Another Bubble Ahead?
I am hearing more and more talk about a real estate bubble in the Sarasota market. In my humble opinion I believe this concern has some merit. First, let's compare sales in August 2012 vs. sales in August 2013.
| August 2012 | August 2013 | % Change | ||||
| Properties Sold | 1,536 | 1,681 | 9% | |||
| Average Sales Price | $213,404 | $255,811 | 20% | |||
| Median Sales Price | $155,000 | $180,000 | 16% | |||
| Days on Market | 107 | 86 | -20% |
The above numbers are sales for single family homes in Sarasota and Manatee counties. I pulled these directly from our MLS system. As you can see the number of homes that sold increased as well as average and median sales prices. The time it took to sell a home decreased as well. Now keep in mind that this is only one month and not the entire year. In a later blog post I can compare different months and longer lengths of time.
The 20% rise in average price and 16% rise in median price are concerning. Remember back in 2003, 2004 and 2005 when home prices were skyrocketing, people were rich, everyone was a real estate expert and no one thought prices could plummet? You had to buy right away to beat out the other buyers and to get into today's prices before they went too high. Today's real estate market feels a bit similar. 
Don't get me wrong. I am all for rising prices but I am little tired of the whipsaw action. A nice slow rise in prices sounds very appealing. It minimizes the booms and busts.
I usually get a little flack from other agents about mentioning the word "Bubble". That is one of those words that might make a buyer think twice about submitting an offer on a home. (Plugging my agents here - Fortunately at DWELL we want to be known as real estate consultants. We are able to provide advice even if it means that it won't provide an immediate commission. ;-))
Frankly, I think we were underpriced for several years and it is nice to have a little more equity in my real estate. Florida is not an expensive place to live. I was chatting with my buddy Tom Kelley in Westport Connecticut who used to live in Sarasota and he was commenting on how cheap it was to live in Florida. They have a lot more taxes to pay up in CT. The average home price in his market is somewhere in the neighborhood of $1.6 million.
Institutional Buyers
Like other areas of Florida we are seeing a lot of institutional buyers purchasing homes and renting them out. If you have been actively looking for a home chances are good that you may have competed with institutions. What is going to happen if all of these companies decide it is time to sell? Will the market be flooded with new inventory that will cause prices to fall? Afterall, real estate prices are driven primarily by supply and demand. If a bunch of homes suddently hit the market it usually means prices will fall.
Plenty of Cash Buyers Around
The good news is that many of today's end users are either paying cash or putting a substantial amount down to purchase a home. This makes for a much healthier real estate market. From 2003 to 2005, if you could fog a mirror you could get a mortgage. Nowadays, you need to put money down and show that you can pay back what you borrow. That's a good thing by the way.
2005 vs 2013
In 2005, investor Robert puts $25,000 down and borrows $475,000 to purchase a $500,000 home in The Enclave. His goal is to flip the property in 12 months. Unfortunately for Robert, buyers dry up and eventually the price of his home plummets to $275,000 which puts him upside down by $200,000. Since Robert is carrying several houses it is a pretty easy decision for him to mail the keys back to the bank.
In 2013, Steve is looking to buy a home to live in with his family. He purchase a home in The Hammocks for $500,000. Steve feels comfortable spending this much on this home because it sold back in 2005 for $775,000. Steve puts $100,000 down, borrows $400,000 from the bank and then moves his family in the home after closing.
Now multiply the above situation by thousands of home buyers with similar situations. Which market would you prefer to own in?
Buy as Much as You Can
This is what I heard from a speaker when I recently attended the FAR (Florida Association of Realtors) annual convention in Orlando. Zan Monroe was one of the colorful speakers. Prior to joining the speaker tour he was in construction. He was of the opinion that people should be buying as much real estate as they can because of inflation and that very few homes were built during the bust. The combination of rising construction costs and a lack of inventory will cause prices to rise.
You Need a Place to Sleep
Fortunately, I have never slept on a park bench or in the bushes but I cannot imagine it is comfortable. Shelter is just one of those basic things that most people need. If you are buying a home to live in for a number of years then I wouldn't worry too much about a real estate bubble. If you are investor just know that it isn't impossible for prices to decline.
What do you think? Is a bubble on the way? Please leave a comment below.
Discussion
No, I don't believe we have a bubble. As long as incomes are in line with home prices we are good. Outstrip income and we have a problem.
It is a little concerning from what I read in the newspapers. Amazing how times have changed. On the other hand my house is paid off and I am not going anywhere so I don't care too much. ;-)
I came from the Northeast. Florida is so much cheaper (other than insurance). We needed a boost in prices. This is a good thing so far.
I don't think we have a bubble yet, but nothing is impossible. Florida is a little behind other areas of the country where some institutional investors have stepped out now that prices have gone up. As long as prices begin to stabilize, hopefully everything will settle down to a normal housing market.
Until this spring, I did not think there was a bubble going on, for the reasons you mention (low prices, cash buyers, etc...).
I now think there is one. Prices continue to jump and:
- interest rates are rising (1% more means 10% less buying power, remember that)
- mortgage applications are falling at a rapid pace
- although unemployment declines, most job creations are part time and low income, by no way allowing to get a mortgage.
- inventory is scarce, bidding wars are around, which make people becoming unreasonable (have short memories, too).
- investors are fuelling this bubble, but they can pull away as quickly as they came, like like they do with gold, stocks and bonds. Remember it is an asset for them, not a shelter.
I could go on and on. I think that as soon as the monetary policy of the FED will change (which the FED has chosen not to do today but it will come), this bubble is going to burst. As usual, the last ones in the ride will be the ones caught with their pants down, the 2005 real estate experts.
In the meantime, if you are here for the long term and not to flip properties, you do not mind. A home is a home. Someone who has owned a home for 15 years has not seen any bubble nor crisis and does not care.
I'd rather sip a pina colada in a longboat key condo I paid a little too much than wait for the next bargain with my money in hands.
We moved from Sarasota in 1996, continued to visit and could not believe the escalation of prices, I refused to purchase during the Boom years, I continued to survey the market and once I felt the prices had finally hit bottom we purchased our home in Gulf Gate, after a few years of remodeling we are ready to sell, NOW is the time for selling as the supply is at records low's, and in my market in Gulf Gate, properly priced homes sell before the sign is in the ground, we will buy another home in Gulf Gate, my opinion is we are still undervalued, but for how long ? No one has the crystal ball to tell us correctly, Sarasota is one of the best markets in the United States, pay attention-watch the trends-ask a realtor-go with you gut feeling, glad we are back!! Thanks Mark, for keeping us informed :-)
Great comments all. Thank you very much.....I love this statement:
"I'd rather sip a pina colada in a longboat key condo I paid a little too much than wait for the next bargain with my money in hands."
I wish more people would realize the fabulous experiences you can have far outweigh the few extra dollars you can make by waiting for a "steal" that rarely ever shows up.
We're not seeing huge increases in the southwest suburbs of Chicago. It is a pretty even market and we're just now experiencing our normal slowdown after the school year started. We're still affordable but some villages have shown an increase in prices this year, but I like to wait for year-end stats as they paint the true picture of what happened in 2013.
thank you Marc for a very insightful article. If all conditions; those are many to include inflation/wars/state of the economy/Federal reserve actions etc- remain as they at the time of writing this note I believe and homes in Sarasota don't become way over-priced Sarasota will fair well especially with the fresh batch of baby-boomer retires.
Don't know for sure, heck, who does yet?
More interested in knowing how we will pay back the 17 trillion in debt, currently at 73% of our GDP? If action is not taken soon, it will have a troublesome affect on everything including the housing market. OK, my 2 cents worth.
I don't think this present situation can sustain itself much longer to create a bubble, at least in our market, Los Angeles. I see the craziness slackening off a little. There is still low inventory and with the rise in interest rates, buyers are losing faith.
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