Scott's Sarasota Bay Market Update

The Standard and Poors Case-Shiller Home Pricing Index – A Great Perspective On Home Prices

The S&P Case-Shiller home pricing index (CS) has become the most widely quoted source for home pricing trends.  The index methodology and the actual indices can be found on the S&P website at

http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,1,1,0,0,0,0,0.html

I won’t repeat what you can read in detail on the S&P site, but for now just know that CS is the best resource we have when it comes to tracking changes in home prices across time. The only downside to CS is that it only provides data on 20 markets across the country and a composite national index. While 2 of the markets are in Florida (Tampa and Miami), the Sarasota/Bradenton area is not included in either of these markets. The Tampa index is comprised of data from Hillsborough, Pinellas, Pasco, and Hernando Counties. Dade, Broward, and Palm Beach Counties make up the Miami market. However, there is not that much variation between the 2 Florida markets and the national composite. Price changes in our market have got to be close to these three indices.

Before I start talking about all of the great things you can interpret from the CS index, let me reproduce some of the data from the latest report

December  of Year	Miami Market	Tampa Market	10 Market Composite
1989	78.7	82.0	82.4
1999	99.3	99.7	99.9
2000	108.7	109.8	113.9
2001	123.7	119.9	124.0
2002	141.1	131.8	142.5
2003	162.6	145.3	161.6
2004	201.0	173.7	191.8
2005	264.4	226.2	222.3
2006	280.1	230.4	222.8
2007	231.0	199.7	201.0
2008	165.0	156.0	150.7

 The index is constructed such that January 2000 = 100. So if the index in any particular month is, say, 150, then prices in that month were 50% higher than those recorded in January 2000. An index of 75 means prices in that month were 25% lower than January 2000 or one half the level of the 150 index month.

Now, I will just divide each year’s index by the previous years to arrive at the appreciation (or depreciation) for that year or period. Here’s what I get:

December  of Year	Miami Market	Tampa Market	10 Market Composite
1989	NA	NA	NA
1999 (cumulative rate over prior 10 years)	26%	22%	21%
2000	9%	10%	14%
2001	14%	9%	9%
2002	14%	10%	15%
2003	15%	10%	13%
2004	24%	20%	19%
2005	32%	30%	16%
2006	6%	2%	0%
2007	-18%	-13%	-10%
2008	-29%	-22%	-25%

Let me point out a couple of observations I have on these charts:

• The market peaked in 2006 across all 3 indices. The actual month during 2006 varied slightly across all of the markets (Miami was May, Tampa and the Composite peaked in July).
• Although it is not obvious from the annual chart above, current prices are back to somewhere in mid-2004. That means that most of the people who bought home after mid 2004 would have to take a loss in order to sell their home today. The glass-is-half-full analysis is that everyone who purchased prior to 2004 could still sell for a profit.
• The cumulative appreciation on homes since January 1, 2000 has been somewhere between 50% and 65% (65% for Miami, 56% for Tampa, and 50% for the composite index) – that’s 50% to 65% in nine years.
• The cumulative appreciation on homes during the 1990’s (the 1999 index divided by the 1989 index) ranges between 21% and 26% (26% for Miami, 22% for Tampa, and 21% for the composite index) – that’s 21% to 26% after 10 years. 
• As bad as things seem now, we are still experiencing a rate of home price appreciation at about 2 and a half times the rate as the previous decade. That’s with a terrorist attack, 2 wars, 3 stock market crashes, and what most people consider the near total failure of our financial system. And compared to what most would consider the most prosperous times in our lives – the 1990’s. As I tell customers daily, if we had gotten to today’s prices more directly (without the boom and bust) no seller would be displeased with the price they receive. It’s the path to these prices that has distorted everyone’s perception of value.

Implications for people trying to sell in this market

To make the decade of the 2000’s equal the 1990’s, he indexes would have to drop such that the decade had appreciation of21% to 26%, cumulatively. That means they would all need to come back to the 120 to 126 level by the end of this year. This would represent a one year drop of 24%, 19%, and 17% for Miami, Tampa, and the Composite, respectively. That’s less than last year’s drop. There is no rule that says prices have to drop to that level or that they have to get there next year. The market could dribble down over a couple of years.

If you trying to sell now, just keep in mind that further price drops are not out of the realm of possibility. Although the levels of unsold inventory have dropped, they are still high relative to sales. We could have price declines in the face of inventory declines for the next year just as we had price increases in the face of increasing inventory for the last year of the boom.  Now may the best price the market will give you in the next 3 to 5 years. If the prices do drop another 20% and then start moving up at somewhere near the 2.5% historical rate, then it will take 7 or 8 years just to get back to today’s prices.

Some of my customers say that they will hold on until the market returns. In some cases this can make sense (generally, in cases where you are using the home for something, like a residence or rental property). However, if the home is vacant, this idea will never be a winner. Vacant real estate is just money pit. It will take a once-in-a-lifetime round of appreciation (like we’ve already experienced) to make this pay off.  

To prove it to yourself, try this exercise. Add up all of your costs of owning the property, including the cost of capital (even if you have no mortgage, you could still be earning 1% or 2% on some type of long term, secure investment.) Between insurance, taxes, cost of capital, and maintenance fees if the home is a condo, odds are your costs will be between 6% and 8% of today’s value. Your costs of owning (and these are hard, out-of-pocket costs) are 2 to 3 times the average appreciation rate over the past 20 years. Just to break even you need somewhere between 6% and 8% appreciation next year. Looking at inventory levels, what are the chances of that happening.  If the market drops 5% instead, prices have to increase between 11% and 13% in the next year. You’ll never catch up unless we have another 2004 or 2005.
Just mark the home to the market and sell it.

Implications for buyers

If you read my post on the single family home market in Sarasota, you will see that inventory levels have dropped from about 2700 in January 2008 to about 1600 in December 2008. That’s a 40% drop in inventory and  a 40% drop in selection. I’d be the first to say that today is probably not the bottom of the housing market as far as prices are concerned. But I am convinced that we are getting close. We’ve already established that inventory levels can lead pricing.  Prices can drop while inventory drops (not the normal long-term relationship). By the time prices hit bottom, there will be very little selection. As long as you are buying with a 5-7 year horizon or longer, this could be a historically great time to buy – prices are dropping along with inventory (price’s can’t drop forever if the product is becoming more scarce) and the selection is still great. Start making offers and see if you get something today for prices that will ultimately represent the bottom (while still having the selection available to you).

Sarasota Single Family Residential Market

Sarasota Housing Market – February 2009

Let’s start this analysis by looking at inventory and sales level from the end of the boom and compare things then to the way they are today.

The inventory of unsold single family homes in Sarasota County hit a cycle low of 1601 residences in December 2004. During this month, 594 homes were sold which represented an amazing 37% of the opening inventory.

By the next December, inventory would more than triple to 5,189 unsold residences.  Home sales during the month of December 2005 were just 380 units or about 25% less than the previous year. The 380 unit sales during this month represented only about 7% of the opening inventory.

During the next 4 months inventory would increase nearly 50% more to 7,543 in March 2006.  Unit sales were 467 during March 2006 down from 654 the previous March.

Unsold inventory would hang around the 8,000 unit level for the next 2 years while monthly sales dropped to the 250-350 range.

In April 2008, the inventory of unsold homes dropped below 8000 and continued to drop for the next 9 months. We opened January 2009 with 5,670 residences on the market, just slightly more than we had on hand in December 2005 when prices started to fall - a very positive sign. Unit sales have also come in higher than the previous year every month since March 2008 (nearly 10 months of consistently improving sales). In fact, for the 12 months ended January 2009, unit sales are up over 26% from the previous 12 month period.

What Does All of This Mean?

Sellers want to know when prices and unit sales will return to 2005 levels.   Buyers want to know how much cheaper things will be in 6 months.

Let’s look at this first from the standpoint of sales volume. The chart below shows unit sales by year for all single family properties in Sarasota County over the past 7 years:

Year	Number of Homes Sold
2008	4,842
2007	4,021
2006	4,491
2005	6,392
2004	6,967
2003	6,059
2002	5,397

First, assume that sales from 2002 through 2005 were inflated by speculative fever.  Many homes were sold more than once during this period. It is probably unlikely that we will see high end of this range any time soon. My conclusion here is that the 4842 units that sold in 2008 could be “normal”.  Unit volume may already be back as far as it can get.  I wouldn’t expect too much more in terms of unit sales over the next couple of years.

Inventory

Excess inventory is the problem, not unit sales volume. From 2002 through 2004 unsold inventory levels never increased above 3000 homes. Even though levels are down significantly from the peak, we have nearly twice our historical levels of unsold homes. There are only 2 ways that inventory can leave:

·        Sales

·        Permanently taken off the market (ie sellers realize they can’t get what they need to move to a different home).

I’ve already concluded that sales can’t increase much more. However, sellers will have to be very competitive (i.e. make further price concessions) in pricing due to high inventory levels. While the reductions will be needed just to maintain sales, they will accelerate the rate at which homes are taken off the market. It will also discourage new homes from coming on the market.

The round of price reductions we had in 2008 generated 4800 unit sales which created a net reduction in unsold inventory of nearly 2000 units (sales plus homes taken off the market less new inventory coming on the market). As of January 2009, we had about 5700 unsold homes on the market. If we can repeat the 2008 unit sales volume we might be able to eliminate much of the excess inventory, assuming that the price depreciation slows the pace of new listing and causes more listings to be taken off the market.

 So, if you are a seller, I’d say look for another year of no more than the same unit volume and more price depreciation. If you are a buyer, yes prices will most likely be less at the end of the year, but selection is narrowing daily. You may be able to pick up a very low priced home by the end of 2009, but you most likely will not have a vast array of choices.

In the upcoming posts I want to talk about prices, in particular how to best measure the county-wide appreciation. I also want to look at different parts of the market, price point in particular to see if any one pocket is in better or worse shape than others.

Sarasota County Condo Update

Sarasota Condo Market Update

With the real estate market, much like the market for anything really, the relationship between supply and demand will tell you everything you need to know about the condition of the market.  When the supply of unsold homes exceeds the past 12 months of sales, prices are going to be falling, time on market will grow, and the housing market will be a topic of conversation at every cocktail party.

Across all of Sarasota County, there are 2,588 condos currently listed for sale in MLS. Over the past 12 months, only 1,205 have sold. We have over a 2 year supply of unsold condos.  The best way to put things into perspective and answer the question on everyone’s mind (when will the market turn around) is to compare sales and inventory levels as of today with the levels a couple of years ago when the market was hot. The two charts below help with this comparison.

The first chart shows our current situation. We ended 2008 with 2,588 condos on the market, down from the cycle high of 3,098 condos in February 2008. Monthly sales during 2008 ranged from 115 to 76. During 2008, we sold between 2% and 4% of our available inventory each month. Now compare 2008 to 2004. December of 2004 was the beginning of the end. After 12/2004, inventory increased virtually every month for the next 3 years. Interestingly, prices increased during the first 12 months of inventory building

   

 

Looking at these charts then it seems fairly obvious that one of two things has to happen with inventory and sales levels to get us back to an appreciating market.  Either much of our inventory has to vanish or sales must increase significantly. To get to the same sales to inventory ratio that we had at the end of 2004 (during 2004 the median sale price of a Sarasota condo increased 11%) inventory levels would have to drop to the 500 to 600 unit range or with no change in inventory, sales would have to grow to around 500 units per month.  That is, inventory must drop about 80% or sales must increase 5 fold (or double what I’m sure was our previously largest year). Neither of these looks particularly likely to occur during the next 12 months.

Additionally, prices tend to lag inventory changes by nearly a year. Recall that prices continued to increase during most of 2005 while inventory levels grew. I would bet that the same thing will happen on the downside as well. As inventory levels start to fall, prices will continue their downward trend during the first year of inventory reduction.

Implications for sellers

Aside from the information I just presented, there are a couple of other things you should know:

·         There are plenty of buyers looking for property right now.

·         There are very few dumb buyers looking for property right now. Everybody can go online and see the other listings in your building, when the last sale was, the sale prices and dates of every unit in your building, what your mortgage, if any is, etc.

·         Your asking price will have very little to do with your sale price. The only thing that an inflated asking price does is to discourage showings. Fewer showings mean fewer (or no) offers. No offers mean longer marketing time. Longer marketing time in a depreciating market means a lower sale price. Asking more than you know your home is worth ensures that you will get a lower sales price and incur more holding costs.

·         Pricing your home at the market is not “giving your home away”. It is the logical thing to do. An empty condo costs a fortune to own. Taxes and maintenance fees are going to be in the 3% to 4% of value range each year. If you add another 3% or 4% for interest rates (either actual expense on your mortgage or lost interest income on your equity), then you are betting 6% to 8% every year that the market will be better the following year. Just to break even on holding costs, your condo would have to increase 6% to 8% every year. If prices don’t change at all next year, then you’re betting on 12% to 16% appreciation the following year to break even. If you can look at the charts above and see how this could possibly happen, please call me immediately. I must be missing something big.

·         Selling your condo in today’s market will still give you a positive return when compared to 2002 prices. In fact, the annualized gain you’ve earned since 2002 will, in most cases, be the same or better than condos earned during the last 25 years of the 20^th Century. If the events (market ups and downs) between 2003 and 2008 had never occurred, no one would be upset with condo prices today.

The logical conclusion here is to price your home at the price of the last few sales. If you do this, you will probably be the next residence to sell in your building and, because all of the buyers are educated, that’s all that anyone will pay you anyway.

Implication for Buyers

Whether or not buying is a good idea right now depends on your horizon. If you plan to live in or use the condo for the next 5 to 10 years, then start looking. If there is a chance that you might have to sell the place in less than 5 years, then be careful. Buying a condo is more than just a financial investment. Real estate is not fungible. As prices start to bottom inventory levels will start to dry up. Even if you could determine that prices were at the bottom, you would have a fraction of the selection that is now available. Inventory levels have already fallen about 17% from their high. And believe me, it's not the least desirable places that are selling. Savy buyers are using the market to pick of the most choice pieces first - places they could not afford or that simply were not available 4 years ago.  If you get the place that you've always wanted, who cares if prices fall another some more during the first few years that you owned it. You'll have the retirement home that you have always dreamed of owning. When it comes time to sell in 10 years or so, you won't even remember the market of 2009.

Sales History for Downtown Condos is Published

I just added a page that details a sales history of most of the downtown Sarasota condos. As you review the sales history, please keep the following points in mind:

• Many of the downtown condos were constructed in the past 5 years. Even though many of the condos may have closed on the same day, prices could have been negotiated over a period of years. In other words, sales that took place in 2008 (at the current market low point) could have been negotiated during the early parts of 2006 (the market high point). For any given building, this could give the appearance that prices are appreciating or holding up better than another building.
• In condos, the floor number and view are everything. For any given building view and floor are the largest determinant of value. If you are using the sales prices in these reports to determine a market price for your condo or to help you value a possible purchase, you will need to find comps with views and floor levels similar to yours.

Update on West of Trail Analysis

Just one more thing the pricing comments from the last post. So far this year there have been 15 sales where the seller originally purchased the home in 2003 or 2004. Of these sales, 8 sold for more than the previous sales price and 7 sold for losses. For all sales this year where the seller purchased before 2003, all sold for more than the previous sales price.

This says that if you bought your home during or before 2002, you should be able to sell it in todays market for more than your purchase price. If you bought the home in 2003 or 2004, you have about a 50/50 chance of breaking even.

West of the Trail Market Analysis

Please read the page "****What you Will Find on this Site" (link near top of right margin) before reading this post.

All information analyzed in this posts relates to single family homes located in the area West of US 41, south of Mound Street, and north of Siesta Drive. All sales information, including price, square footage, date of sale, and year built come from First American Real Estate Solutions, Inc. Inventory levels come from Trendgraphics.

Inventory Levels

Nothing tells you the state of the market like inventory levels and their trend. Like any other product or commodity, real estate is not immune to the laws of supply and demand.  When inventory is high relative to sales, buyers will have the upper hand putting pressure on prices. As prices fall, more buyers will enter the market reducing inventory levels, until we reach some sort of equilibrium.

As the chart below shows inventory levels are falling, but the absolute levels relative to sales are still high. We still have nearly two years of inventory on the market based on the pace of sales in the past 6 months. Prices may not have reached the bottom, but if you consider the problem to be too much inventory (with prices simply being a result of the problem), the problem is not as bad as it was six months ago.

 

Sales Volume and Pricing

The chart below summarizes the past 7 years of sales volume and pricing in the area.

	West Of Trail
Year	SPSF	# Trans	% of High	% CH
2001	156	118	39%	NA
2002	196	135	49%	25%
2003	218	150	55%	11%
2004	238	191	60%	9%
2005	337	135	85%	42%
2006	399	72	100%	18%
2007	333	60	83%	-17%
2008 (9/30)	285	48	71%	-14%

Source: First American Real Estate Solutions

The first observation that I would make is about sales volume. The unit sales that occurred between 2003 and 2005 were most likely inflated because of the boom that occurred during that period. My guess is that the 2001 volume is much closer to the normal volume that we should expect going forward. If that's the case, we should sell about half a "normal" year this year, making it 3 successive years where we haven't hit the 2001 levels.

The next observation is on prices. As I discuss in the "What you will find on this site" page referenced at the beginning of this post, I use the average sales per square foot statistic to evaluate prices. I will admit that it is a poor way to value any single home, but I think that this statistic is a reasonable measure of pricing activity in the area. In other words, my focus is more on how the statistic changes than the actual value.

The right most column shows that annual increase in the SPSF statistic. It may not exactly agree with the county totals for each year, but we are only talking about a small subset of the homes in the county. The size and direction of the changes certainly look reasonable.

The column immediately to the left of the annual change column shows the SPSF statistic for that year as a percent of the statistic for 2006 (the high point of the boom). I added this column for those morbid people that always ask how far we've dropped since the high. I'm saying roughly 29% for this area.

More interesting, though are the average compound growth rates which are not shown on the chart. The current value of the SPSF stat ($285) represents a average annual 9% growth rate (ie increase in prices) since 2001. In other words, prices had increased at 9% per year every year since 2001 instead of taking us on this wild ride, homes would be selling for the same prices as they are today. For real estate, 9% per year appreciation is a phenomenal (most experts would say unsustainable) growth rate. Even from the levels in 2004 ($238) today's price of $285 represents 4.6% per year annual increase - not phenomenal, but probably close to the long term average appreciation rate for real estate.