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Florida's housing bubble, is it ready to burst?

By ROBERT TRIGAUX
Published May 25, 2005

May 25 - When Florida can claim four of the top five, and eight of the top 10, metropolitan areas in the nation with the greatest home price appreciation in the first quarter of 2005, can talk of speculative investing be far behind?

When the median sales price in April of a single-family home in Florida soared to $218,600, a breathtaking 26 percent increase in one year's time, can a real estate bubble be looming?

Florida dominates nearly every list of over heated housing markets these days. That trend is stoking the debate over the size and severity of the real estate bubble in the Sunshine State, even amid the brisk national runup in home prices.

Existing homes in the United States were sold in April at the fastest pace in history as a hot housing market fueled by still-low interest rates just kept getting hotter, the National Association of Realtors said Tuesday.

Nationwide, the Bradenton and Sarasota markets ranked No. 1 and 2 in housing appreciation, rising a startling 45.6 percent to $275,100 and 36 percent to $326,300, respectively, in the first quarter of 2005 from a year earlier.

(The Tampa-St. Petersburg-Clearwater market ranked No. 32 nationally, with home prices rising 15.7 percent in the first quarter to $172,800.)

Since 2000, when the median sales price of a single-family home in Florida was $115,900, the price has jumped 88.6 percent, according to the Florida Association of Realtors.

Surely, such runaway markets are not sustainable. Florida is home to some of the most overheated markets edging ever closer to the pinprick of a real estate bubble.

Real estate experts, economists and the real estate agents who sell homes everyday are nervous. But they all differ on how big and dangerous the Florida housing bubble seems to be, and why it is happening.

From a national perspective, warnings of a nasty end to the bubble are on the rise. Yale University economist Robert Shiller's first book, Irrational Exuberance, examined the speculative craze in investing during the late-1990s dot-com boom and subsequent stock market crash. His second edition of Irrational Exuberance, published last month, shifts its focus to the current real estate market.

Shiller argues the runup in housing prices was spurred in part by people who got rich in the dot-com boom. The same national psychology of speculation that fed the stock market craze is now feeding the real estate boom.

"The world is increasingly capitalistic and the idea is fading that the government will take care of us," he said in an interview Tuesday. One result is that people, prodded by competitiveness and a fear of being left behind, have become more speculative in their investing. It is a trend likely to continue, he added.

"I think this is actually the biggest (real estate) bubble in U.S. history and possibly even world history," he said.

Sid Rosenberg, the William F. Sheffield professor of real estate at the University of North Florida in Jacksonville, sees some early danger signs in housing but isn't ready to sound an alarm.

"I am thinking about the potential bubble all the time," Rosenberg said. Tuesday's data showing a 3-percent increase in sales of Florida's existing single-family homes in the past year is good news, he said. But beware if that sales figure slows or shrinks.

Rosenberg sees a red flag in the rapid rise of apartment houses being converted to condominiums. If those conversions multiply, and include more and more mediocre apartments, it is another sign the bubble is overinflated.

He also warned of the flurry of adjustable-rate mortgage products that allow speculative borrowers to delay the cost of their loans.

"If a buyer can get an adjustable-rate loan that cuts in half the initial cost of today's traditional 6-percent, 30-year fixed mortgage, it means twice as many people can afford a house at the start," Rosenberg said. But eventually, those loans have to be paid of.

His advice: Watch for problems with these mortgages in about three years.

"People think housing prices will not fall or not fall much, but I have seen declines of 60 percent or more," Rosenberg said. In the 1980s, he witnessed the Houston housing bust that forced $70,000 condos to sell for $10,000.

So in the nation's hottest real estate spots like Bradenton and Sarasota, what's driving up home prices at such a torrid pace?

"I think we have location, of being close to beaches and St. Petersburg and Sarasota, and they say we are getting the baby boomers," said Joan Oliszewski, a Bradenton real estate agent and president of the Manatee Association of Realtors. "But I do not know what's driving these prices. I live with it every day and it is amazing."

Sarasota real estate agent Nick Figlow rattles off the usual reasons for this red-hot market, then adds a few more. Not only are baby boomers moving to the area, but a second wave, boomer kids, is old enough and starting to show up to buy homes.

That rising demand is meeting shrinking supply, he said. Many older people who once would have sold their homes in their 60s and 70s are hanging on to their houses, he said. People are healthier and living longer, which is creating a crunch in traditional turnover of housing.

The tight market is also the result of what Figlow calls "captives." Many current homeowners who might have sold their homes in hopes of moving up now find they can afford neither the new prices nor the higher taxes that come with new purchases, said Figlow, a director with RE/MAX Gulfstream Realty and past president of the Sarasota Association of Realtors.

In some Florida markets, especially the infamously overbuilt condo market in Miami, there are reports of real estate investors creating "vulture capital" funds aimed at buying condos cheap once the market collapses.

Last week, Federal Reserve Board chairman Alan Greenspan pooh-poohed the idea of a national real estate bubble. But, he added, "it's hard not to see that there are a lot of local bubbles."

Pop. Pop. Pop. Florida, is that sound getting closer?

[Last modified May 25, 2005, 09:29:04]