Speculation in Real Estate
At the time, the encounter seemed to reflect more the fast-lane Miami condo scene than main-street Florida real estate. But the post-bubble economic wreckage that now litters the state’s major population centers makes it clear how rampant speculation was everywhere. In the Tampa Bay area, news reports detail friction in many new subdivisions as large numbers of speculative buyers, unable to sell their homes, lease them to renters who are, let’s say, less community-minded than home buyers who actually moved into the neighborhood. Renters now amount to as many as half of the residents in some subdivisions. In Lee County, which I just visited, there’s now a bus tour of foreclosed homes, which are coming on the market at about 19 a day. In southeast Florida, lawsuits fly among developers and buyers, many of whom were aspiring flippers and are now trying to escape their contracts.
The pervasiveness of the speculative mentality is reflected in how many average home buyers ended up with the kind of mortgage financing that only speculators should want — or get. Plenty of average people who didn’t know better got into homes by borrowing half the purchase price with an interest-only mortgage loan and the other half with a “home equity line of credit” that adjusts upward after a year or so. They end up as “homeowners,” but have no equity and face rising monthly payments. In different times, lenders would have told them to come back after they had a real down payment. (It’s worth noting that the most egregious lending offenders weren’t banks, which kept much higher lending standards during the price run-up.)
While the day-to-day headlines likely will continue to focus on the pain in the market, the broader context of Florida’s real estate story is somewhat more hopeful. Housing prices have, in many markets, adjusted quickly to more or less 2003 levels. The free fall in prices has given way to the emergence of a slow, “bumping-along-the-bottom”-type market that will see inventories of for-sale homes shrink back to normal levels over the next couple years. One industry executive I spoke with says she expects a small surge in bargain hunters this summer. No one expects a new boom, but it’s worth mentioning that several new Development of Regional Impact-size projects are already on the drawing boards, with developers hoping to time construction starts to when the market has revived.
Another aspect of the current market that’s remained out of the headlines is the increased affordability of housing for the oft-mentioned cohort of “police officers, firefighters and teachers” who purportedly faced such a tough time buying homes during the boom. “That Achilles’ heel is gone,” said one banker I spoke with in southwest Florida.
The most frightening speculation that’s going on in real estate these days has nothing to do with building and selling homes, but rather with our state’s approach to insuring them. The Legislature and the governor took no substantive action last session to restore a healthy insurance market. The Legislature passed a bill whose biggest provision is to stimulate the creation of startup insurance companies by creating a loan pool using $250 million in reserves from the already undercapitalized, state-operated Citizens Property Insurance Corp. The lawmakers apparently think that adding to the 20-plus “domestics” — Florida-based insurers that generally cover only Florida homes — that now have a third of the market in the state will keep down premiums.
The problem, as Mike Vogel’s reporting this month makes clear [“A Game of Risk”], is that all those domestic insurers are striving generally for the same risk profile: Newer, more robust homes, with a mix of a few coastal-area homes balanced against many in safer, interior areas. Without the ability to distribute risk outside the state, there’s just not all that much more room for many more domestics, so the creation of a few more companies isn’t likely to push rates down much if at all.
In addition, the $250-million loan pool represents the conversion of healthy reserves into a potential liability with a double-whammy for the state: If Citizens makes a loan to a startup insurance company that fails after a storm, the state will have to make good on the company’s losses by charging all of us. At the same time, Citizens will be coping with its own storm losses with fewer dollars in the kitty. That means that to make up its own losses it will have to assess us more than it otherwise would have — on top of charging us to make good on the failed insurer that it helped create with what should have been reserve money. Whew.
Meanwhile, the Legislature isn’t allowing Citizens’ rates, which are an actuarial fantasy, to rise until 2010. It allowed Citizens to increase its exposure by insuring multimillion-dollar homes owned by the very people who can most afford private-market rates. And it continued to allow Citizens to offer builders insurance to coastal-area development, subsidizing construction in the most vulnerable areas with the highest potential storm losses.
This is nuts. Even as it embraces the idea that climate change is coming at us like a freight train, state government continues to bet that we’ll be immune from a storm long enough for Citizens, its pretend-insurer, to build up the funds to pay for one when it finally hits. The bottom-line risk remains: A decent-sized storm could bankrupt the state in fairly short order, with a cascade of storm damages that can’t be paid for and charges to policyholders of every insurance company in the state that could run for decades.
The biggest real estate speculator, it turns out, isn’t a developer or a flipper. It’s our own government.
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