pathetic), and prices (still too high in spite of very big reductions in some markets) will eventually be resolved and the real estate market will return to equilibrium. The pessimists believe that news like the 32% decline in the median price of existing condos in the Bradenton-Sarasota market from March 2007 to March 2008 will continue well into the future, fueled by factors like baby boomers fleeing the suburbs for low tax sunbelt retirements.

In the meantime for any optimists out there, there are deals to be had. A number of developers are offering incentives, which include: guaranteed buy-backs, help selling your existing home (Erickson Communities), special prices, reduced interest rates (Lennar Corp.), and lots of “frees” (landscaping, granite countertops, finished basements, etc.). Shea Homes says they won’t offer incentives, but will offer lower no-haggle prices (e.,g.; like Saturn automobiles). Sellers of existing homes, faced with pages and pages of competition, know that they have to offer a deal to rise to the point of being noticed, so there are plenty of deals to be had there too. As always, cash buyers who are ready to sign a contract will get a better deal than a window shopping customer who needs a mortgage.

Of course there is always the difference between a come-on and real deal. So if you are tempted by an incentive, analyze it carefully to find out its real benefit (or get your lawyer or financial advisor to help). Go out and visit the property and ask questions of the neighbors and HOA (Home Owners Association). The bold and the brave can easily find deals - if they do their due diligence and are willing to be patient. Then time can tell if their instincts were correct or not.

Charlotte is Sole Market with Higher Prices in January

March 28 — January housing statistics from Case-Shiller were released this week - and the news continues bad for sellers, good for buyers. Of the 20 metro markets that this firm tracks, only 1 metro managed higher real estate prices vs. the year ago period, Charlotte (+1.75%). The 19 others had declining prices, with 10 of them experiencing double digit declines. Las Vegas, Los Angeles, Phoenix and San Diego had the biggest drops (Las Vegas went down over 19%). Overall the 20 city index showed a 10.7% decline in January 2008 vs. Jan. 2007.

Meanwhile industry pundits had plenty of theories about what this all means, and above all, when it will get better. One of the most interesting we read was by Barry Ritholz. His point is that until illogical sellers get the picture that there is too much inventory out there and reduce their prices, the market will be soft.

Another provider of housing data ran into flack this week over the positive way it slanted its reporting of its February numbers. The NAR (National Association of Realtors) chose to highlight sales changes from January to February, instead of the more traditional year to year comparisons (thus eliminating seasonality). The effect was to mask the declines that actually existed year to year - although sales increased 3% from January, they were 24% behind the year ago period.

Other pundits wonder when the market will turn around - can the end of the bad news be near?

Real Estate Really Is Local - Prices up in Half of Markets

February 17 - Sales of existing homes in the 4th quarter of 2007 continued the slide seen earlier in the year. According to the National Association of Realtors sales fell in 45 states; down 21% on a national basis vs. the year ago quarter. The median price declined a record 5.8% in the quarter. Prices increased in about half of the markets surveyed.

Hardest hit were Las Vegas, Jackson (MS), Sacramento, and the Riverside and Orange County areas of southern California. Foreclosures are often cited as the major cause of the declines. But all the news wasn’t bad, showing that real estate is nothing if not local. Bucking the trend with double digit price increases was the Cumberland region in Maryland and nearby West Virginia; Yakima, Washington; and Binghampton, New York. Commentators from these regions cited strong local economies, moderate prices, and a desirable lifestyle as reasons for their relative strength.

Industry experts seem to think that the turnaround will take place in the second half of 2008. All are concerned about the large number of foreclosures, which continues to add inventory to an already over-supplied market. Another problem for people looking for a retirement community is that although they might have the money and the interest in buying into an active adult community, they are having a difficult time selling their existing home in this environment. Several experts were emphatic that “when” (not “if”) the current over-supply gets back to normal, the market will resume its upward march. Late 2008 is seen by many as the beginning of the trend.

Your Topretirements editor just returned from a trip through the south where he observed big differences within local markets. Whereas southern Florida seems to be the home of bad real estate news these days, other parts of Florida are flourishing. Gainesville, for example, seems very strong. On the streets of Tallahassee “For Sale” signs are a distinct rarity, “For Rent” signs are more likely to be seen. Orlando real estate is reportedly strong as well.

Time to Buy Yet?
Ads were seen last week on USA Today from REBAC (The Real Estate BUYER’S AGENT Council of the National Association of REALTORS®), which urged buyers that this is now a great time to buy real estate. They cite lower prices, low interest rates, and plentiful supply as good reasons. And as the NAR numbers reveal, buying in the right market makes all the difference.

Adventures in South Florida Retirement Real Estate - 2008

The real estate market in South Florida, one of the hardest hit regions of the country, affects thousands and thousands or baby boomers who are considering retirement communities there. Your Topretirements editor has been in the Sunshine State for the past several weeks - this report summarizes his microcosmic view of the Florida real estate market.

2005’s Unsustainable Price Increases
The recent history of home prices in this market is very instructive. (Note: all pricing figures are from the National Association of Realtors website). In 2004 the median selling price of a home in 5 of Florida’s major metros (Miami, Fort Myers, Tampa/St.Pete, Sarasota, and Orlando) averaged $212,000. A year later (2005), when speculators were waiting in line to buy condos sight unseen, the selling price for homes in those markets had jumped 35%, to $287,000. In 2006 prices were mixed; prices continued to increase in some markets and declined in others. By the 3rd quarter of 2007 the average selling price had declined to $271,000, still a significant 23% above the group’s 2004 median selling price.

Our conclusion is that - even without the sub-prime financial mess, speculation, or over-building - the price increases experienced in 2005 were unsustainable. When these other factors are added in, it is no surprise that real estate markets are hurting through much of Florida (although prices in Orlando have actually held up quite well).

Observations from a Secret Shopper
While in Florida we have had the opportunity to read about real estate, talk with realtors, and visit many properties for sale. Here are some general observations and tips that we offer for any baby boomer considering retirement here.

- The condo market is moribund. We visited a number of condos projects, both existing and new, with very few signs of life. In some new buildings not a single unit had been sold, even though the project has been on the market for more than a year. It would be very scary to be the first person to buy – but some one has to eventually! In existing buildings the problem is too many units for sale, at 2005 prices. If you are tempted to buy an unusually nice property, you should demand a sizable discount.
- Far too many homes for sale. In Key West, considered to be one of the more stable markets because of its steady tourist business, there are generally at least 2 homes for sale on every block. Many have been on the market a long time, and getting attention from buyers or brokers must be very difficult.
- There seem to be 2 groups of sellers (and this observation seems to be true just about anywhere in the country). The first group is stuck in the mind set of 2005 prices. They put their properties on the market at high prices, and no one is interested. The second group, sellers who know that if they want to sell their property they have to be realistic about their asking price, is in the ascendancy. Their properties are being looked at by buyers, who are making offers.
- In any market this uncertain there have to be some bargains somewhere. Some buyers have to sell. Others want to sell and know they have to be realistic. Anecdotal evidence from agents tells us that offers at 85% to 90% of the asking price have a good chance of success.
- Get a good broker. A poor broker will waste endless amounts of your time showing you only their listings, whether or not they are the best properties for your needs. A good realtor will ask you about your needs and pricing range, and then only show you properties that fit. The broker you want will only show properties that are fairly priced, and that are quality listings. If you feel your broker is wasting your time get another one, there are plenty to choose from.
- Foreclosures and forced sales. If the bank is taking over a property it might be prepared to make a good deal to qualified buyers. If you can pay cash, you are the kind of buyer they want. Ask your realtor to show you (quality) foreclosed properties, or at least explain to you what is involved in buying one
- Coping with the fear issue. If you decide to buy a home in Florida (or most any other state) you have be apprehensive with what you are reading in the news. But there are 3 positive factors to consider: 1) If you buy now you won’t be buying at the top, because prices have definitely fallen back. 2) Experts usually advise buying when fear is at its highest (and fear seems pretty high now!). 3) Many high quality properties are available now, so you are in a rare position to be very selective.

Good luck!

New Year Comes in As Uncertainty Persists in Real Estate Markets

January 2 — The new year might have just rung in, but the news for buyers of retirement real estate is the same - buyers are cautious as inventory piles up, sales slow down drastically, and prices come down only slightly. A dire New Year’s Day front page headline in the Miami Herald screamed about “Home Sales and Prices” being in a “Nosedive”. But aside from the softness in the market for retirement communities, another worry has emerged - unfullfilled promises and communities.

One of the worst things that can happen to spoil an active adult community dream is to have important planned amenities not materialize. For example; a sleek clubhouse, 2nd golf course, or extra swimming pools that are promised - but don’t get built. Unfortunately the list of bad things that can happen doesn’t stop there. A builder may find that it is so strapped for cash it must sell off extra property, and the community loses control over what gets built there. One just has to read the newspapers to find out new problems one hadn’t even thought about.

Making the news in late December in the Maryland Daily Record were the woes of D.R. Horton Inc., which was sued by MTBR LLC for allegedly breaching a 2004 agreement to purchase 3 land parcels. The land was supposed to be part of the Bulle Rock complex near Maryland’s Havre de Grace. D.R. Horton Inc. is the nation’s 4th largest builder and just had its first loss in 15 years. Most of of the affected lots were targeted to be single-family houses.

Back in November a division of Levitt made news when the giant builder laid off more than 200 workers, defaulted on loans, and stopped building. Affected projects include Florida active adult communities such as the Seasons at Tradition (Port St. Lucie), the Cascades development in Sarasota, the Cascades at World Golf Village in St. Augustine. Projects in Georgia, South Carolina, and Tennessee have also been halted. One of the ones in South Carolina is its Murrells Inlet project, Seasons. As detailed in a New York Times article, “With Builder in Bankruptcy, Buyers Are Left Out“, residents of that community are upset by the many unfinished or unbuilt homes, including an unfinished community center.

Obviously, finished and more established communities would appear to be safer from problems with failure to deliver. But ample due diligence is always a good practice even before buying in a completely built out community (see 10 Questions to Ask Before You Buy). Most people rely on their attorneys to do a lot of that work.

Reputable sellers and developers encourage buyers to study all disclosure documents carefully. They have usually put protections, such as bonds and escrow funds, in place to protect buyers. They also want happy buyers, because bad publicity is so damaging and good word of mouth so helpful. Just make sure you take the effort to ask all the right questions - before you sign on the dotted line.

Housing Woes Hit Levitt’s Retirement Community Unit

November 12 — One of America’s household names in construction, Levitt Corp, announced last week that its Levitt & Sons LLC division has filed for Chapter 11 bankruptcy. The division built retirement communities for baby boomers. In making its move the company cited cited “unprecedented conditions in the home-building industry” that were “particularly sudden and steep” in Florida and the Southeast. While the sub-prime catastrophe has been really bad for builders of traditional homes, this is one of the most direct cases that show that the troubles are extending into retirement communities as well.

The Levitt retirement community division has laid off more than 200 workers, defaulted on loans, and has stopped building. Affected projects include Florida active adult communities such as the Seasons at Tradition (Port St. Lucie), the Cascades development in Sarasota, the Cascades at World Golf Village in St. Augustine. Projects in Georgia, South Carolina, and Tennessee have also been halted. One of the ones in South Carolina is its Murrells Inlet project, Seasons. Residents of that community are upset by the many unfinished or unbuilt homes, including a community center that is not complete.

Levitt revolutionized American construction in the unique Long Island “Levittowns” it built on Long Island for returning WW II veterans. The company estimates it has built more than 200,000 homes in the last 78 years. Among the options it is considering is the sale of its remaining assets.