Tuesday, November 01, 2005

Experts Agree - No Sarasota Real Estate "Bubble"

Home Price Analysis for Sarasota-Bradenton-Venice

By the Research Division of the National Association of REAL TORS@

Executive Summary


With home prices rising strongly in most parts of the country, there has been widespread media coverage on the possibility of a housing market bust. A thorough analysis of the Sarasota-Bradenton- Venice metro market, as detailed below, reveals that there is very little danger of this.

In fact, the local housing market is in excellent shape with a
potential for significant housing equity gains, particularly for homebuyers who plan to remain in their house for the long run.

Because prices have risen faster than income, the ratio of price-to-income is currently above the historical norm. This measure is frequently cited to imply that there is a housing market bubble.

But this ratio is a misleading measure in assessing bubble
prospects.

A more relevant measure is the mortgage servicing cost relative to income.
This ratio is at a very manageable level. It implies no widespread financial
overstretching to purchase a home in the region. Furthermore, the nationwide supply of homes on the market relative to home sales is very lean, suggesting similarly tight market conditions in the local area.




Price Activity

The current price of $367,800 is 80% above the national average.
The median home price rose 23% in 2004 and 92% in the past three years.
Home price growth has been weak throughout the 1990s. So part of the recent
increase is attributable to the "catch-up" effect.


Affordability

Because the prices have risen faster than income in recent years, the ratio of price-to-income has been rising strongly. This measure is frequently cited to imply that thereis a housing market bubble.

Mortgage rates declining to 45-year lows have been a major force in boosting home
prices in recent years. Lower rates allow homebuyers obtain a larger loan without
necessarily increasing monthly mortgage payments.

A more relevant measure for assessing the risk of a home price bubble is the median
mortgage servicing cost relative to the median income. This ratio is currently above
the local historical average, but well below the worrisome levels of the early 1980s.

It implies no widespread financial overstretching to purchase a home in the region
Furthermore, the newly arriving retirees may not get reflected in the income data
since they are not working, but they could have substantial wealth holdings.


Local Sarasota Fundamentals

The job market has been exceptionally strong. There have been 41,000 payroll job
additions in the past five years. Many new job holders seek their own housing units.

The region added in the past five years an estimated 56,000 new housing units of
which about 42,000 were single-family units.

The ratio of five-year job gains to five-year new home construction shows the
"hangover" impact of the housing shortage, or housing surplus.

In our case, the localmarket is at a neutral level as the ratio is right near one. With recent job gains and the expected continued economic expansion, the jobs-to-new home ratio could further
increase.

In addition, as mentioned earlier, the newly arriving retirees will not show
up in the jobs data, though they will need housing.


Other Factors

There is no good data on ARMS or interest-only loan composition for the local
market. But, there have been some reporting in the media of a higher use of these
loans in recent years compared to the past. If true, some homeowners will feel the
pinch of higher rates over time.

The baby boomers are in their peak earning years and have been active in purchasing
second homes, which many consider as their future retirement homes. The baby
boomer impact will continue for another 10 to 15 years.

The region is a prime retirement destination. The local market will benefit from
second-home purchases by U.S. baby boomers as well by wealthy foreigners.


Stress Test

Price declines in the local market are unlikely according to our stress test.
The local housing market will experience a price decline of 5% only under
extreme unlikely scenarios.

For example, mortgage rates rising to 9% in combination with 33,000 job losses could lead to a price decline.

Such scenarios are highly unlikely. Most credible forecasts predict the region will
create at least 12,000 jobs over the next 24 months and mortgage rates will hover
around 7% by the end of 2006, which bodes well for future price gains.

Even in the unlikely event of prices declining by 5%, most homeowners will maintain
sizable equity build-up in their homes. Housing equity will most likely continue to accumulate to local homeowners. The equity gains under three price growth scenarios are presented below.

One scenario assumes a historical conservative price appreciation of 1.5% above consumer price index inflation. With most credible inflation forecasts pegged at 2.5%, home prices can expect to rise by 4% per year under normal circumstances.

The two otherscenarios assume slightly below (1.5%) and slightly above (6.5%) the normal rate of appreciation.

The local market is more likely to appreciate at an above-normal rate because of the
on-going wealthy baby boomer searching for retirement destinations.


Additional Discussion Points

Home price declines are very rare. In fact, the national median home price has not
declined since the Great Depression of the 1930s. Stock market collapses, the OPEC
oil crunch, economic recessions, and even wars have not negatively impacted national
home prices since the 1930s.


There have been few times when local prices declined. In nearly all these cases, the
price declines were accompanied by sharp prolonged job losses. It is difficult to
foresee a price decline in ajob creating economy.

Homes trade far less frequently than financial assets (about one home sale every 7 to
10 years for most homeowners). There are also larger transaction costs associated
with selling a home due to the lengthy careful examination demanded by home
buyers and sellers. Therefore, home prices are not prone to fluctuations as in the
stock market.

There are neither panic sells nor margin calls associated with homes.

Many non-quantifiable factors could be important for this metro market in
determining home prices.

Access to cultural life, the quality of museums, nearby
local and national parks, water views, exclusive neighborhoods, weather, the
international airport, city vibrancy, restaurants, and a host of other non-quantifiable factors could have an important influence on the overall pricing.

There are immense tax benefits to owning a home. These tax considerations were not
considered in the analysis. For example, the 1998 law permitting primary owner
occupants to trade down without having tax consequences.

Also most home sales results in no capital gains tax. In addition, long-term capital gains tax rates were reduced in 2003, thereby providing higher return for home investors.

These positive benefits, if accounted for in the analysis, would have shown an even stronger case for housing fundamentals in supporting home prices.

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