Monday, March 07, 2005

Soaring home prices boost gains, worries

By ROBERT TRIGAUX, Times Business Columnist

Location. Location. Location.

With this state a people magnet, the still-good news is Florida ranked fifth nationally in housing appreciation in 2004. That's behind just three far-western states and the government-bolstered housing market in the District of Columbia.

Florida housing prices rose 18.79 percent last year, and 3.77 percent in the fourth quarter of 2004. Those numbers may pale next to modestly populated No. 1 Nevada, where housing price zoomed 32.38 percent last year. But contrast Florida to its southeastern neighbors. Georgia housing prices bumped up a mere 5.22 percent in 2004. Alabama, South Carolina and even North Carolina housing all appreciated at less than a third that of Florida homes.

Before Florida homeowners start calculating their increases in paper wealth, just remember that runaway housing prices can cause as much pain as gain to the state economy.

While Florida still tries to sell itself as a low-cost place to do business, that message is getting muddy as housing prices soar. Rising house values do enrich homeowners and grease the home-equity lending business. But higher prices stress many younger home buyers - gee, the same young workers we're so eager to attract and keep - who must stretch further to afford even a basic place to live.

And as Florida house prices rise at a double-digit clip, Florida wages are not even remotely keeping pace.

The average weekly wage in Pinellas County is about $650 a week, about $700 a week in Hillsborough and about $565 in Pasco. These days, wages are increasing barely enough to cover inflation. That makes it tough for many already here to go shopping for single-family homes that routinely top $200,000.

Florida housing prices are up for good reasons. As folks sell their homes in northern markets - many of which have appreciated dramatically over the past decade or more - they are pouring into the state loaded with cash from their home equity. A home that sold for $400,000 or more up north may cost only $300,000 here, so many newcomers are not sensitive to paying a few extra bucks in such a bargain market.

Area home builders will hasten to add that available land is difficult to find and increasingly expensive to buy. Those costs, too, get passed along in higher housing prices.

And do not forget the increasingly weak U.S. dollar. It is turning overseas tourists in Florida into real estate investors armed, in effect, with up to a 20 percent shopping discount.

After all, what's a little housing arbitrage among friends?

Still, Florida's affordability issue is starting to be noticed. In the annual St. Petersburg Times survey of 180 area business managers, conducted in January, 6 percent of those polled said "housing prices" was their "most pressing" concern.

That's not a big percentage. The fact, however, that it was a top worry of anyone here suggests a tremble in a Florida economy historically built on cheap and seemingly endless housing.

Within Florida, the Tampa Bay housing market continues to appreciate at a strong clip. Area housing prices rose 16.83 percent in 2004 - which, you might notice, is lower than the statewide average, according to data from the government's Office of Federal Housing Enterprise Oversight.

Compared with Tampa Bay, 11 other mid-to-large-size Florida metro markets reported higher housing appreciation rates last year. Eight of those 11 were smaller metro areas.

Among the big metro areas in the state, West Palm Beach, Fort Lauderdale and the Miami area recorded higher housing appreciation rates than this area in 2004. Orlando and Jacksonville recorded slightly lower rates. All major Florida markets were still well above the national average of housing appreciation last year of 11.17 percent.

Wow. Sixteen paragraphs on real estate and not one mention of bubble.

Are we in a real estate bubble? Not here.

Market experts look for at least another year of double-digit appreciation. Most of the credit must go to mortgage rates that remain stubbornly below 6 percent - lower than the 6.5 to 7 percent range Federal Reserve chairman Alan Greenspan and his merry team of interest-rate hikers would like.

There are some red flags to watch:

* More people are speculating in real estate as an alternative to the stock market. A new National Association of Realtors study shows that nearly one in four of all homes purchased in 2004 was for investment. Another 13 percent were vacation homes.

In addition, a record 2.82-million second homes were sold in 2004, up 16.3 percent from 2003. The investment home component rose 14.4 percent to 1.8-million sales in 2004 from 1.57-million in 2003. Vacation home sales rose 19.8 percent in 2004.

The typical vacation home buyer is 55 years old and earned $71,000 in 2003. Investment property buyers had a median age of 47 and earned $85,700, the study found.

"We've seen a shift over the last few years with a growing number of second-home buyers purchasing primarily for investment," NAR chief economist David Lereah says.

* Increasingly, an investment practice known as "flipping" is used to buy and sell distressed or undervalued property, often without any renovations. The boom in condominiums has accelerated this trend to the point where condos are sometimes bought and sold for profits, multiple times, even before they are built. That's happening more often in the Tampa Bay area, a trend that has been honed to perfection in the condo-canyon-crazy scene of South Florida.

According to the San Francisco mortgage data company LoanPerformance Inc., about 8.5 percent of mortgages nationwide in the first 11 months of 2004 were taken out by people who did not plan to live in the houses themselves. That's up from 5.8 percent in 2000.

* Waterfront property remains a high-price obsession. A recent Wall Street Journal real estate analysis of home price changes in 1,200 zip codes found that "waterfront access was the feature many of our fastest-appreciating towns shared."

One such town mentioned in that analysis is St. Pete Beach, where housing prices (median price: $410,000) soared 22.7 percent last year and doubled in the past five years. The town, described by the Wall Street Journal as "once a sleepy retirement mecca and vacation retreat for the likes of Clarence Darrow and Al Capone," now is awash in new condo projects with starting prices of $700,000.

* Rising interest rates are coming. Yes, mortgage rates have stubbornly refused to break the 6 percent barrier. But that day is coming. The curve ball is that houses bought by investors often are paid for with adjustable rate mortgages because ARM rates start low and investors assume they will sell their properties before rates adjust upward too much.

That makes for an interesting bet. It assumes interest rates will not rise rapidly, but that housing appreciation will. If that does not happen? According to the Mortgage Bankers Association, one third of all home mortgages are now adjustable, meaning the carrying costs of investment homes that are not selling could get expensive in a hurry.

The latest numbers from the Office of Federal Housing Enterprise Oversight show a steep slowdown in quarterly house price increases in the fourth quarter of last year, slipping to 1.69 percent from 4.79 percent in the third quarter.

The bottom line is: Don't hold your breath waiting for a local bubble to burst. Too many darn people keep wanting to move to Florida.

The giddy appreciation days, though, are slowly nearing an end. I like the way Morgan Stanley's chief U.S. economist Richard Berner puts it. Home prices are likely "to rust, not bust."


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