Realty Investors

Real Estate Bubble or Market Correction in South Florida By John Kavazanjian

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In a previous article I defined the word bubble in relation to the real estate market. I pointed out that real estate is an economic market and is not exempt from the laws of economics, especially supply and demand and the relationship to pricing.

There is no question the Real Estate market in South Florida has changed in the last 100 days. We have transitioned from one a very hot sellers’ market to a neutral to buyers’ market. The interesting dynamic is not that the real estate market has changed cycles, but how quickly it has changed.

In the last few years, buyers outnumbered sellers of existing homes and new construction. Prices continued to rise and property values appreciated at rates between 20-30%.

It seems to me the number of active qualified buyers in the market has changed dramatically. At the same time, the number of properties for sale has significantly increased, creating a high supply to demand ratio which has prompted downward pressure on prices. Perhaps this is why my mail box and e-mail inbox is barraged with commission bonus offers form fellow realtors and builders. Last year a lot of builders would not work with realtors because they could sell the majority of inventory with minimal marketing and exposure. Today, the majority of builders are soliciting realtor’s services and offering incentives to gain access to their clients.

What happened? Several influential factors began to occur at the same time.

First, I believe the media hype of a pending bubble became so over whelming that buyers started to be come very conservative.

The 12 straight quarters of The Federal Reserve increase to the Prime Interest Rate that banks charge their best customers has begun to effect mortgage money.



“Rates on 30-year Mortgages Climb


WASHINGTON (AP) -- April 7, 2006 -- Rates on 30-year mortgages rose this week to the highest level in 2 1/2 years as financial markets began to worry more about inflation.

Mortgage giant Freddie Mac reported Thursday that rates on 30-year, fixed-rate mortgages averaged 6.43 percent this week, up from 6.35 percent last week.

The increase meant that rates surpassed the previous 2006 high of 6.37 percent set in early March and climbed to the highest level since the 30-year mortgage was at 6.44 percent the week of Sept. 5, 2003.

Analysts attributed the increase to a pickup in economic growth in the early months of 2006 and renewed concerns about higher energy prices.”

"There is concern that the continued high level of energy costs may lead to inflation in other sectors of the economy," said Frank Nothaft, chief economist at Freddie Mac. "Fear of inflation leads to higher mortgage rates, like the ones we see this week."

We have begun hurricane season and the past season and predictions of a more active season have many people concerned. That is the bad news! The good news is that 77,000,000 Baby Boomers are nearing retirement age and Florida is expected to be their first choice of places to retire, along with Arizona and New Mexico.

It costs more to buy land and build new construction than ever before because the amount of land is finite. The recent rise in energy cost increases has permeated and increased the cost of building significantly, causing replacement value to rise and creating extra value in existing structures The following is an except from an article reported by The Associated Press on a recent study questioning the housing bubble in 9 0f 10 markets:

“Study: No housing bubble found in 9 of 10 urban markets

CLAREMONT, Calif. -- April 5, 2006 -- Fears of a real estate bubble are overblown, and homes remain undervalued in many markets, according to new research from a pair of Pomona College professors who developed a fresh methodology for gauging bubble trouble. By comparing the cash flow generated by owning a home to the cost of renting a comparable house, economics professors Gary Smith and Margaret H. Smith found bubble conditions in only one of the 10 metropolitan U.S. housing markets evaluated.”

“The full study can be found on The Brookings Institute website at: http://www.brookings.edu/es/commentary/journals/bpea_macro/forum/bpea200603_smith.pdf.”

Here is a recent article that suggests we have entered a more normal market. Supply and demand nearly balanced in overall U.S. housing market


"HUNTINGTON BEACH, Calif. -- April 10, 2006 -- A recent "Current Market Conditions" survey of real estate agents in 47 states reveals a balanced U.S. housing market, marking the first time in eight years that such an event has occurred.

Of the agents polled by HouseHunt Inc., 45 percent say they are seeing more buyers than sellers; and 31 percent report that sellers are outnumbering buyers. Another 24 percent believe the market is divided equally between buyers and sellers.

The National Association of Realtors reported a 5.3-month supply of available properties in January and February, with a supply of 5.5 to 6 months indicative of a balanced market.

HouseHunt President and CEO Michael Bearden says the housing market appears to be most balanced in the South, Midwest, Northeast, and California but reports that there continues to be more buyers than sellers in the West and Alaska.

NAR President Thomas Stevens believes the market is returning to normalcy, and he predicts the end of double-digit price gains in the coming months.

"This appears to be the beginning of the 'soft landing' many economists are predicting for housing sales activity and certainly good news for both consumers and Realtors after five years of market imbalance," says Bearden.

Source: RisMedia.com (04/07/06) Bresnahan, Beth
© Copyright 2006 INFORMATION, INC. Bethesda, MD (301) 215-4688"


In my opinion, there is no question the market will need to adjust to the current inventory supply. Opportunity follows investment, and as price adjustments occur for over priced properties, buyers will take advantage of those buying opportunities. It may take several months or several years for this adjustment. However historically over the long run, real estate continues to increase and is still the best wealth acquisition strategy that an individual or investor will make.