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Dueling Outlooks
TRENDS by Jean Gruss | Editor/Lee-Collier
Economists are split over the future of Florida's housing market. Some say the decline is at an end while others suggest there's more bad news to come.
How much worse can it get?
The residential downturn in Southwest Florida is the talk of cocktail parties and networking events just as it was when it was surging to new highs in 2005. Everyone wants to know: Have we hit bottom?
A recent Urban Land Institute meeting in Naples illustrated the wide ranges of opinion among experts. There's a lot riding on the right answer, as developers and builders worry whether things can get worse and plan for the eventual turnaround.
"It's not fun, especially if you're down here," Gregory Miller, vice president and chief economist with SunTrust Bank, told the gathering. Miller says he told a similar group in Atlanta: "At least you guys aren't in Southwest Florida."
Miller forecasts more housing-price declines, calling this one of the nation's top three worst housing crises in decades. "This is a valuation problem, not a fundamental-demand problem," he says. Southwest Florida and the rest of the state continue to grow the labor force by 5% annually, so the demographic trends remain strong. But Miller points to studies that show that Florida markets are among the most overvalued in the country.
Furthermore, all the investors who piled into the residential market after the dot-com bubble burst are trying to get out now. "This is the first investor market since the passive-income boom in the early '80s," Miller says.
However, Orlando economist Hank Fishkind calls studies that claim Florida markets are overvalued "baloney." That's because they're based on household income instead of household wealth, which discounts the impact of retirees who don't work but have the money to buy a home.
"I think we're reaching the bottom of the cycle," Fishkind told the ULI gathering, noting that Miami and Fort Myers are the weakest housing markets in the state. One sign things are improving: Homebuyers are still canceling home purchases but at a slower rate than before.
Miller says the Federal Reserve Board isn't going to rescue the housing market or stop its decline unless it drags the whole economy into a recession. Unlike his predecessor, Federal Reserve Chairman Ben Bernanke prefers to wait for conclusive data before acting.
One of the major risks in the year ahead is if the Federal Reserve raises short-term interest rates, Miller says. That's because long-term rates are lower than short-term rates, an unusual situation that has augured a recession in the past. The risk is that banks, which borrow money at short-term rates and lend it at long-term rates, will tighten credit. "Banks can't make a profit like that," Miller says. The result will be they won't lend to the construction companies that have been big customers of late.
Fishkind also believes that short-term rates will rise to 6% by year-end, up from 5.25% now. But that's because of strong growth, especially around communities with airports. In a study, Fishkind found that most of Florida's growth occurs within a one-hour drive from a major airport.
For example, Fishkind credits the new terminal at Southwest Florida International Airport in Fort Myers for fueling the growth in tourism. "This is an economy that is fundamentally strong," he says.
However, Lee County's inventory of homes for sale is still high and housing starts continue to outpace closings. "The market is still out of equilibrium," he cautions.
By contrast, Fishkind says Collier County's housing market is in better balance because there wasn't such a boom in new-home construction as there was in Lee, the adjacent county. "I find it fascinating how close these markets are but how different they are," Fishkind says.
REVIEW SUMMARY
Industry. Real estate.
Who. Economists Gregory Miller and Hank Fishkind.
Key. Two economists differ on the outlook for Florida's housing market.
Energy may drive market
The high cost of energy is starting to influence the way developers build communities and how municipalities zone areas.
"Energy is going to be a big issue and will affect housing affordability," says Anthony Flint, public affairs manager for the Lincoln Institute for Land Policy, a Cambridge, Mass.-based think tank. Flint also is the author of This Land: The Battle Over Sprawl and the Future of America.
The high cost of heating and cooling, gasoline and far-flung roads will translate into smaller homes and developments that combine homes with shops and offices, Flint told a group of real estate professionals at a meeting of the Urban Land Institute in Naples.
Some of these trends already are evident in Southwest Florida. At the new Coconut Point mall in south Lee County, for example, developers have added residential condominiums and offices to the development.
What's more, the 70 million aging boomers will seek out smaller homes with amenities such as shops nearby. Meanwhile, municipalities are starting to balk at building roads and sewers to distant areas, emphasizing revitalization of existing communities. "Toll Brothers is in Manhattan, for gosh sakes," Flint says. Toll is a suburban builder of luxury homes.
"The new model is city living," Flint says. He points to communities such as Plano, Tex., that are building commuter rail and Denver, Colo., where the old Stapleton airport has been redeveloped into a residential community.
In Massachusetts, municipalities have adopted a "fix-it-first" plan, where no new roads or other infrastructure will be built until the existing infrastructure is repaired.
Meanwhile, municipalities are adopting new zoning codes that allow builders to develop shops, homes and offices together on a single site. They're also giving builders more leeway to build additional housing units on a site.
In addition, they are forcing builders to sell a portion of these homes at prices that make it affordable for those with lower incomes, a tactic called "inclusionary zoning."
"Affordability is a major theme across the country," Flint says. Community land trusts, below-market mortgages for certain locations and property tax caps are among the ideas that are spreading.
-Jean Gruss
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