Florida's Perfect Storm

Florida is undergoing a Real Estate crisis of historic proportions. Four factors have converged into a “perfect storm” that has caused the evaporation of nearly a trillion dollars in values not to mention tangible effects on hardworking families that have done everything right yet are facing foreclosures in record numbers. In the short term we have a bleak future as the bottom is not yet here. In the log term we have a challenge to prevent this from ever happening again. The four factors I see are:

1. Interest Rates. The widely known national-level credit mess created by Greenspan & Co. with the interest rates. The rapacious Fed-led increase in interest rates had an initial effect on sub-prime mortgages but it has now infected all areas of finance and investment. The record number of foreclosures yet to flood our market will undoubtedly maintain pressure on real estate prices as a simple consequence. This is compounded by the absence of buyers, not only those who no longer qualify for loans, but those who get scared away at the higher financing costs.
   
   
2. Excess Inventory. The large inventory of new unsold properties, spec homes, and vacant properties from speculators that became flippees instead of flippers. The current inventory of unsold properties is over 300% the level of 2005. This will take years to absorb assuming all other factors stay the same (which they won’t as we have not yet seen the bulk of foreclosures to be dumped on the market). Higher inventory means lower prices, longer sell times, additional competition, and alternative options for buyers to the detriment of sellers.
   
   
3. Property Insurance has reached untenable levels in Florida. Insurance companies are allowed to have Florida-only subsidiaries instead of blending high risk areas with low risk areas. So, we don’t really have insurance here, what we have is a limited local fund for calamities. The cost of insurance for the typical home is already higher than the cost of a average car loan. This partly explains the massive migration of home owners to insurance-friendlier states such as North Carolina. The risk does not match the record profits, even during the worst of times, but the market accepted the increases due to the media-led fear mongering after the hurricanes of 2004. To make matters worse, insurance rates have gone up at over ten times the rate of inflation, while at the same time the coverages have been drastically reduced with ever larger deductibles and countless disclaimers.
   
   
4. The Real Estate Property Tax crisis in Florida. Current bills of property tax relief in the Florida legislature are conflicting and do not address the underlying problem. The system is so messed-up that if you live in Florida and would like to move to another home, you face significant tax increases unless you move out of state. The tax bills for out of state residents are in many cases 200 to 500% + higher than the bills for a similar property, where a resident might live. The fact that there is activity in the legislature is freezing the market as people are afraid to sell or buy just because of the uncertainty. The current proposal our bright leaders in Tallahassee managed to assemble incorporates the worst of the ideas to a “solution” in a single ballot.
   
   The problem is not so much a flawed tax system but spending that is irresponsible and out of control. When properties went up in value during 2000-2005, service demand and costs to the cities did not grow at the same rates, but their revenues did. When Cities collected a windfall of billions of dollars in additional money, they embarked in a near criminal massive spending extravaganza, investing in pet projects, creating sham jobs for their friends, giving themselves large raises with no basis on merit or productivity, hiring unnecessary and unqualified people, and most egregious: hiring advisers and consultants to do the jobs the hired employees were hired to do but can’t. In essence they wasted the windfalls with unprecedented speed from a historical perspective and now have become dependent on inflated budgets that require ever higher taxes to fund. Allowing an inept or corrupt public official a large budget without checks and balances is the fiscal equivalent of giving a chimpanzee a loaded machine gun… either will give you destruction in return.
   

Many cities in Florida were hit especially hard since they led on the rise of values. The tremendous rise of values was led not for reasons of hard demand (jobs, economic growth, prosperity) but due to investors looking to protect their savings from the stock market after the Greenspan-led mess of 2000 that destroyed trillions of dollars of value, and of course, the unbridled speculation by amateur real estate investors and I don’t think prices have bottomed-out yet. Future generations will call these times “The Great Greenspan Depression of the Millenium”.