Number of Distressed High-end Properties Increases – a Market Bottom?

Financially marginalized owners of luxury, investment, and second home properties are feeling the pain. The result – an increase in the number of distressed high-end properties appearing on the market

Palm Coast, FL – July 7, 2009 – Owners of expensive real estate are not immune to financial setbacks. Today, some find themselves financially marginalized by the double collapse of the real estate and financial markets. Facing ongoing carrying costs, often including association fees and club dues, they have run out of reserves. Flagler County is experiencing an increase in the foreclosure rate of high-end properties.

High-end Foreclosures

Until recently, most local foreclosure activity was limited to the "under $200 thousand market. Properties in that category began to hit the market in significant numbers at the beginning of 2008. Owners of inexpensive homes often lack financial reserves. A job loss or bump in interest rates can quickly cause mortgage payments to stop.
Owners of more expensive properties (luxury homes, investment property, and second homes) typically have greater financial reserves. But the depth and duration of the current real estate recession has consumed the reserves of some. Now, lenders are foreclosing.
There were 263 lis pendens (notice of foreclosure) filed in Flagler County in June ’09, down slightly from last June’s 280. (There were only 130 filed in June ’07 and 29 in June ’06.) While the overall foreclosure rate is settling down, the list now includes many more high-end properties. Among properties on the June ’09 list are:
  • Homes and lots in Grand Haven
  • Homes and lots in the Hammock luxury communities including an oceanfront lot and two Island Estate homes
  • Four lots in The Conservatory
  • A Cambria condominium in Hammock Dunes
  • European Village condominiums
  • Surf Club condominiums
  • A Canopy Walk condominium
  • Condominiums in Tidelands
  • Hammock Beach condominiums
  • A Woodhaven condominium
Why is this important? It’s important because the over $300 thousand market has remained stubbornly sluggish. Buyers are not sure the bottom of the market has been tested, but I believe the arrival of distressed properties has accomplished this. The condo, second home, and investment market will follow the same pattern as the under $200K market. Look at these numbers:

Effect of Distressed Properties on Home Sales in Flagler County, Florida





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Clearly, the affordable single-family home market was sparked by the arrival into inventory of distressed properties; lender-owned (by foreclosure) and short sales. Lender-owned properties are experiencing something not seen in the last three years; offers are being received at prices greater than the listing price. Agents report that some contracts are written the same day the property is listed.
There are already signs that the condo market is responding to the pricing pressure of distressed properties. Luxury condos in Hammock Dunes are selling for well under $300 per square foot vs. $400 to over $500 per square foot only a couple of years ago. Similar bargains (compared to prices two years ago) are being found at Surf Club, Cinnamon Beach, Hammock Beach, Canopy Walk, and Tidelands. Three short sale condominiums have closed already in the first 7 days of July.
This is not good news for sellers, especially those that bought at the peak market and can’t wait untill later to sell. But it’s great news for buyers. Prices are as far below intrinsic value today as they were above intrinsic value in 2005.

Single-family Residential

The last two months have not been stellar at the unit sales level. In both May and June, the number of units sold was slightly below the same period for last year. But the high number of short sales distorts the record. The closing cycle for short sales is much longer than traditional or lender-owned sales. Importantly, the inventory of single-family homes for sale continues to drop, reaching the 1,400 level. This represents a drop from a peak of over 2,400, and is down by 60 in just a month. 571 homes are under pending or contingent sales contracts, up from 549 last month.

Palm Coast Lots

Additional evidence of normalcy comes from the Palm Coast lot sector. There were about 48,000 10,000 square foot (approximately) lots in the original Palm Coast planned community design. Aside from those on salt water canals, Palm Coast lots represent the closest thing to a commodity in the local market. They are fairly uniform; there is a large supply and a sufficient number of transactions for statistical analysis.
Land represents the underlying (truly underlying) value of real estate. As land costs rise, the value of developed real estate rises accordingly. In other words, the increase in the market value of your home is caused by the increase in value of the lot on which it sits. Early in the decade, Palm Coast lots were available at prices between $5 thousand and $15 thousand. The subsequent building frenzy drove the median selling price to $77 thousand in January ’06. The median price this year to date is back to the reasonable level of $15,000. In fact, of the 95 non-salt water canal lots sold in the first 6 months, none sold as high as the peak median price. Isn’t it also ironic that three lots in Ginn’s Conservatory sold recently for under $40 thousand?
I don’t see any strong price resurgence in the near term, but great buying opportunities are available in all sectors of the market now. What a great time to be on the sidelines with cash.

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