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.