Newsletter – 2007 Single Family Residential Home Market Analysis and 2008 Predictions

The final numbers are in for a bad year in residential real estate. Will 2008 show improvement?

January 1, 2008 – Palm Coast, FL – GoToby.com closes its first calendar year and the housing market in Palm Coast and Flagler County, as well as nationally, closes its worst year since the 80’s. But the slide is two years old. How far did it drop? Are we at the bottom? When will it start up again?  The numbers tell the story.

I track three sectors of the local residential market closely:

• Single family residential homes – Single family homes make up the core of the real estate market. No matter what is happening in the larger economy, people move each year due to job changes, down sizing, ill health, family issues, etc. These people represent the major non-discretionary component of the market.
• Palm Coast Lots (PCL) – Palm Coast lots represent the closest thing to a commodity in real estate. They represent the original 40,000 plus lots originally platted by ITT when Palm Coast was first planned. Approximately 10,000 remain vacant and other than the salt water canal frontage lots, are similar.
• Condominiums – The Palm Coast area is popular as a retirement, vacation, or second home market destination. Hence the large number of condominiums here. The condo component is largely second home and investment driven.

Data used is that reported by the Multiple Listing Service (MLS) which does not include "sale by owner" or property sold directly by developers or builders. This report covers single family residential homes only. Palm Coast lots and condominiums will be dealt with in a subsequent newsletter next week.

Single Family Homes

Median Selling Price:

For each month since January 2006, the median selling price for existing single family homes in Flagler County has dropped from the same month in the previous year. December 2007’s median selling price, $190,000 represents a drop of 17.2 percent from December 2006‘s $229,500 and a drop of 27 percent from the December 2005 peak of $259,950.

Selling Price per square foot of living area:

The median price per living square feet finished with a December low of $99.52. This is the first time since 2004 that this measure has been below $100/square foot and represents a 29 percent drop from the $139.37 seen in December 2005.

Total sales volume:

While both median sale price and median price/square foot give a good indication of how far the average value of Flagler County single family homes has fallen, they do not tell the whole story. The economy is driven by volume, not price alone. It’s the volume that pays real estate commissions and construction workers. It feeds government coffers with fees. In the fourth quarter of 2007, sales of single family homes produced $70 million. The peak of $244 million was achieved in the third quarter of 2005. That’s a 71 percent decrease. For Flagler County alone, this represents a decrease of $1,218,000 in deed document stamp fee revenues (for single family homes sold through MLS).

Building permits:

The number of building permits issued by Palm Coast for single family residential homes dropped from 2,915 in 2005 to 1,141 in 2006, then to 418 in 2007. At today’s level of impact and permitting fees (over $18,500 per new home), that represents a $46 million revenue loss to Palm Coast and the Flagler County School District.

Absorption rate:

The absorption rate is defined as the total number of properties listed for sale divided by the number of recent monthly sales. It’s a rough measure of the number of month’s sales that are in the available inventory for sale – the higher the absorption rate, the softer the market. Generally, any rate above seven indicates a buyer’s market. I measured absorption rates three times in 2007. In June, I measured the Palm Coast sections of Cypress Knolls, Indian Trails, Lehigh Woods, Matanzas Woods, Palm Harbor, Pine Grove, Pine Lakes, Quail Hollow, and Seminole Woods. I also measured Flagler County two times. The results are summarized in the table.

Note: The over $300,000 numbers show more varience because the number of transactions and listing is smaller. A small change makes a big difference.

No matter which standard of measure you prefer, the fourth quarter was weakest yet. Most reports had forecast an increase in inventory of homes for sale due to an expected increase in foreclosure properties but the increase didn’t happen. The weakness seems to be caused more by a lack of buyers than an increase in inventory. People are reluctant to buy when a perception prevails that the bottom hasn’t been reached. Remember too that the December numbers do not reflect the condition of the market in December. Because of the time lag between the date of the sales contract and the closing, we are really measuring the market as it existed in October. Would you buy $250,000 worth of stock if the only price you could confirm was the price for which it sold two months ago, especially if you suspected the price was still falling?

When will the market reach bottom? I believe it will happen in late 2008, but we won’t know until long after the event. Not only do we have to wait until two months after the sale contract for sales data, but also for several months after to confirm a trend (vs. an anomaly). It will bottom when buyers start entering the market, a few at a time initially, soon to be followed by still more. The inventory will start shrinking while, at the same time, there won’t be any new construction coming on line. For new homes to be available when the market turns, builders would need to start construction months earlier. That’s not likely to happen.

Some economists argue that the median price needs to fall to a level affordable by a buyer with the median local household income. This seems to make sense on the surface, but many home purchases in retirement and second home markets, such as ours, are wealth driven rather than income driven. At current exchange rates, you don’t have to be too wealthy in Euros, Pounds, or Yen to be wealthy in Dollars. I forecast a pick up in the volume of sales to foreign buyers.

Spring will be a critical time when the local market is typically at its best. On the other hand, it’s also the time when many ARMs are scheduled for rate resets.