The Law of Real Estate Gravity-Part 1

Are we seeing aftershocks or tremors in the Tampa Bay real estate markets and sub-markets? Actually it is probably both with daily stories emerging about the effects of the rapidly deteriorating prospects for planned developments. From an analyst's standpoint this is part of a logical series of events marking yet another (but nevertheless unique) real estate cycle in Florida. We have seen a nearly unprecedented "up" portion of this latest cycle lasting in some cases nearly five years. The inevitable "Law of Real Estate Gravity" ultimately rules and markets move from being out of equilibrium in terms of excess demand toward level and then declining conditions in terms of prices and volume. It is a simple concept in all markets even beyond real estate; when prices rise and even skyrocket the market participation increases as latecomers join the frenzy and act to increase supply. The next result, a slowing in sales is predictable as is a leveling of prices. Declining prices always seems to catch some by surprise but the results are plainly evident when the now "tooled up" market starts adding massive amounts of supply. At present many are ready to declare the busted bubble healed and are optimistic about near-term recovery prospects. It is not entirely a pessimist's point of view to declare "not so fast"!

The cycle is not new nor unique to Florida but some of the elements present here are worrisome in terms of near term recovery prospects. The first of these is the nature of "users versus investors" in the purchase of the end product. The seemingly global consciousness that compelled so many who were either ill or misinformed to "invest in real estate, they are not making any more" accounts for the expectation of profit by flipping, always sure that there would be a "greater fool" to purchase their investment. At some point the music stops (see this website feature-"how we got here" for more details) and there are no more players.

Additonal factors at work in Florida, particularly south and central Florida include the hangover form the devastation of the recent multiple hurricane seasons, the property tax increases that require us to "pay the piper" and wildly increasing insurance costs. Add to that the growing reality of development density, crime, clogged highways, drought, pollution and water concerns and we now have a recipe for a change in habits and preferences. It is believed by some that there is a migration whiplash taking place where move-ins from the north have increasingly become move-backs from the south. The Florida dream life may be a bit frayed at the edges.

Finally, the beneath the surface rumblings are the future shock of possible dramatic increases in mortgage failures, foreclosures and bankruptcies. The additional hangover from too much borrowing of cheap money against the "sure thing" of value increases is already catching some short and putting even more pressure on a market where resistance to price decline is both understandable and inevitable. Borrowing to buy "things" and unexpected real estate ownership cost increases leave some with a real dilemma. Where do we go next? All markets eventually heal themselves and Florida has a track record of recovery for over a 100 years; this time may be as different in the recovery process as it was was in the run-up of prices. There are questions to be sorted out and other "shoes" waiting to fall.