Is It Over Yet?
May 18, 2007 5:10 pmFiled in Real Estate It’s been a tough 18 months for residential real estate and it’s not over yet. There has been much speculation about how we came to be in the current market slump. If you listen to the media it’s easy to believe that capitalism is broken and the end is near.
I don’t agree. As I see it this is Economics 101—short supply and high demand for developed real estate drove prices to a crescendo that began in 2004 and continued through the first half of 2005. Prices overshot the market causing demand to all but disappear. As demand waned, supply (still drunk from the party and always slow to react) continued to build in an attempt to capture yesterday’s demand.
As a result, we’re now in an over-supply situation. None of this is particularly surprising to anyone who has taken 9th-grade economics.
What is interesting is the root cause for this latest market swing and it’s implications for real estate and other asset markets.
The cause of the 2004-2005 hyper-inflation in real estate is the glut of cash in the world economy. Economics and human nature demand that the cash be put to productive use. As a result it has flowed from one asset type to another for the last decade.
The cash glut is responsible for hyper-inflation in the equity markets during the mid to late 1990s. During that period the Dow Jones Industrial Average rose at an annualized rate of 41%. The NASDAQ rose at an incredible 44% annualized rate and the S & P 500 Index rose at a rate of 41%.
In 2001 the Dot Com bubble burst, values declined and cash looked for another vehicle for investment.
By 2004 it found real estate. Now that real estate has temporarily stopped producing large returns, where will the world’s cash be put to work? That’s the next opportunity.
As for Florida real estate, it has enjoyed a tremendous 100-year ride and it will be back—soon. But not until we finish the price correction we’re in now.
The charts above show the annual median home price for 1994-2006 in six markets:
- Ft. Lauderdale
- West Palm Beach
- Orlando
- Jacksonville
- Tallahassee
- Fort Walton Beach
The blue bars indicate median home prices while the red line represents the long-term national average for home appreciation of 7 percent. With the exception of Ft. Lauderdale, which grew at an annual rate of about 7 percent, all of the markets grew at a slower pace than the national average during the period from 1994-2002.
The south and central Florida markets of Ft. Lauderdale, West Palm Beach and Orlando jumped far above the average growth line in 2004-2005 and remained high despite some signs of declining prices in 2006. In these markets, there’s more pain to come in 2007.
By contrast, the north Florida markets did not see the type of price spikes experienced in the southern markets. As a result those markets will see modest price adjustments as opposed to the 20 to 30 percent drops already experienced in Ft. Lauderdale and West Palm Beach. I expect the north Florida markets to return to growth before south and central Florida.
It’s not over yet, but we’re getting closer every day.
