Sunday, November 19, 2006

Real Estate Market Woes

My previous post started me thinking about the real estate market, or housing market as the economists call it.

One reason the housing market is down is that it is comatose in Florida. A decade of rampant speculation and condo-building is coming to an end. Deals are falling through, and people who thought they sold real estate to builders 3 years ago find the banks have pulled funding, and the deal collapsed

There are two major reasons for this: insurance and property taxes. Both are getting expensive in FL. It can be 300 or 400 dollars per month for housing insurance that includes hurricane coverage. (And if you want a loan on a property the banks insist in hurricane and flood coverage.)

Then there is overbuilding. There are something like 10 thousand condos for sale in the greater Tampa Bay area right now - the result of speculating and, as Alan Greenspan would say, "irrational exuberance" of the developers. There are not 10,000 buyers for those condos. Results: no new buildings are going up, since the banks and the developers are holding the just finished properties. The way it worked in Florida 10 years ago was, a developer would offer condos in a new development at "pre-construction prices." You would put 5 or 10 grand down, in some cases more, and not have to come up with a mortgage for 3 years. In that time, you would have been able to sell your condo for a tidy profit without every having to get a loan. You could take your initial deposit, go down the street to the next new development and do it all again. That isn't working anymore. While some people are getting loans, a lot of speculators are chalking it up to the risks of doing business, leaving the developer (and the bank) with a lot of unexpectedly unsold condos.

Prices are going down a little - though there is evidence that they are stabilizing now, but the big impact is the complete halt to residential building - at least of condos.

In terms of property taxes, Florida has expensive property taxes. There is a "homestead exemption" for residents on your primary residence that keeps the taxes stable. For 2nd homes and vacation homes there is no exemption and the taxes go up every year. In some case they go up a lot. Businesses also get hit with yearly increases.

Between the taxes and insurance, a lot of snow birds are deciding that they don't have to fly all the way to Florida in winter. (This is a good thing from my point-of-view.)

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