Spring 2007

The Emerald Coast has at least three very different kinds of residential real estate market:

• Full-time residents in all areas of Okaloosa, Walton, and Bay Counties
• Second homeowners who are going to use their properties and possibly rent them to help defray expenses
• Investors whose primary motive is to earn a return on their investment and who may never use the property at all

The latter two segments make up most of the market in the coastal area running from Destin to Panama City Beach – over 70% in some areas.

In keeping with the national real estate market trends over the last 18 months, our overall market has cooled noticeably. However, demand has held up well for permanent residents in most price points – consistent with a local economy that continues to well outpace the nation and even Florida as a whole. It’s the second homeowners and investors who have felt the pinch. In these segments we’re clearly in a buyer’s market, and this affords a major opportunity for anyone who has wanted to own property and enjoy life on the Emerald Coast.

What Happened?

From the mid-1990’s, Emerald Coast real estate was a great investment, with steady, strong appreciation from year to year. For example, if you had purchased a home in Seaside, the community that got it all started, in 1987 and held it until the beginning of 2003, you would have enjoyed a compound rate of return of 15% annually on your investment – and that doesn’t count the effects of leverage and rental income. Not surprisingly, Northwest Florida and especially the Emerald Coast became more and more widely known and admired as a place to own and invest in property.

A relatively benign tropical storm climate since hurricane Opal in 1995 meant the summers were long and uninterrupted and the beaches were beautiful. A strong economy and declining interest rates made things even more attractive. To top it off, while there certainly was new development during this period (e.g., Rosemary Beach, WaterColor), it had a measured feel to it, and prices just kept going up. Life was good!

2004 brought this activity to a crescendo that’s easy to see in hindsight – and some of which we saw as unsustainable at the time. Flipping lots and homes was rampant - the equivalent of “day trading” in real estate. Appraisers and lenders were struggling to figure out how to keep up with the changes – but the money was flowing. Land developers were rushing to market with plots that only a year or so earlier would have been considered uneconomic. In some areas over 80% of the properties in new developments were snapped up by investors seeking a quick profit. Prices were going up in some cases at 10% per month. The adage in the business at the time was, “if you don’t sell it, raise the price.” And that’s what people did. Life was really good!!

At some point, the investors got nervous about trading with each other. Unlike strong equities, there’s no underlying economic activity in a plot of land that’s going to make cash and dividends pour forth even if investors don’t care at the moment: it’s a huge matter of perception. And there are carrying costs: interest and principal payments, taxes, association assessments, insurance, construction draw-downs, etc., etc.

Perceptions began to change with the weather. Hurricane Ivan blasted the beaches in September 2004, followed by Tropical Storm Arlene in June 2005 and Dennis in July. By the time Katrina hit New Orleans in late August (we only got some modest storms, and Katrina actually increased the sand on some of our beaches), the media was in full frenzy mode. The talking heads asked solemnly whether global warming was going to make every summer a gauntlet of category 5 storms and were we all going to be underwater within a decade. Add in war jitters, increasing gas prices…well, you get the idea.

It’s a little like the roadrunner cartoon, where Wile E. Coyote rushes off a cliff chasing RR and is doing fine until he looks down. The storms severely disrupted the 2005 rental season and caused advance bookings to decline for 2006 (though bed tax collections are up substantially overall, suggesting a different picture). A cooling national market, rising interest rates (though still quite low and with ready availability), rapid increases in homeowners’ insurance premiums, and the large amounts of new land, homes, and condos coming on the market from developers, caused many owners and investors to decide that now was the time to cash in on the “profit” they had in their investments. And, of course, there were others who were simply holding the bag from the last flip.

Are We In Free Fall?

Of course not. Markets are self-correcting over a reasonable period of time. And it’s worth noting that by some estimates, as many as two-thirds of the homes in this area have no mortgage on them at all, so the owners have a much greater ability to carry them. The 2006 storm season was a non-event, and our beaches are returning to more normal conditions as well as renourishment proceeds despite legal and environmental hurdles.

We think the bottom may have already been reached. Asking prices on lots, homes, and condos are in many cases well off the highs of 2004-2005, and some owners would have to realize a loss if they sold now.  Actual sales prices are even lower. For example, prices adjusted for size (price per square foot) in some areas have returned to 2004 levels and are off 25%+ from the highs of 2005. As a result, 2007 sales volumes (resales only) for these areas is up as much as 50% from a year ago, and this trend appears to be accelerating.

Developers will slow down or even cease activity if they can’t make a decent return – and we see that happening today, with many new condo projects deferred or even cancelled, especially those that were in marginal locations. Some land developments that were started in 2004/05 are lying fallow with little attempt to market them. St. Joe, the area's largest landowner and the developer of WaterColor, WaterSound, etc., has exited the homebuilding business. The demographics that have long driven our market haven’t changed. People still want to come to the beach and many will want to work or retire here. Second home ownership continues to be very strong across the country. We believe that Emerald Coast residential real estate, well-located and well-purchased, will continue to be an attractive investment for years to come.

What’s the Outlook?

There’s no law that says you are entitled to make money quickly (or even at all) in a real estate transaction – despite what people may have been talking about at cocktail parties over the last few years. In our opinion, the flipping game is over for now, at least. However, if you’re someone who has been considering a second home as a user, or if you’re an investor with a 3-5 year time horizon, we think the timing is excellent for you. There’s a reason why it’s called a buyer’s market – i.e., it’s a good time to buy. Consider:

• Asking prices in this market have been trending down – nearly all price changes are lower, not higher.
• The average price at which actual sales are occurring relative to the asking price at the time of contract has been declining modestly as well, meaning sellers have more “give” in their negotiations. Some sales are being made at very significant discounts from their asking prices.
• Some sellers are offering additional incentives to induce buyers to consider their property over others. These can take the form of paying the buyer’s closing costs, buying down the rate on a buyer’s mortgage or even paying a portion of the first year’s mortgage payments, funding a year’s homeowners’ association assessments, or other inducements.
• The inventory on hand (i.e., the number of properties currently offered for sale divided by the number of such properties that actually sold during the past 12 months) ranges from about 3.3 years for homes and condos to nearly 5 years for residential lots. This ratio has nearly tripled in the past 18 months. And that doesn’t count lots that developers have in their inventory but have not listed.
• Over the next 2-4 years a number of major infrastructure and developments will be completed that will further enhance the area’s appeal. These include the new Panama City International Airport and the huge Pier Park Shopping & Entertainment complex, the Wild Kingdom Animal Park near Bonifay, the Turnberry and Emerald Grande projects in Destin, and others.

In other words, there’s lots of attractive “product” available, asking prices are down and sellers are anxious to negotiate, and the community outlook is terrific. What more could you want? Call your realtor now!