July 14, 2008

The Housing Bubble:
Has It Popped Already?

 

January 2006 © by Temple & Kerstin Williams

 

Boca Raton, FL, January 2006 -- Experts call real estate a local industry. When analysts slide Cleveland, Ohio, under their microscope, it does not reveal what’s happening in Los Angeles or Boston.

Still, if a “hot” real estate area cools off, who’s going to argue that it does not have larger implications? Boca Raton, Florida, may have some valuable lessons for the real estate industry as a whole.

Within Boca Raton, a “typical” subdivision -- the Boca Country Club -- characterizes the area. This popular subdivision of 945 homes, nestled in over a dozen separate and distinct communities, epitomizes life in the paradise of south Palm Beach, Florida.

Buyers choose from hi-rise condos, town and coach homes, attached courtyard villas, and detached estate homes. Many of the communities have their own clubhouses, while others offer small private pools in every home.

An 18-hole championship golf course threads its way through the Boca Country Club. The links are part of the world-famous Boca Raton Resort & Club, recently purchased by the Blackstone Group. Blackstone, a public company, has a well-deserved reputation as a savvy real estate group.

So how’s the Boca Country Club doing? Like dozens of other subdivisions in the Boca area, it has sizzled with sales for five, price-popping years. Until now.

Absorption Rate’s Crystal Ball

Real estate experts watch “absorption rates” closely. It’s a time-tested yardstick. Homes “go to contract” in an “average” amount of time. Recent history determines exactly how many, and how fast. Simple mathematics determines, over a year, how many homes can be “absorbed” in a particular market … if the immediate past projects the immediate future (which it often does).

In the year prior to Hurricane Wilma, which ripped through south Florida in October, 2005, 64 homes had new owners at the Boca Country Club. At any one time, between 8 and 12 homes were up for grabs. It took less than 45 days, on average, to find a buyer willing to go to contract. In some cases, homes went to contract in a day or two. Prices continually bounced higher at the rate of over a percentage point per month.
That’s the immediate past.

Here’s a snapshot of the present: 42 homes are for sale at the Boca Country Club as of this writing. That’s a record, five times higher than “normal” … and it actually surpasses the bad old days of the early 1990s, when IBM deserted Boca Raton and left its housing market in shambles for almost a decade (IBM has since returned, albeit much smaller).

On average, houses currently take 283.3 days to go to contract (up from the low 50s prior to Hurrican Wilma).

Given the current number of listings, 145 homes would have to sell in the next 12 months to “absorb” the homes with For Sale signs. That would be almost three times more than normal. It will not happen.

What’s Next?

One of three things will occur. Only three things can occur. Either prices plummet and buyers rush in. Or sellers take their homes off the market. Or it’s going to take a lot longer to sell a home.

Prices will not plummet in hurricanne-ravaged Palm Beach. Why? Because it costs a lot more to build a house than it used to. Roof tiles, wallboard, lumber, steel, washing machines and water heaters … everything costs more in a new house. And the osmosis of those rising prices drags up the pricetag of used homes.

Prices may not rise as fast as they have in the past five years – no more double digits – but they will not suddenly reverse. The battleship of rising prices does not turn on a dime. Not unless the preconstruction boom goes belly up, which seems unlikely (but stay tuned).

Watch out for 2008, however. That’s when capital gains jumps from 15% to 20% according to current legislation. A 5% hike on a big-ticket item like housing could get a lot of sellers to rush into the market to beat the deadline. Supply and demand. Housing prices suffer. The rush for the exits may have already started.

Will Sellers Stay Put?

Sellers faced with fewer buyers may pull their homes off the market. It’s a pain to keep it in show condition, and strangers rummaging through your kitchen and bedroom gets very old, very fast. It takes time, however, for a listing to “expire” -- most listing contracts are for 6 months or more, with 1-year the norm.

A real estate agent may suggest in a listing presentation that your home will sell for more than you imagined, and in just a few weeks. They may even hint that they have a buyer ready and willing, right now, this very minute. Often, this mystery buyer disappears once the listing is taken (as an aside, offer an agent who suggests a buyer in the wings a single day, one-show contract).

Regardless, it remains surprisingly hard to cancel a listing contract once you’ve signed the bottom line. The listing agent will sadly explain that it’s his or her broker’s decision not to release the seller. Your home remains on the block until the listing expires, and if you sell your home to anyone who saw it while it was listed, you owe the broker a commission even after it expires (there’s a time limit of six months to a year on this, depending on your listing contract).

Today, it seems likely that more homes will be listed on the market, not fewer. A record-shattering 42 homes are for sale at the Boca Country Club right now … powerful proof. So it does not look like inventory will pressure buyers into reaching for their wallets anytime soon.

Most Likely: A Stagnating Market

Sellers will suffer through the stigma of stagnation. They stand at that precipice at this very moment. Because a disconnect between buyers and sellers has appeared. A huge disconnect.

While many sellers currently believe that they can sell their homes in roughly 2 months, the absorption rate suggests a lot more time is needed: well over 2 years, not 2 months. That is a real disconnect.

At least one area of real estate seems destined to gain from all this … the long-suffering rental market will start to boom. An increasing number of Boca Raton homeowners have quickly discovered that the best way to “cash out” of a home is to rent instead of buy. That lets them bank the tax-free capital gains ($250,000 for a single person, or twice that for a married couple). No blossoming real estate taxes, no overheads, and you’re just a plane ticket away from outrunning the next hurricane threat. With money in your pocket and nothing to worry about.

Which may, in fact, explain who so many sellers have surfaced recently. They can’t downsize, because even smaller, less expensive homes often carry new, revised real estate taxes in excess of their existing residence. Once the tax assessor gets hold of a sales contract, and reappraises a new home, the new home’s tax base can double or triple.

Housing Bubble? There’s no shortage of pinpricks right now. Sellers want to cash in. Tax assessors seem intent on doing the same. Smart sellers would rather rent than downsize. A 5% hike in capital gains looms on the horizon. Five times as many sellers as usual have listed their homes. Buyers seem willing to wait a while as things sort themselves out. And a lot of real estate agents and their brokers are holding their breath.

By definition, every historical event takes time before it gets recorded as fact. But the Housing Bubble does seem to have witnessed a first-class “POP!"

 

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20 ways
smart sellers
raise the price
of their home.

Even if you sell your home "as is, subject to inspection" … you can do a lot to raise its price. A top-notch Realtor® will probably hand you a list that looks something like this:

1. Curb appeal sells: Do some landscaping. Plant some flowers. Remember that the front door greets buyers. Make sure it looks new.

2. Decorate For A Quick Sale: Faded walls and worn woodwork reduce appeal. Invest in a few cans of paint. Brighten up the interior.

3. Let The Sun Shine In: Open draperies and curtains and let the prospect see how cheerful your home can be. Dark rooms do not appeal. One trick which always seems to work is to replace 60-watt bulbs with 100-watt bulbs, and have your Realtor® turn them all on, even for a daytime showing (and off after the showing).

4. Fix That Faucet! Dripping water suggests faulty plumbing, one of the greatest fears that savvy buyers have.

5. Repairs Can Make A Big Difference: Loose knobs, sticking and squeaking doors and windows, warped cabinet drawers, and other minor flaws detract from home value. Fix them. Most buyers assume there will be ten hidden problems for every one they see.

6. Clutter clogs sales: Display the full value of your space by removing all unnecessary articles. Consider storing things you don't need all the time.

7.Safety First: Keep halls and stairways clear. Avoid cluttered appearances and possible injuries.

8. Clean Your Closets: Neat, well ordered closets look bigger, suggesting that storage space is ample. One of any home's biggest deal-killers remains: "Not enough closet space."

9. Bathrooms Sell Homes: Check and repair caulking in bathtubs and showers. Make the room sparkle!

10. Arrange Bedrooms Neatly: Remove excess furniture. Use attractive bedspreads and window treatments, with freshly laundered curtains if you use them.

11. Harmonize The Elements: FM radio or stereo on softly, TV off. All lights on, day or night. Drapes open in the daytime, closed at night. If it's hot, cool it!

12. You Can Sell Pride Of Ownership. Cleanliness counts. Potpourrie works. So does a nice-smelling stew simmering on the stove. Happy buyers often tell us: "I liked the smell of the home." And you'd be surprised how many people walked away from a "perfect" home because "the owners were smokers."

13. Three's A Crowd: Avoid having too many people present during a showing. Potential buyers need to feel at home, not like intruders being hurried through the house.

14. Noise does not sell well. Let the Realtor® and buyer talk, free of disturbances. Background "soft playing" music is okay, but the wrong sounds will turn buyers off. Noisy children and animals are roadblocks to a contract … and traffic, trains, and planes must be dealt with honestly, if they are part of the deal.

15. Pets Underfoot? Keep them out of the way ... preferably out of the house. Many people are acutely uncomfortable around animals. Nothing can stop a sale faster than man's best friend, wagging its friendly tail at a prospect with an allergy.

16. Silence Is Golden: Be courteous but don't force conversation with a potential buyer. He wants to inspect your house, not pay a social visit.

17. Be It Ever So Humble: Never apologize for the appearance of your home. After all, it has been lived in. Let the trained agent answer any objections. That's the job of your Realtor®.

18. Never Stay In Your House With House Hunters: Let the agent handle it, and remove yourself if possible. Remember that the Realtor® has worked many hours with these people, and knows what they're looking for, and how to work with them. Let the Realtor® do the job without interference.You may feel that an agent isn't showing the important features of your home to the prospect, but the agent knows people aren't sold by details until they've become emotionally involved with the "big picture" of your home. The presence of any member of the seller's family can't help. It always unnerves possible buyers. It often prevents a sale.

19. Don't Put The Cart Before The Horse? Trying to dispose of furniture and furnishing to a potential buyer before he has purchased the house often loses a sale.

20. Let your Realtor® discuss price, terms, possession, and other factors with the prospect. They are qualified to bring negotiations to a favorable conclusion. A smart Realtor® knows, in certain rare cases, when to tell a buyer and seller to sit down and negotiate the final price on their own. And if you don't think you have a smart Realtor® … well, you know where to find them if you are reading this page.

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