Another Real Estate Bubble Ahead?

Posted by Marc Rasmussen on Wednesday, November 28th, 2012 at 3:00pm.

I was at a Realtor social last night. This is where people in the industry get together once a month to mingle, network, let off some steam and tell stories about working in the real estate trenches. An interesting topic of conversation was the similarities between our current market and the one we experienced from 2003 to 2005. You remember. The one where everyone became a real estate expert overnight. Where you couldn't get hurt because prices rarely if ever go down. This was the bubble market that nearly caused a financial meltdown in 2008. 

Realtors are comparing the two markets because they feel the same. Inventories are down, sales are up. Buyers are having a hard time finding a property and when the do they might have to compete for it. Home builders are buying land and cranking out houses. The "WE BUY HOMES" signs are popping up on many street corners. I am starting to receive "We would like to buy your home" letters in the mail. So, I thought it might be interesting to compare the two markets. 

2003-2005 Sarasota Real Estate

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Here is the craziness from 2003 to 2005. Sales were huge while inventories were low. Lines of buyers would form outside of new construction projects to get a piece of the action. You can find the raw sales numbers below. All of this data is pulled from the MyFloridaMLS system. 

Date 8/03 11/03 2/04 5/04 7/04 9/04 12/04 3/05 6/05 8/05
For Sale 4144 4288 4364 3418 3122 2943 2879 3543 3957 4704
New Listing 876 915 1063 787 726 645 692 1092 1215 1561
Sold 809 662 715 1008 917 782 885 990 996 844
Pended 752 741 935 1002 877 659 801 1025 898 837
Months of Inventory (Closed Sales) 5.1 6.5 6.1 3.4 3.4 3.8 3.3 3.6 4 5.6
Months of Inventory (Pended Sales) 5.5 5.8 4.7 3.4 3.6 4.5 3.6 3.5 4.4 5.6
Absorption Rate (Closed Sales) % 19.5 15.4 16.4 29.5 29.4 26.6 30.7 27.9 25.2 17.9
Absorption Rate (Pended Sales) % 18.1 17.3 21.4 29.3 28.1 22.4 27.8 28.9 22.7 17.8
Avg. Active Price 672 690 745 840 907 940 1006 976 921 847
Avg. Sold Price 299 299 339 396 340 370 378 460 480 488
Avg. Sq. Ft. Price 176 174 202 226 196 212 218 261 273 283
Sold/List Diff. % 95 94 96 95 96 96 97 97 96 96
Sold/Orig LP Diff. % 93 93 94 93 95 94 96 96 95 96
Days on Market 82 92 85 83 69 75 65 60 61 63
Median 193 190 200 241 230 240 262 289 320 300

During this time period inventories were as low as 2,879 in December 2004 and the highest was 4,704 in August of 2005 and ultimately to over 13,000 in 2007. 

Fast Forward to 2011-2012

 

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The chart above represents our real estate data for the last 2 years. Inventories have dropped substantially from around 7,000 to October numbers of 3,771. Below are the raw numbers for October 2011 to October 2012. Even though inventories are lower at 3,771 they are still 892 properties higher than the low period of December 2004. The number of pending and sold properties between the two time periods seems to be pretty similar. 

Date 10/10 1/11 4/11 7/11 10/11 1/12 4/12 7/12 10/12
For Sale 6959 6836 6046 5166 5040 5269 4427 3811 3771
New Listing 1219 1442 1137 923 1173 1467 1089 950 1221
Sold 582 654 937 722 700 671 1085 800 788
Pended 767 991 1005 743 827 1090 1103 870 1100
Months of Inventory (Closed Sales) 12 10.5 6.5 7.2 7.2 7.9 4.1 4.8 4.8
Months of Inventory (Pended Sales) 9.1 6.9 6 7 6.1 4.8 4 4.4 3.4
Absorption Rate (Closed Sales) % 8.4 9.6 15.5 14 13.9 12.7 24.5 21 20.9
Absorption Rate (Pended Sales) % 11 14.5 16.6 14.4 16.4 20.7 24.9 22.8 29.2
Avg. Active Price 472 481 509 504 502 527 572 556 561
Avg. Sold Price 205 209 251 258 224 216 263 246 264
Avg. Sq. Ft. Price 123 126 148 147 133 135 158 142 152
Sold/List Diff. % 91 92 90 89 91 93 91 93 92
Sold/Orig LP Diff. % 81 80 83 77 82 86 87 87 87
Days on Market 104 121 121 122 121 106 112 98 91
Median 130 125 136 140 122 125 145 150 160

Interesting observation - Notice the average sold price at the beginning of the bull market in 2003. It was $299,000 and it eventually went to $488,000 in August of 2005. In October of 2012 the average sold price is $264,000. 

Bubble Ahead?

Probably not. Even though we have a low inventory today and the buyers are motivated I don't think we will see a real estate bubble. One glaring difference between the two markets are the buyers and how they are paying for the properties. Many of today's buyers are paying cash and/or put 20% or more down when they purchase. This makes for a much more stable market. In 2003 to 2005 banks were extremely aggressive in lending money and anyone that could fog a mirror could borrow money. Waiters making $30,000 a year were using liar loans to borrow $500,000 to buy homes. It is pretty easy for a buyer to walk away from a home when they put little to nothing down. However, a buyer might have second thoughts if they put 25% down. 

Personally, I'm not worried about repeating the bubble mess of 2003-2005 anytime soon. 

 

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3 Responses to "Another Real Estate Bubble Ahead?"

jerry wrote:
great stuff...as they say , " the devil is in the details". I can remember when people were lining up hoping to get a ticket with a # allowing them to purchase a condo in Ft Myers....NUTS! You showed great restraint in not calling the lending practices as criminal. LOL

Posted on Wednesday, November 28th, 2012 at 4:49pm.

Elliot Meyer wrote:
Marc,
low inventory due to people wanting more for the sales, what happened in Gulf of Mexico waters with
oil spill affected all real estate on gulf coast of Fl. People moving from other states have the benefit
of no personal income tax in fl., reason I will be moving
E. Meyer (ps you have a very good web site too)

Posted on Thursday, November 29th, 2012 at 8:12am.

Marc Rasmussen wrote:
Thanks for the comment and compliment Elliot.

I think the low inventory is a combination of many properties selling as well as sellers taking their properties off the market.

The oil spill affected our tourism industry. It also affected some real estate sales as buyers put things on hold until it was resolved. I don't believe it is affecting our market to any great degree today.

Posted on Thursday, November 29th, 2012 at 8:46am.



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