"Hurriphobia" Pricks South Florida's Residential Real Estate Bubble
Sellers are mystified by the fact that after several months of listing they have had no showings or any offers. Some desperate sellers have decided to ask for help from a higher power and have buried statues of St. Joseph on their property. Urban legend holds that burying this patron saint of real estate will guarantee a quick sale.
Numerous commentators deny that a South Florida real estate bubble is in the process of bursting and note that median sales prices remain virtually unchanged. At worst, these people believe that there will be a soft landing. Such optimistic prognostications are nothing more than wishful thinking and are generally espoused by those heavily reliant on high real estate prices.
In 2006 South Florida reached the point where the average person could not afford the average home. In fact, most people could not afford to buy the very homes they own, if they had to pay today’s asking price.
Florida real estate developers have generally been living in a “Field of Dreams” environment for the past 30 years, whereby if they built it then people would come to occupy whatever they built. This operating philosophy was made possible because Florida enjoyed significant in-migration and, in turn, those people needed dwellings.
Florida Land Crash - 1926
It was not always that easy for real estate developers. For example, in 1926 real estate speculation ended in what became widely known as the Florida Land Crash during which many fortunes were lost by builders and developers. In the mid-1970s there was a collapse in the condominium market caused by overbuilding and easy financing by REITs. Each of those episodes caused great financial losses and it took a number of years for the Florida real estate market to recover.
The Florida Land Crash of 1926 deserves special mention because it occurred at a time of general economic prosperity in the rest of the nation. Hurricanes played a major role in the crash and collapse of Florida real estate prices in the 1920s. The Miami Hurricane of September 1926 caused the loss of 415 lives, destroyed 13,000 homes and contributed significantly to the despair that was becoming embedded in the real estate sector. Historians suggest that the 1926 hurricane pricked the real estate bubble that was showing signs of deflating.
The initial decline in real estate prices was somewhat orderly from 1926 until the fall of 1928. In September 1928, however, the Okeechobee Hurricane struck the southeast coast of Florida and left an estimated 3,500 people dead. That hurricane ranks as the second worst natural disasters in the history of the Unites States and it served as the coup de grace for the South Florida real estate. Newpaper accounts of the 1928 hurricane featured headlines such as “Florida Destroyed! Florida Destroyed!”
That hurricane and the stock market crash a year later brought real estate activity to a halt throughout the nation. South Florida real estate prices did not fully recover until the arrival of military forces and training facilities that accompanied World War II.
It took years of advertising to create the mental image people had of Florida as a land of sunshine, orange blossoms, sandy beaches and gently swaying palms. Unfortunately, a force of nature in 1928 wiped out that image and replaced it with visions of raging water, gale force winds, death and destruction of property. Those deep-seated fears gradually eroded with the passage of time and effective promotion of South Florida. People’s vision of South Florida once again returned to balmy images with little or no thought of storms.
Deja Vu
The dormant fear of hurricanes was awakened in the September 2004 when South Florida was struck by Hurricane Frances and Hurricane Jeanne. That fear was elevated and became palpable in August and October 2005 when the area encountered Hurricanes Katrina and Wilma. In a 13 month span South Florida was struck by four destructive hurricanes with attendant loss of life and billions in property damage.
Television coverage of these storms as they struck Florida allowed all viewers to experience the destructive power of such storms. Importantly, viewers saw the human suffering and virtual destruction of New Orleans from the breach of its levee system brought on by Hurricane Katrina.
Hurriphobia and Other Causes
This fear of hurricanes is now so pervasive that it might be appropriate to officially give it a name such as hurriphobia. It should be added to all the other phobias that afflict people. Hurriphobia could then take its rightful place alongside agoraphobia, acrophobia and other phobias that describe unnatural fears which cause panic, flight and avoidance. Just as a person with acrophobia avoids flying and high places, the person with hurriphobia will naturally avoid places that experience hurricanes.
Numerous people who were once considering retiring to Florida have abandoned those plans because they have become victims of hurriphobia. They acquired this modern mental disorder from watching television coverage of hurricanes.
Hurriphobia is also observed among a growing percentage of South Florida residents who have weathered one or more of the six (6) hurricanes that have struck during the past three years. Hurriphobia among South Florida residents can be more severe because these people also frequently suffer from post-traumatic stress attributable to their experiences during recent hurricanes. Florida residents with this condition have an unnatural fear of death and see themselves in God’s Waiting Room (aka Florida) without a lot of other people.
The number of hurriphobiacs alone is enough to guarantee that the number of dwellings available for sale (listed and unlisted) will far exceed the number that will be sold for the foreseeable future. The strong desire by resident hurriphobiacs to leave Florida will cause prices to fall. Sales agents who prompted buyers to buy before prices rose will prompt sellers to sell before prices fall further.
The negative psychological impact of recent hurricanes represents only one of many negative forces bearing down on Florida residential real estate prices. Other factors that are causing growing problems are (1) layoffs within the construction and real estate sectors, (2) increases in the cost of property insurance, (3) increases in property taxes especially for non-homesteaded properties, (4) increases in interest rates, (5) lack of buyers able to qualify for mortgages, (6) continued completion of speculative units, (7) speculative buying by people (flippers) who own several dwellings, (8) increased cost of construction partially attributable to stringent building codes designed to protect inhabitants during hurricanes, and (9) continued financing of new construction by unwitting lenders.
Economic Fallout
The widespread fear and news coverage associated with Tropical Storm Ernesto at the end of August 2006, which failed to even gain hurricane strength, highlights the problems now facing the South Florida real estate industry. South Florida economic activity is heavily reliant on the health of residential real estate. Probably, half of all the businesses and workers in this area are dependent directly or indirectly on real estate for their income. Businesses that think they are immune to a bursting real estate bubble will undoubtedly fall victim to accounts receivable gridlock, whereby their receivables cannot be collected from other businesses, which, in turn, cannot collect their receivables.
Those who believe they will not be negatively impacted by this perfect real estate storm are mistaken. The wealthy with million dollar mansions and no mortgages will be able to withstand the drop in their net worth and may only be forced to forego some luxuries. Other people who have mortgages and whose net worths are tied up entirely in their homes may find their net worth totally evaporate and even go negative. Some people will be forced to sell in order to pay bills, while others will be foreclosed on by lenders.
The economic pain experienced by homeowners will be directly related to how close their purchase was to the peak in home prices. Those who bought at the peak and paid the highest price will experience the greatest problems since prices on those properties should decline by at least 30 per cent. It will likely take at least a decade for residential real estate prices to reach the heights reached before this bubble burst. Those “flippers” who think they can ride out the South Florida real estate storm by renting out their properties will discover their plan is doomed to failure as rental properties overwhelm demand.
As in all past real estate bubbles, prices will decline to the point where leading sellers of residential real estate will be mortgage lenders and taxing authorities. Distressed property sales will likely affect most areas and cause remaining property owners to question the merits of their continued mortgage indebtedness. Losses on real estate loans will undoubtedly lead to the failure of financial institutions with heavily concentrations.
The daily appearance of more “for sale” signs on lawns is a clear harbinger of collapsing residential real estate prices in South Florida. Those signs will not disappear for the forseeable future and will simply add to the number of dangerous flying projectiles that will accompany the next hurricane.
posted by Tarot Cardreader at 5:59 PM
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