Wednesday, June 21, 2006

Unaffordable Florida Housing Markets

Study predicts Charlotte County, Florida housing markets becoming California East

Housing affordabilty has deteriorated remarkably since 1999 both in Charlotte County and all over Southwest Florida.

Florida's housing price explosion may have less to do with heavy demand than with restrictive land-use regulations that have retarded new development.

And Charlotte County -- applying a familiar Mark Twain quote about human cowardice -- is "not only marching in that procession but carrying a banner."

The cost of a single-family home in the Punta Gorda metropolitan statistical area has doubled relative to family income in just the last six years, according to a recent study by the American Dream Coalition, an Oregon-based think tank that promotes home ownership and free market principles. The metropolitan statistical area includes all of Charlotte County.

The study defines an "affordable" house as one that's priced at roughly twice the median annual family income in a metro area, based on U.S. census figures. At the outside, this ratio of home price to family dollars should be no more than about 2.7 to 1. Anything above this more than likely represents waste caused by artificial curbs on supply.

Despite media reports of a nationwide housing affordability crisis, many of the nation's greatest cities remain affordable, as ranked by the price-to-income ratio. Atlanta, Houston and Indianapolis are good examples.

At the other extreme, there's San Francisco, where a typical home costs nearly 12 times annual family income.

What's affordable?

Census data going back to the 1950s shows that, nationally, families tended to buy houses that cost a little more than two full years of income. A family devoting 25 percent of its income to mortgage payments should be able to own such a dwelling in no more than 20 years.

By this measurement, housing in Charlotte County was solidly affordable as recently as 1999, with a 2.06 ratio of home price to family income, the study reported. Indeed, the area beat the national ratio of 2.24.

But by last year, the median home price had risen to nearly four times median family income -- a ratio of 3.92.

Using the national 2.24 price-to-income ratio in 1999 as a baseline, the study estimates that houses in this area are 43 percent overpriced. A ratio of 2.24 is 57 percent of 3.92 -- the difference represents a 43 percent price rise over six years that hasn't been offset by any increase in the median income of Charlotte County residents.

Some of the area's price boom can be attributed to post-Hurricane Charley scarcity of product. Also, more money has been flowing into Southwest Florida because it's still an attractive alternative to costlier cities. That factor tends to bid up the price of the existing housing stock.

But nearly every other metro area in the state has experienced a similar price breakout, save a few smaller communities like Pensacola and Lakeland. Home prices in nearby Naples, Fort Myers and Sarasota -- none of which suffered extreme hurricane damage -- have all nearly doubled since 1999.

Even Naples was somewhat affordable as recently as 1999, at least when one considers its preponderance of high-income residents. Its 1999 price-to-income ratio was 2.72; today it's 5.46, making it an almost impossible market for working people.

Fort Myers deteriorated from a ratio of 2.08 to 3.89; Sarasota from 2.15 to 4.03.

Home prices rose roughly 11 or 12 percent annually in all four Southwest Florida metro areas between 1999 and 2005. By comparison, Atlanta home prices rose 3.2 percent, and Houston 2.9 percent a year over the same time.

Planning paradise

The allure of life in paradise just can't explain these numbers, concludes economist Randal O'Toole in a report titled "The Planning Penalty: How Smart Growth Makes Housing Unaffordable."

Rather, he attributes most of Florida's rising home prices to the Growth Management Act of 1985, which required cities and counties to write comprehensive land-use plans. He views the rise in housing prices that began in the 1990s as a result of these plans.

Florida, once renowned as an inexpensive place to raise a family or enjoy retirement, is in imminent danger of following California and the Northeast toward "a dangerous precipice," O'Toole wrote.

If Florida "continues on its present course, it will suffer such high housing costs that only the very rich will be able to afford the American dream of homeownership. Only if it quickly changes course will it remain a state whose housing is affordable for people of all income levels," O'Toole wrote.

O'Toole quantifies his argument by computing a "planning penalty" for each metropolitan statistical area in the nation. This represents the extra cost to homebuyers created by a cluster of restrictive planning practices termed "smart growth" by advocates. For the Punta Gorda area, O'Toole estimates that the cost of regulation adds about $60,000 to the median price of a house.

The basic intent of "smart growth" is to curb suburban sprawl by using the planning and zoning process to restrict development. "Smart growth" tends to support greater population density, along with mixed commercial and residential uses within neighborhoods and generally less reliance on the automobile.

"Smart growth" policies include:

* Impact fees on new construction, based on the assumption that new residents create additional governmental costs, which they should pay for.

* Urban growth boundaries, or other restrictions on the amount of land available for development.

* Municipal green space purchases, which have the same effect.

* Drawn-out permitting processes, including excessive opportunities for public comments and appeals.

* Historic preservation ordinances.

* Tree ordinances.

* Design codes that force developers to use higher-cost construction methods.

Even measures that are supposedly intended to promote housing afforability might have the opposite effect. For example, O'Toole criticizes the practice of "inclusionary zoning," which requires a developer to construct subsidized low-cost housing as a condition of getting permits for a larger project. This, he contends, will simply have the effect of driving up the cost of the remaining units.

Who'll watch the developers?

That's not to say there aren't benefits when the goverment requires developers to make a plan for a community and stick to it.

"If you create a nice community, people may be willing to pay more to live there," said Charlotte County Commissioner Adam Cummings.

"The free market works best when the money is there when you start," he said.

In an ideal world, municipal governments would be able to issue permits with confidence that developers had the financial resources to complete their projects and not impose any external costs on the community.

Cummings offered this example: A new area is opened for low-density residential development. All goes well for a time, until septic systems begin backing up and creating pollution. Then the locality has to go back into the area and build sewers, at great expense. Effective planning is intended to keep such miscalculations from happening.

One local project that will be affected by inclusionary zoning will be Murdock Village. The Charlotte County Commission awarded the deal to Stock Development of Naples.

Brian Stock, chief executive officer of the development company, said he's not fazed by the escalating cost of development in Charlotte County. Likewise, Murdock Village offers some advantages in that it's already zoned and the county already has its own ideas on how it should be developed.

Although it will still take several weeks to work out a development agreement, Stock said that everything that's been done so far should actually make building an easier and cheaper proposition for his firm -- at least compared to having to acquire raw agricultural land that has to be rezoned. He noted that any development plan will have to include housing at a wider range of price points than his company has developed in the past. Stock is mainly noted for its luxury communities in Naples and Fort Myers.

Maryann Mize, vice president of Charlotte State Bank and former president of the Charlotte County Chamber of Commerce, suggests that communities need to be selective about their planning practices.

The perfect recipe for managing growth doesn't exist due to the unknown variables in a particular community.


There is apparently another factor in the Florida housing crisis, aside from the periodic hurricane cycles. According to a Palm Beach Post story, the ease with which housing loans for rebuilding storm-damages have been obtained has led to a spate of foreclosures and defaults.

Over $106 million in home loans have collapsed in that vicinity during first quarter 2006 alone. This compares with about $68 million in mortgage defaults in the period of 2005. As the article puts it, "Experts say the worst is yet to come," citing a spokesman for the Center for Responsible Lending, a Washington nonprofit that tracks lending practices, as saying, "We know the whale is coming, we just don't know how big the whale is."

It notes the explosion of new brokers and brokerages who obtained Florida licenses during the last housing boom, and helped a number of middle-income buyers to move into half million-dollar homes.

More South Florida Sellers Turn to Auctions

The five-bedroom house in Davie with hurricane shutters, a pool and guest cottage went on the market last year for more than $1 million. It sat for six months with no takers.

So the owner, Les Galex, decided to try something different. He hired an auctioneer.

Boca Raton auctioneer Fred DeFalco and his team hosted three open houses, advertised in newspapers and mailed thousands of public-sale brochures. Seventeen bidders, each toting a $50,000 cashier's check, crammed into the family room of Galex's house on a scorching hot April day. In seconds, DeFalco worked the bidding to more than $900,000.

A Broward County couple, with their five wide-eyed, well-behaved children sitting on the floor, made the highest bid: $976,500. They signed the papers, and the sale closed less than a month later.

"Everything went off without a hitch," Galex said.

As the nation's housing market continues to soften after a five-year boom, more sellers are eschewing traditional real estate listings for public auctions, which accounted for 6 percent of all U.S. real estate sales in 2004, according to the National Auctioneers Association. That number grew to 19 percent in 2005 and is expected to balloon to 30 percent by 2010.

Auctions used to be associated more with livestock and vacant land. But last year residential real estate auctions generated $14.2 billion in sales, an increase of more than 23 percent from 2003.

The Florida Auctioneers Association doesn't provide specific numbers, but President Neal Van De Ree said the public sales statewide have increased tenfold just in the past eight months. The process is fast, gives the seller a measure of control and almost always brings fair market value, proponents say.

"We're getting tons of calls," Van De Ree said.

Another reason to consider an auction: It spotlights a property, helping it stand out. And that's noteworthy in South Florida because the number of homes for sale has more than doubled since last year in Palm Beach County and tripled in Broward County.

"That `auction' sign is magic," said auctioneer Scott Frank, who works with DeFalco.

Marilou MacKenzie, auctioneer for Palm Beach Gardens-based Illustrated Properties, added: "Auctions create a buying frenzy. It's an ego thing. If you're trying to buy something, you don't want the guy next to you to have it."

A seller who commits to an auction usually doesn't have to pay a commission or most of the closing costs, which are the responsibilities of the buyer. But the seller does have up-front marketing expenses that vary, depending on the auction company.

Some companies charge up to 3 percent of the value of the home, meaning a seller might find an auction cheaper than listing the property with a real estate agent. Other companies charge more.

Annette Elms, president of Jupiter auction firm Christenson-Elms, said it's not uncommon for her firm to get $30,000 to market a property. The money is spent on television, newspaper and Internet advertising, as well as signs and direct-mail brochures. That ensures dozens, if not hundreds, of qualified bidders on the day of the auction, Elms said.

The price is steep, and often causes sellers to forgo auctions. But those who do choose the process know their homes will sell within 90 days or so and fetch top dollar, Elms said.

Those are important considerations in today's uncertain housing climate, where homes can stay on the market for months, steadily increasing sellers' carrying costs.

"They might be carrying two mortgages and they might just want to get on with their lives," Elms said. "If you list your property, it's going to be on the market a very long time. No matter how nice it is, it's just one of many that people have to choose from."

Real estate agents still can get commissions from auctions, but some don't like the concept. Scott Agran, president of Boca Raton-based Lang Realty, called it a "fad," saying that qualified agents can market the homes just as well as auctioneers.

"If the sellers have priced their homes correctly, they're going to get the same type of activity and interest," Agran said. "Everybody's always trying to create a better mouse trap.

"An auction is great hype, but it's not something I would look into or am excited about."

Bidders might pay more in fees to buy a home at auction but usually don't mind because they're dealing with motivated sellers and avoiding drawn-out negotiations, auctioneers say. They also tend to feel like they're getting a deal on the price of the home, although that might not be the case.

"You know you're not going to overpay for it," said Carl Carter, spokesman for J.P. King Auction Co. in Gadsden, Ala. "With an ordinary listing, you make an offer, and you might be 15 to 20 percent over what anybody else was willing to pay."

Auctions generally work best for high-end homes, but some real estate observers say they could become more common for mid-priced properties if the housing market remains sluggish through the rest of the year.

The public sales aren't meant for homes that lack a certain appeal. In addition, many auctioneers will pass on unmotivated sellers and those who don't have much equity in their homes because they're unrealistic about how much the properties will fetch. Some auctioneers won't handle distressed properties.

Auctions are designed to help sellers find buyers after only about 10 minutes of bidding. They don't always go according to plan, but still can be effective.

Howard Frank, no relation to Scott Frank, hired DeFalco to auction his five-bedroom Weston home on June 8. A Weston couple looking for bigger digs had the high bid, but it wasn't high enough for Howard Frank, who exercised his right to reject the offer.

After a weekend of back-and-forth negotiations with different prospects, Frank agreed to sell for $705,000 to a New York native, Paul Ferretti, who had toured the house before the auction.

Business prevented Ferretti from attending the sale, but the event set the market value for the home and showed him what he had to pay to get it.

In that respect, Frank, 42, considered the auction a huge success. "I would never list my house again."

Americans Leave Big Cities in Search of Open Spaces

Americans have been moving west and south for decades, and last year was no different. All but three of the 50 fastest-growing cities from 2004 to 2005 were in those regions of the country, with many in California and Florida, according to Census Bureau estimates yesterday. The estimates were for cities with populations of 100,000 or more.

Elk Grove was followed in the top five by North Las Vegas, Nevada; Port St Lucie, Florida; Gilbert, Arizona, and Cape Coral, Florida.

All five are suburban, and all have fewer than 200,000 residents.