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South Florida--Ground Zero of the Housing Bust:

Palm Beach County has an amazing forty-nine months worth of housing inventory for sale.

In August, WCI Communities, a luxury builder with much of its business in South Florida, reported that net condo sales were down 88% from a year earlier. (I think there's been an even worse report since then, but I can't find a link.)

Wow!

But perhaps not too surprising for South Florida, perhaps the most speculator-dominated market in the country, and the birthplace of "condoflip.com" in the Summer of 2005, which I presciently called a "sign of the housing apocalypse."

Tracy Johnson (www):
I bet it is a good reason CSI: Miami has so many good locations for film shoots. All that unused property for rent!
10.26.2006 3:46pm
Oh my word (mail):
A prescient man indeed.
10.26.2006 3:55pm
gab (mail):
I believe Las Vegas is right behind.
10.26.2006 3:57pm
Joel B. (mail):
Lol, maybe it's a CSI thing. Hmmm, what's going to happen in NY then? Either way, Florida was the most speculative market so is likely to take the biggest hit. Other places...who knows so much, a lot are seeing more normal 6 month inventories, and plenty are showing excess inventory at around 9 months.
10.26.2006 3:59pm
dearieme:
It was a Florida property bust that ushered in the Great Crash.
10.26.2006 4:09pm
Anon1234:
Interestingly, that article reports that the price of condos (condoflip.com, anyone?) continues to rise, up 13% this year.
10.26.2006 4:12pm
DavidBernstein (mail):
Anon, one would have to guess that the mix of condos sold is changing, with the nicest, newest, most expensive condos more relatively more likely to be sold this year. This would make some sense, because such condos are most likely to be held by (a) desperate flippers or (b) real estate developers, both of which groups are more likely to lower prices more and more quickly than long-time homeowners.
10.26.2006 4:14pm
Truth Seeker:
Did you see the story linked to by Drudge that rents are skyrocketing? Rent for a 2 bedroom in SF went from $2600 to $3000 a month! Sounds like the wise thing for sellers to do now is hold and rent them out.
10.26.2006 4:19pm
Toby:
Perhaps a few years of bad hurricane seasons (prior to this one) convinced some that ownership of SF property and its responsibilites is not as attractive as it once was
10.26.2006 4:23pm
John T (mail):
Did you see the story linked to by Drudge that rents are skyrocketing? Rent for a 2 bedroom in SF went from $2600 to $3000 a month!

Makes sense. Home values have skyrocketed in the near past in several places, but rents didn't match. In the long run, house prices must go down, rents up, or both.

NYC probably won't have as much of a correction. The FL and NV corrections (and VA) are largely because those states let people build new houses. All the new construction is helping push down the prices. NYC and SF make it much harder to build, so the prices are less likely to go down. (That explains why rents are jumping so fast in SF too.)
10.26.2006 4:33pm
te:
I see the data that comes in nearly every day (there was another piece in the WSJ today) so I think that Mr. Bernstein is right.

But then I look at what's happening around me in my own neighborhood (which I guess I would describe a sort of a second tier neighborhood in San Francisco) where a 2 BR condo sold a few weeks ago for $1.1M and closed escrow in 14 days (asking price was $999K). A 3br house sold for $1.85M last week. (That house listed for $1.6M)

So, yes the overall numbers tell of a slow down - but it seems that when you have small scale bidding wars going on, that the numbers might not tell the whole picture.
10.26.2006 4:41pm
Truth Seeker:
Perhaps a few years of bad hurricane seasons (prior to this one) convinced some that ownership of SF property and its responsibilites is not as attractive as it once was

Sorry, by SF I meant San Francisco, not South Florida. South Florida rents are, I believe MUCH cheaper. Mid Florida rents are about 1/3 that amount.
10.26.2006 4:47pm
Jeek:
2005 is "prescient"? People have been yelping about the meltdown of the housing bubble since 2001!
10.26.2006 4:49pm
TheMadItalian:
A friend of mine sold their condo in South Florida recently because the real estate tax laws has changed for non-Residents - non-Residents are charged more. Could it be the housing glut in Florida is exagerated by these tax law changes?
10.26.2006 4:50pm
te:
RE SF rents

I did a check check on Craiglist and it showed that the following availability for 2br apts:

392 -<$1500
393 -$1500-2500
310 -$2500-3500
121 -$3500-4500
208 -$4500-5500
63 -$5500-6500

All unscientific, of course, but it seems that there are still plenty of apts avail for under $3K a month.
10.26.2006 4:52pm
PersonFromPorlock:

- but it seems that when you have small scale bidding wars going on, that the numbers might not tell the whole picture.

Or that 'the ten percent who don't get the message' are still with us.
10.26.2006 4:52pm
JDNYU:
David,

I am astounded that you could have foreseen such an eventuality! I, like everybody else in America, believed that prices would go up exponentially, forever.

It's worth realizing that even smart people who knew that the dot-com boom was destined to become a bust were in the stock market. As long as you weren't the one left standing when the music stopped, there was plenty of dough to be made.
10.26.2006 5:09pm
DavidBernstein (mail):
Much to everyone's surprise, the Bay Area, and Cal. in general, are lagging other bubble markets. In No. Va. prices are off more than 10% from last Summer's peak, and are falling like a rock since July. Inventory is down slightly, which some see as evidence of a bottom, but I think is more likely the result of people hoping the market will roar back next Spring, and holding their homes off the market till then.
10.26.2006 5:09pm
Shawn-non-anonymous:
TheMadItalian:

A friend of mine sold their condo in South Florida recently because the real estate tax laws has changed for non-Residents - non-Residents are charged more. Could it be the housing glut in Florida is exagerated by these tax law changes?


I believe your friend is mistaken. As a homeowner in Tampa since 2000, the law has been unchanged. Property taxes are calculated based on annual valuations. However, if you are a resident you may claim a homestead exemption that, in effect, limits your increases to a maximum of 3% a year. As non-residents cannot apply for this, their property taxes are adjusted to full market annually.

This is good news for owner-occupied homes and not-so-good news for renters.
10.26.2006 5:12pm
DavidBernstein (mail):
JD, it was obvious to me, but last Summer, the "experts" were in fact talking about 8 to 12% increases in housing prices forever, virtually the same spiel the "experts" gave re tech stocks in 2000. Indeed, someone with too much time on their hands could do a great youtube video of experts on CNBC saying they same things about housing in '05 they said about tech stocks in '00 (soft landing, doesn't matter when you get in if you're holding for long term, moderate growth from now on but no declines foreseen, rising interest rates won't affect prices, etc., etc.)
10.26.2006 5:12pm
arthur (mail):
re: prescience. A prediction that prices will go either up or down in a defined period of time will be correct 50% of the time. A prediction that prices will go either up or down with no time limit will be correct 100% of the time. Even the "Dow 36,000" guy will be right eventually, probably inside this century.
10.26.2006 5:33pm
DavidBernstein (mail):
I don't have the link handy, and don't feel like looking at it, but I predicted on the VC in April 2005 that the top of the Bubble would be within a few months. That's prescience, thank you.
10.26.2006 5:41pm
zooba:
The reason the Bay Area housing market is lagging is because people are less rational there. The housing is going to crash very hard there as people realize that a $60k median household income is no where near enough to afford a median house price of $775k, no matter how crazy the loan. Almost all new home owners had interest only mortgages. Apparently many of the loans are actually fraudulent stated income loans, where the broker rights in a $150k+ yearly salary for people making $40k. I'm calling it now, expect SF to fall to NY levels in housing prices, about a $200k drop, with condos having a 50+% drop in some neighborhoods (see a few posts above).
10.26.2006 6:06pm
Jon Black (mail):
In San Francisco the rents are rising, or seem to be.

I can say that anyone moving into my building today, would kill for the rent that I am currently paying, and my lease began in October of 2005. I would guess that in that time frame the delta in rental rates is probably close to 20%.
10.26.2006 6:08pm
anonassociate:
Hate to be the constant contrarian, but although inventory is up SHARPLY, still no evidence of price reductions in SFHs in the prime close-in Arlington neighborhoods.
10.26.2006 6:44pm
HBD:
Rents increasing makes a lot of sense - don't know if it's true empirically but presumably, people need to live somewhere. As demand for home purchases at current (or near current) prices decreases, we are undoubtedly seeing some degree of substitution in favor of rentals.

I would expect the demand for rentals and the demand for purchases to be inversely related in the short term such that purchase price stagnation / decline would coincide with a tighter rental market until we approach some equilibrium based on the fundamental asset value.
10.26.2006 6:55pm
DavidBernstein (mail):
Anon, I'm not sure about SFHs in the prime neighborhoods, or what you consider prime neighborhoods, but townhouses are clearly down; there's a very nice th two blocks from Ballston for sale right now for $600k, you couldn't touch it last Summer for under $725 (and it's county assessed at $700k), and prices are clearly down in 22203, 22205, and 22207. Indeed, I'm seeing 3+ br, 2.5+ houses in 22203 under $600K for the first time since '04.
10.26.2006 7:36pm
anonassociate:
22203 means different things depending on what side of glebe you are talking about. Single family homes in Lyon Village, Lyon Park and Ashton Heights are selling at essentially 2005 prices (which I readily grant you is a real dollar decrease) but there are a number of very expensive ($1MM plus) homes that have sold in the past few months, and more being built and planned. Not at all debating a general slowdown, or even that SFHs may undergo a slight decline, but there is no real evidence of that yet in prime Arlington close-in areas (which, again, I define as Lyon Village, Lyon Park and Ashton Heights).
10.26.2006 11:01pm
Toby:
As a realtor told me today, if everyone expects housing bubbles to burst, prices to be less next year, why buy today?

This tends to drive up Rent.
10.26.2006 11:42pm
SenatorX (mail):
Sigh. It's much worse than it looks even. Take a look at how the stat weenies keep revising down the previous months numbers in order to give a bogus "increase" for the current headlines. What a joke. Factor in incentives as actual price reductions and see where that leaves us. New sales numbers don't factor in cancellations which are exploding. Manipulation of the numbers across the board people. The spin machines are smoking from the work on all economic figures. Some serious clueless wonders commenting in this thread.
10.26.2006 11:47pm
neurodoc:
DB: I predicted on the VC in April 2005 that the top of the Bubble would be within a few months. That's prescience, thank you.

Will you be so good as to tell us when the residential real estate market has hit bottom and is about to start back up, in order that your readers may buy in at that time?

If one believes a stock is going to decline in value, they can "short" the stock and if they were right, then they will make money on their bet. Because there are not the same opportunities to "short" residential real estate, it is considerably more difficult to bet that residential real estate values will fall and profit if right. The best most of us can do in such circumstances is to get out of the way and avoid losses.
10.27.2006 12:48am
DavidBernstein (mail):
Anon,

Even if you're right that prices are stable, they are still down, because sellers are having to pay closing costs and do repairs after inspections, which they didn't do last year. Also. what do you mean by 2005 prices? 1/05 prices were 10-15% less than 8/05 prices. My own sense is that prices in Arlington are now somewhere between 9/04 and 2/05 prices, depending on neighborhood.
10.27.2006 12:59am
JDNYU:
David,

Which experts? All experts? Citations please.
10.27.2006 3:03am
JDNYU:
Here's just one mention of an expert opinion about a housing bubble from '04: http://www.cepr.net/columns/weisbrot/housing_bubble.htm.

Of course, I still get all my investment advice from law school professors.
10.27.2006 3:09am
JDNYU:
Or how about: this review (published May '05) (and written by some sort of expert!) of a book that warns of the housing bubble.

Here's the general idea:
1. Some asset price rises precipitously
2. Actual experts notice a bubble.
3. Ridiculous media reports that of a "new economy" resulting in asset prices rising forever!
4. David Berstein notices a bubble.
5. Profit!
6. Profit!
7. Profit!
8. ???
9. Bubble deflates.
10. David Bernstein pats himself on the back.

Did I miss anything?
10.27.2006 3:18am
anonassociate:
What I mean by 2005 prices is, prices in Lyon Village, Lyon Park and Ashton Heights have not dropped from their peak, regardless of when that peak was. And, Professor Bernstein, with all respect this is getting ridiculous. We all get the point. You want prices on SFHs in Arlington to drop enough that you can get a good deal on a nice place. They have not, to date. They may or may not, in the future (though as you note they have dropped in less desirable areas). Nothing you say here is going to have an impact on that. There are many housing bubble blogs with more detailed posts and information, and your posts are frequently filled with unsupported assertions. You do yourself no favors in these housing bubble posts (which are, I'm sorry to say, the object of much laughter whenever VC is brought up at any social gathering I've attended recently).
10.27.2006 9:08am
SenatorX (mail):
"Where the herd drinks the water is unclean" comes to mind when I think of your cocktail parties anonassociate.

This just yesterday:

Sales of homes in Virginia slid nearly 27 percent in September, marking the largest percentage drop this year -- and the 13th consecutive month of slower sales.

The median price, with half the houses selling for more and half for less, fell 9 percent to $199,975, according to figures released yesterday by the Virginia Association of Realtors.

Sales and prices for new and existing homes are compared with those from September 2005.

The Richmond area took a hit as well, with sales of all homes down 15 percent last month compared with September 2005.

Nationally, sales of existing homes dropped for the sixth consecutive month. The decline was 14.2 percent in September from the same month a year ago, according to figures released yesterday by the National Association of Realtors.

The national median price was $220,000, down 2.2 percent from $225,000 a year ago.

For the year, Virginia home sales are down nearly 19 percent. Richmond results are 3 percent lower.

Slower sales this year come after five record-breaking years in the housing market.

"We continue to remind consumers that comparing this year's numbers to last year's extraordinary market isn't a fair comparison," said Kit Hale, president of the Virginia Association of Realtors.

Still, "there is no doubt that consumers are more cautious and taking their time in making a purchase decision," Hale said. "We're also hearing that sellers are waiting until their homes are sold before purchasing another in order to avoid placing a contingent contract."

Only two of 24 metropolitan areas in Virginia reported increases in sales in September compared with the same month a year ago: Williamsburg, up 10.8 percent; and South Central, up 7.5 percent.


South Central is made up of Amelia, Brunswick, Buckingham, Charlotte, Cumberland, Lunenburg, Nottoway, Prince Edward and a portion of Mecklenburg counties.

Wes Atiyeh, president of the Richmond Association of Realtors, said he was surprised that sales here fell as much as they did.

"They may be down 15 percent, but that doesn't mean they've tanked," Atiyeh said. "We're still in a good market."

More houses are on the market, he said. "But things are still selling."

The average days a Richmond-area home stayed on the market was 48 last month, up from 35 in September 2005.

The average price here was $264,147 in September, up from $240,701 a year ago. The median price, which is considered a better indicator, is unavailable for the Richmond area.

The market here is stable compared with Northern Virginia, where sales fell 35 percent in September, Atiyeh said. "Northern Virginia increased so fast that the only way it can go is down."

There the median price fell to $445,000 in September from $480,00 a year ago.
10.27.2006 10:16am
DavidBernstein (mail):
Anon, that's really pathetic. If you notice, you're the one who keeps bringing up SFH's in the "hot" neighborhoods in Arlington, where you live. I said prices are down more than 10% in No. Va. from the peak. You say they're not down where you live. I'm dubious, but who cares? Why are you so bitter? I don't think that pointing out what's going on in the market is going to have any effect on prices. Do you?
10.27.2006 11:06am
anonassociate:
Wow, that was quite a reaction. Impressive.

I was merely pointing out that your continued harping on the housing bubble is leading you to be the object of derision in social circles in which you presumably would not want that to occur (i.e. the lunches at Tony Cheng's).

I strongly disagree with your reference to my tone as bitter, but that is of course your perogative. My objection is to your repetitive posts which lower the discourse.

In the end, neither you nor I are real estate experts. I limit my claims to things I factually observe, while you extent yours to speculation about the effect the 'mix' of housing supply is having on price trends, as well as extrapolations to the housing prices in all of Arlington. I leave it to others to decide which is more 'pathetic.'
10.27.2006 11:44am
DavidBernstein (mail):
JD, I posted a couple links a while back when people expressed doubt on the same subject. Feel free to search for them in the Volokh archives.
10.27.2006 12:00pm
DavidBernstein (mail):
Anon, the housing bubble and its bursting will be the biggest economic story of the decade, like the tech bubble for the 90s. I may not be a real estate expert, but I knew enough to know that prices as of last year were unustainable, which is a lot more than most "experts" quoted in the media seemed to know, not to mention investors who bid builder stocks up to ridiculous levels, or better yet, the "investors" who quit their jobs to make a living flipping condos in Miami, Vegas, and Phoenix. I've probably averaged around one "bubble" post a month since I started posting on it in Spring '04, but I get disproportionate negative reaction from all the people who thought they were real estate geniuses last year who were going to retire on their never-ending real estate riches. I can live with that.
10.27.2006 12:14pm
Steven Vickers:
Anonassociate-

From what I see, Bernstein didn't even mention Arlington, just Northern Virginia in general, until you brought it up. How do you interpret that as him extrapolating observations to "all of Arlington"? Even the most hardened real estate bear generally doesn't think prices will plunge in every zip code during a bust--but that fact doesn't disprove the notion of a bubble, any more than the success of a few assorted tech stocks would disprove the notion of a stock bubble in the last decade.
10.27.2006 12:17pm
anonassociate:
Mr. Vickers, I was referring to his posts in general, although to the extent he was referring to all of Northern Virginia, that is clearly a larger area than Arlington!

And the reason I focus so much a few zip codes is that Professor Bernstein has made no secret of wanting to buy a house in 22201, 22203 or 22207 but is waiting for prices to fall. So it is appropriate to look at how SFH prices are actually doing in those locations.

Professor Bernstein, I appreciate your walking back the vitrol you expressed above.
10.27.2006 12:24pm
DavidBernstein (mail):
Anon, our housing search is well beyond the zip codes you mention above, and goes well beyond Arlington for that matter, but more to the point, your mistake is thinking that I blog about this because of my personal stake in the matter. While you seem disproportionately interested in that subject, the reason the issue is of interest, hopefully, to readers, is that many of them are potential buyers and sellers, and even if they are not, the bubble and what happens thereafter will have very significant economic effects. If I tend to disporportionately blog about the D.C. market, No. Va, and sometimes Arlington, it's not because I think anyone cares about my housing search, but because I am most familiar with those markets, and they are collectively one of ten or so of the great bubble markets that will determine the near term future of not just the housing market, but the economy. And I wouldn't like to deprive you and your friends of mirth.
10.27.2006 12:36pm
NickM (mail) (www):
Sorry, Tracy, but CSI: Miami doesn't film in Miami. Many of their scenes are readily recognizable to Los Angeles-area residents as being in Long Beach, CA.

Nick
10.27.2006 1:50pm
TheMadItalian:
Shawn-non-anonymous:


I believe your friend is mistaken. As a homeowner in Tampa since 2000, the law has been unchanged. Property taxes are calculated based on annual valuations. However, if you are a resident you may claim a homestead exemption that, in effect, limits your increases to a maximum of 3% a year. As non-residents cannot apply for this, their property taxes are adjusted to full market annually.


Ah...that makes more sense. However, since the housing market prices were rising so fast wouldn't that force many non-residents to sell their properties because of escalating taxes? And that would contribute to the large pool of existing homes for sale? Also, in the short term this would raise revenue, but as many out of towners sell their stakes - this would cause tax revenue to flatten. And with a large market correction rela estate tax revenues are going to plummet.

Seems like bad law contributing to a deeper valley.
10.27.2006 2:46pm
Shawn-non-anonymous:
TheMadItalian:

I'm not certain what all the logic behind this tax law is but the 3% value is pretty telling--it's the average long term inflation rate. Essentially, this law appears to protect homeowners from rapid changes in housing values. Florida attracts retirees who live on fixed incomes; this law keeps housing costs stable for such persons. It also keeps rising values from forcing poorer homeowners out of gentrified areas. Both of these have some public policy value. As a majority of residences are resident-occupied, this tends to level out tax revenues over a window of time (if the average period of ownership is 5 years, that'd be the window.)

Homeowners who's taxes increase quickly because the resale value of their homes increase quickly will sell at a presumed profit to avoid the higher costs and relocate to an area where costs are lower. If the new area is in Florida, we have a net zero effect on the number of available homes in that area, though it might tend to skew the distribution to pricier homes. (This may also tend to drive some amount of rural redevelopment, highway congestion, etc. )

Part of the issue is how people with second (or more still) homes affect local economies. I have no data on what percentage of the total they represent though I imagine it to be relatively small. Without question they represent fewer people than resident renters.

Of more importance these days is the cost of homeowner's insurance, which has increased at an alarming rate. My monthly payment increased $200/mo in the last 2 years as a result. Insurance has increased in cost at a higher rate compared to the increase in the medium home price in Florida. It affects all residents, not just those in the coastal cities, primarily due to sinkholes and hurricanes.
10.27.2006 5:19pm
jojo (mail):
Could you give some eamples of Europeans asking Jews to denounce Israel iust because they are Jewish?
10.28.2006 2:33pm
Aleks:
Re: the housing bubble and its bursting will be the biggest economic story of the decade, like the tech bubble for the 90s.

Nope, and for the very good reason that while demand for stock in the "dot.bombs" could go to zero (the bubble could indeed burst) demand for housing will not go to zero (the bubble can only deflate down to true market levels).
10.28.2006 11:46pm
Mary Katherine Day-Petrano (mail):
The cause for this is pretty simple: A random Hurricane will wipe out the dam at Lake Okeechobee, and all that water will head South toward Palm Beach County, while global warming will bring a rise in the Ocean water levels from the South ... thus, any real investor in property would decline to buy in Wellington-Loxahatchee, and head North to buy near Ocala-Marion County (Florida Horse Park) and sit on the property until the mad land rush begins and rampantland appreciation sets in. And any one who doubts it need only spend a day on South Beach.
10.29.2006 12:02pm