Scott's Sarasota Bay Market Update

Condo Sales Poised for a Big Break Out?

If you look at the 6 month rolling sales charts of Sarasota and Manatee County, you will notice that the peaks in the charts are all in the late summer (July or August). I have reproduced the Sarasota chart below but you can see both charts in the Data Library. This trend is caused by the way the chart is constructed and by our seasonal traffic pattern. The six months ended in July, includes all of the sales made during our winter (tourist) season and is usually about 40% larger than the sales in the second half of the year.

 

But look at the overall pattern of the chart. First look at the July 2007 peak. The sales during this period were inflated by the closing (sales) of a couple of large downtown buildings. Although all of the sales closed and were booked in the first half of 2007, they represented contracts that were signed over the past couple of years. The sales do not represent true demand during that 6 month period.  You can look at the Downtown Sarasota sales chart in the Data Library to see the magnitude of the distortion. These closings inflated the period’s sales by over 250 units.

Without these closings, sales at the 2007 peak would have been closer to 600 units, below the subsequent peak in July 2008 (which was 692). The most recent peak in July 2009 was 832 unit sales (Again, these are rolling 6 month figures, so the sales figures quoted are for the 6 months ended on July 31^st.) This gives us 3 seasons of progressively higher demand.

But the most exciting part of the chart is the activity after July 2009. Instead of falling off during the trough period of July through December, sales have remained steady. In fact, the trough month is January and sales in this perid are usually about 70% of the previous peak. For January 2009, the rolling 6 month sales figure is about the same as the previous peak (823 in January vs 832 in July). If we move up the usual 40% from here, the 6 month sales figure at the 2010 peak could break 1200 units (back to 2005 levels). If inventory levels stay the same (and they have been flat or decreasing every month since June 2007) the condo absorption rate could drop to under a year.

 Another good piece of news is that these condo sales have not been driven by foreclosures. Bank owned sales for the past 6 months have only accounted for 71 of the 823 sales or about 8.5%. So, if there is a wave of foreclosures in condo inventory, they should all be devoured in short order given the short absorption period for foreclosures (See my post on Foreclosure Overhang for more info on this.).

21% of Homeowners Are Underwater – A Silver Lining In Disguise

Zillow reported this month that 21% of homeowners have mortgage balances in excess of their market values. This was widely cited as another spike in the coffin of the real estate market.  I suppose it’s true that homeowners in this position are more prone to foreclosure and loan default than homeowners with positive equity.  If you get into financial difficulty, you can’t sell your house to get out of trouble without paying out cash at closing (which you presumably don’t have if you are having financial difficulties).  Refinancing is creates the same problem – you can’t refinance your home for the existing mortgage amount because the home will not appraise for the loan amount.

However, the foreclosure rate is tiny – only .1 of 1% of all homes nationally faced foreclosure in 2009. If they all came from this underwater group, then only .5% of the group gets foreclosed every year.  I think the negative effects of foreclosures are more than offset by something even more powerful.

I think a larger impact and certainly a more positive one is that this underwater situation will keep a huge chunk of the national real estate supply off the market for years. Clearly, most of the people in this group are capable of making their mortgage payments and have no intention of losing their home to foreclosure.  But many will be unable or unwilling to sell their home due to the large cash requirement to do so.

The impact will likely be the long-term removal of homes from the market and stable prices. It is already happening (the inventory removal anyway). The huge drop in inventory since 2007 is mostly due to people taking homes off the market.

Foreclosure Overhang

There has been much discussion in the media about the next round of foreclosures and how this round will continue to inflate inventory and drive prices down.  Let’s see how that might affect Sarasota and Manatee markets.

First, The Bad News - Default Rates, Unemployment, and the Direction of Foreclosures

The first question in examining this idea would be the likelihood that foreclosures will increase. On a national basis, I think the answer is yes. Look at this chart created from data found at the Federal Reserve website http://www.federalreserve.gov/releases/chargeoff/delallsa.htm).

 

 
The chart shows the default rate (number of loans that are more than 30 days past due) on the country’s $12 trillion of residential mortgages. As of the end of Q3 2009, the rate was just under 10%. As the chart shows this is a decade long high by a multiple of 4 or 5.  In fact, it is a generational high – 10% is the highest in the 25 years of data provided by the Fed. The previous high was 7.4% set in 1991.

Not only is the absolute rate high, but is increasing sharply.  The default rate this time last year was 5.3%. The rate has almost doubled over the past 12 months. It is hard to believe that the pace of foreclosures is going to do anything but increase in the face of our rapidly increasing default rate.

If unemployment is a leading indicator for default rates, the next chart will not provide you with much comfort either. Unemployment nationally is now over 10% and in the Sarasota/Manatee SMA, it’s over 12%.  Although the UE rate nationally did back off to 9.3% in January, it looks to me like the damage is done – next year is bound to be big foreclosure fest. Having said this, I’m not so sure that our housing market, especially the luxury market, is that dependant on employment. Many of these home owners are retired. A high unemployment rate is not going to cause the average luxury home owner to default.

 

 

The Good News:  Absorption Rates – Foreclosed homes sell 7 times faster than other homes

The absorption rate is a measure of how fast inventory is selling. It is calculated by dividing the current inventory by average monthly sales. It tells you the number of months required to sell the existing inventory at the current rate of sales. The higher the rate, the slower inventory is selling. The next chart shows that the rate of sales on bank-owned inventory is much faster (7 to 8 times faster than other inventory).  A six month absorption rate is a stable market.  Absorption rates near or around 2 months are extremely fast.

	Sarasota County	Manatee County
Total Foreclosures 2009 per RealtyTrac.com	1545	1076
Total Bank Owned  Sales in 2009 per MFR MLS	1766	1139
Total Bank Owned Listings as of 02/04/2010 on the Market per MFR MLS	235	188
Absorption Rates Bank Owned	1.6 months	2.1 months
Absorption Rates – all other	12.8 months	15 months

 

Right now foreclosure inventory is only about 3% of total inventory. Even if the rate of foreclosures doubled and the pace of bank owned sales remained the same (causing inventory to double), total inventory would only increase 3%. Not a huge increase.

 Foreclosure sale prices and the impact on appraisals and market value

By most estimates, foreclosed properties sell for 10% to 15% under market value. If you look at the rate of sales above, it is clear that foreclosure inventory is priced better (or at least perceived to be priced better) than non-foreclosure inventory. Pricing is the only thing that could really explain the short absorption periods.  Last year foreclosure sales were 20% of the market. So if 20% of sales occurred at 15% below market, foreclosures created a 3% drag on average prices (.2*.15). If foreclosure sales double to 40% of the market, they should create a 6% drag on prices (.4*.15).  So if prices would otherwise be flat with no foreclosures, with 40% of sales being foreclosures, prices should drop 6% on average -not the end of world considering where we’ve been.

Of course everything about real estate is local. If your home is in a neighborhood of high foreclosures (where all comparable sales are foreclosures), you home is likely to fall more in value than an area with little to no foreclosure activity.

Unsold Single Family Inventory Graphs - Areas within Sarasota and Manatee Counties

The following graphs show levels of unsold single family homes over time by month and location. The soruce of the data is Trendgraphix and the My Florida Regional MLS for the period and location indicated. Double click on any chart to see it full screen.

All Sarasota County Inventory of unsold Homes

 

All Manatee County Inventory of Unsold Homes

 

 All West of the Trail inventory of unsold homes. West of the Trail includes the area west of Tamiami Trail between Mound and Bay Road.

  


 

All Longboat Key inventory of unsold homes, including Bay Iles and Longbeach Village

 

Lakewood Ranch inventory of unsold homes

 


All Anna Maria Island inventory of unsold homes

 

All West Bradenton Inventory of Unsold Homes

 

Data Library Update

All sales transactions are posted for all sales recorded through the end of January 2010.

Data Library Is Updated For All Sales Through 2009

The sales history files for single family homes and condos are all updated for transactions recorded through December 31, 2009.

Volume of Sarasota Single Family Home Sales Continues to Increase

Single family home sales for the six months ended totaled 2,761 homes (Trendgraphix: All Sarasota County for six months ended November 30, 2009). That is about 13% increase in unit sales over  the same 6 month period in 2008.

Levels of Unsold Home Inventory in Sarasota and Bradenton Remain Low

The levels of unsold single family homes in Sarasota inched up slightly at the end of November but remained more than 50% off the peak established in early 2008. Across the county, inventory is back to late 2005 levels. The same is true for Manatee County.

Unsold condominium inventory in both counties was also essentially flat with the previous month but still down nearly 40% and 55% from the early 2007 highs in Sarasota County and Manatee County, respectively. Condominium inventory for both counties is back to late 2005/early 2006 levels.

On a neighborhood –by- neighborhood basis, the some of the declines are even more severe, as the chart below shows:

	Inventory @
Area	12/1/2009	Peak	Month of inventory Peak	% Decline
SINGLE FAMILY HOMES
ZIP 34202 (mostly Lakewood Ranch)	285	1283	Mar-07	-78%
West of Trail (Mound to Bay Road)	87	184	Apr-07	-53%
Longboat Key	155	305	Mar-07	-49%
Anna Maria Island	225	449	Feb-07	-50%
CONDOMINIUMS
ZIP 34202 (mostly Lakewood Ranch)	64	447	Nov-06	-86%
ZIP 34236 (downtown Sarasota plus Lido/St. Armands)	400	706	Apr-07	-43%
Longboat Key	392	548	Feb-07	-28%
Anna Maria Island	177	433	Feb-07	-59%
West Manatee County	396	706	Mar-07	-44%
Source of data is Trendgraphics for the dates and areas indicated

If this trend continues or if inventory just holds at these levels, prices have got to start firming up. The big fear is that another round of foreclosures will rain on the parade.  What happens with foreclosures is the big wild card.

According to the Federal Reserve website, 9.8% (Q3 2009 data) of all residential mortgages are in default. That’s up from 5.3% for the same quarter in 2008. According to the Center for Responsible Lending, there were 2,400,000 foreclosures in 2009. With delinquency rate nearly twice last year’s rate, what will 2009 foreclosures be? And Florida is the undisputed leader in foreclosures. More on all of this in later posts.

Top 7 Ways Home Buyers Find Homes

Each year, the National Association of Realtors performs a study of home buying and selling habits. The NAR surveys of over 100,000 home buyers and home sellers across the country about their home buying/selling experience. The survey results are tabulated, summarized, and published each November in the NAR’s “Profile of Home Buyers and Sellers”.

 

While there are literally hundreds of survey questions summarized as part of the study, one question stands as the most informative. When it comes to marketing homes, this question is all that you need to know. Asked to home buyers, the question is:

 

How did you first learn that the home you purchased (in 2008) was on the market?

 

Here are the results:

 

My Real estate agent told me about the home    34%

I found the home on the internet     32%

I saw the “for sale” yard sign 15%

Friend, relative, neighbor or otherwise knew seller       9%

Learned of the home from the home builder     7%

Print Newspaper     3%

Other printed ad (home and land guide, etc)   1%

 

* Results total 101% due to rounding    

 

If you look at the results from the standpoint of someone trying to sell an existing home (ie not new construction being sold by a builder), then the internet accounts for over a third of the prospects. Further assume that you have exhausted your list of friends, relatives, and neighbors – now the internet accounts for 38% of all prospects. If, in addition to the previous 2 assumptions, you live in a condominium or an HOA that does not allow signs, the number jumps to 46% of all prospects.

 

The data show why having a comprehensive internet strategy is necessary to sell a home at the best price in today’s market. It is especially true of most condominiums and some HOA’s where signage is prohibited. It also shows that most of the seemingly proactive and outbound marketing (push) techniques (like print advertising, open houses, and TV) are a waste of time and money. More on these differences later and why inbound marketing works so much better (today anyway).

Case - Shiller December Release (for October Results)- Miami drops a little/Tampa takes a dive

The Case-Shiller indices were released earlier this week. The results were not good. The Tampa Index dropped from 142.57 in September to 140.27 October - a 1.6% drop in just one month. The Tampa Index has now given up all gains it made this year and is again at a post-bust low.

The Miami index faired better, showing a minor loss from 149.69 in Sepember to 149.09 in October.

The national market composite indices were essentially flat.