Optimist, Realtor, Realist

Volume 4 Number 25 October 1, 2006

Optimist, Realist, Realtor

Okay, I can see the end of the hurricane season from here and it looks pretty clear. Do you remember hearing, “Heck, if we get through this season without hurricanes next years real estate market will really be hot,” or something similar? We are almost at that mile post. What do I see?

Let me answer the question and then support my answer. One moment while I blow the dust off my crystal ball.

I see many buyers coming to Southwest Florida to capitalize on low prices, low interest rates, high inventory. weary sellers, and beautiful weather. I see a very robust economy, low unemployment, bad weather up north, and Americans with an appetite for real estate. I do not see a return to the boom-boom times of 2004, but see a slow and steady increase in prices and a slower decrease in inventories. Anecdotal evidence already points to increased activity (Interviews with title companies, residential resale agents, etc.) If we are not at the bottom yet, we are darn close.

I think we will see the turnaround, as usual, only in our rear view mirror. All of a sudden we will look back and say, “Wow, that happened fast!”

There have been many new projects that have been put on hold or canceled totally. Developers have responded to the slow market by doing one or a combination of the following:
Canceling or postponing projects
Slowing construction; phasing projects.
Offering incentives (Upgrades, financing)
Returning deposits.
Simply “going on vacation”

These actions will help the oversupply situation. But make no mistake, there will be an oversupply for at least two years.

You must also not expect construction costs to go down. This is a critical point. Replacement homes will cost more than what is already built. World wide demand, let alone local demand, for raw materials and labor is too high for us to see an appreciable decrease in costs. What does this mean? This means that existing homes and commercial buildings will be less expensive to buy than to build or buy new. Once the existing inventory is gone you will see rapid upward price pressure.

Existing home sales dropped nearly 13% in August from the year before. The median price fell 1.7% nationally. Locally we are seeing prices drop in the fifteen percent range. I say, “So what?” The increased prices and volumes that we dropped from were artificially high, pumped up by a frenzy that we could not sustain and that sellers and builders and developers reacted to swiftly. The market is simply correcting for four years of over zealous growth.

Developers and builders can’t react as quickly as buyers. This speed up the price ramp up and slowed down the recovery. The reaction to the hot market took at least a year – this is the time it took for entitlement of land, permitting and financing to be arranged. The reaction to the slowdown in buying is not as swift. It couldn’t be. Properties were bought, monies were committed, entitlements were done, and buildings commenced. But those projects that could be put on the back burner were.

Will there be a high number of “drop outs”? (These are buyers that put deposits down and will not go through with their purchase upon the new homes completion). I do not think so. Real estate is not a commodity. It has emotional value and personal involvement. The projects that are proceeding to closings now are seeing very little actual drop outs. Let’s hope that continues.
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I recently finished reading Good To Great , by James Collins, Harper Business, 2001. The book was given to me by my friend Christopher Jacob. He was sure that I would identify with it. He was right, and I highly recommend the book. Collins has a reference in the book to Admiral Jim Stockdale, the highest ranking prisoner in the “Hanoi Hilton” prisoner-of-war camp during the Vietnam War. Stockdale endured eight years of imprisonment. Collins asked, “Who didn’t make it out?”

Stockdale replied, “The optimists”

He goes on to say that these were the guys that kept thinking they were getting out by, say Christmas; then Easter; then Summer; etc. They kept looking forward to their release and not dealing with the harsh realities of life in the camp. Collins even went so far as to develop “The Stockdale Paradox”.

I could not help drawing the parallel with the real estate optimists that last august said the buyers would return by Season. Then it was, “Well, this is a slow season - wait until after Christmas,” then it was, “Heck the real buyers buy just before they go home for the season.” Meanwhile they went about their lives spending money like it was 2004.

The point is: optimism is fine. However you need to keep your eye on the certainty of your success, and at the same time you must deal with the harsh realities of life that will get you there.

(A small example; you will sell your condo, but deal with owning for the next (2 years) until you DO sell it.)

I have always been a commercial real estate guy. I like the numbers, the art of the deal, the logic of the buyers and sellers, and I love the commercial market. Market America got heavy into residential over the last four years. We still do very well in that arena and do best representing buyers. Buyers need knowledgeable agents to find the best deals in a field of many great deals.

My personal love is still commercial. In this category I put residential investors.

We have released our office condos for contract at Cyperlin Center. THIS IS OUR OWN DEVELOPMENT. Prices are from $958,000 to $4,000,000. Completion will be late 2007 or early 2008. You need to visit the site to appreciate the grandeur of the vision for this office building. We need ten percent down now. Call or email me for details or go to the website.

We have added to our commercial team and we now have one of the best teams in the county. We are working on self storage land, office buildings, medical buildings, industrial, and retail properties. Apartments, retail and multi-use centers. We know how to work with investors and sellers alike. Try us. You will not be disappointed.