Real Estate Trends-Good News for Homebuyers

Terri Gallo knew the frenetic market was finally slowing slightly late last year when she started getting letters from builders offering commissions if she brought buyers to their new communities.

It had been several years since Gallo, an agent with Clermont-based Landquest Realty, had received such offers. Builders, facing the greatest demand for homes that they had ever experienced, had been so busy building homes that they had no time, and no need, to court Realtors.

Indeed, 2005 was a year that saw buyers literally putting their names in hats, hoping to get lucky and win lotteries for the chance to secure a new home-or at least a lot where a new home would eventually be built.

And resales were no easier to find. By midyear, the inventory of existing homes in Orange, Seminole and Osceola counties had shrunk to historic lows. In fact, there were more licensed real estate agents in the region than there were homes to sell.

To complicate matters further, buyers often found themselves in bidding wars, causing prices to soar. The median price for existing homes climbed from $148,324 in January 2004 to $249,900 in November 2005. That's a 68-percent increase in 23 months.

By the end of the year, however, the number of homes on the market had climbed dramatically, from historic lows to the highest levels in nine years. There were 9,685 resale homes listed on the market in November of last year, compared to 3,681 in 2004, according to the Orlando Regional Realtor Association.

And although no comparable figures were available for new homes, anecdotal evidence suggests that new homes available for purchase were also more plentiful. Although sales remained torrid, it appeared that as 2005 drew to a close, builders had worked down inventory and a measure of equilibrium had been restored.

Like many real estate professionals, Gallo thought the frenzy of 2005 was an aberration and welcomes the signs that the market is settling. "The market is going to level off now and that's good, because it was totally distorted," she says.

David Lereah, chief economist for the National Association of Realtors, agrees. He says the Orlando market is more comparable to a balloon slowly deflating than a bubble likely to burst.

That's because housing here remains relatively affordable compared to other major markets. And the economy continues to expand, with forecasters predicting that the region will add 60,000 new jobs in the next two years.

"Air went into the balloons and the prices went up," says Lereah. "But now, air is coming out of the balloons. We're hearing a hissing sound, not a pop. There's a soft landing ahead."

A slowing of the housing market will be good for homebuyers, says Lereah. "Sellers' markets are transitioning to buyers' markets," he notes. "As inventories rise, prices soften somewhat, giving many buyers the break they've been waiting for to get into the market."

Still, say experts, buyers shouldn't expect home prices to be any lower this year than they were in 2005. Prices will rise as long as demand outstrips supply, which is likely to be the case locally for the foreseeable future. Only the pace of the price increases may slow.

According to NAR's "economic stress test," even modest price declines in Orlando could be triggered only by a highly unlikely set of circumstances, including a mortgage interest-rate jump of at least four points combined with a net loss of 64,000 jobs.

"This is the most uniformly strong market I have seen in the country," says Mark Vitner, senior economist and director of corporate investment banking for Wachovia Corp. "Just about everything is right here."

Orlando Homebuyer rounded up a team of local real estate professionals to weigh in with their predictions. They seemed to agree overall with the national experts. Despite interest rate increases and challenges finding land, materials and labor, they anticipate that 2006 will be a great year for the industry-busy, but maybe not quite as crazed as 2005.

Here's what the local movers and shakers had to say.

DEVELOPER:
Beat Kahli

Kahli is president and chief executive officer of Avalon Park, a master-planned community in Southeast Orlando built around a town center with restaurants and businesses as well as homes.

Do you expect the white-hot housing market to continue in 2006? I expect that things will slow down, but I think they will slow down in an orderly fashion. I am not a believer in a crash or the bursting of a bubble. I think we will slow down to a more reasonable pace. I believe Central Florida will still fare very well.

I think some of the slowdown will be in high-end condominiums and very high-end homes and condominiums. But for the $200,000 to $500,000 home, I think the demand will continue and the pace will continue.

How do you expect rising interest rates will affect your business? If interest rates don't go up over, let's say, 8 percent, I think the industry should be fine. If interest rates go higher than that, it will have an impact.

What about supplies of labor and materials? Being in the concrete business, and being an international businessman, I actually see a slowdown in price increases. Oil seems to be stabilized, but that depends on what kind of winter we have.

And, this is more intuition than anything else, I think China's economy will slow down. That will, in my opinion, have the effect that materials will be available again at a lower price.

Do you expect home prices to rise, fall or remain stable? I think they'll remain fairly stable. I don't think that they'll rise dramatically; I don't think they'll fall dramatically. Although the higher-end segments and higher-end condominiums, I see those prices falling.

What homebuying trends are you seeing? There's a lot of creative financing going on, especially in the first-time homebuyer market and the first-time move-up market. We have interest-only loans and negative-amortization loans.

Now we're having 30 percent to 40 percent of the people who'll need to refinance in a year or two or three, when their no-interest or low-interest loans convert, and they might not be able to [because of higher interest rates and because they'll have little equity in their homes if values decline]. They won't have the assets or the income.

Where are the next hot spots? It's becoming intensely difficult to find reasonably priced land in Florida. We're seeing developers going to the Carolinas, Georgia and Alabama for land. In Orlando, I think the UCF area is a hot spot.

Almost any land is a hot spot if you can find it has met concurrency (government approval for development). That land is gold. Years ago, our biggest expense was land acquisition. Now, more and more, land acquisition costs are only part of the total. You have to pay for road infrastructure and schools.

We're slowly going the direction of California, where it takes more and more time to get land entitled for development. And we're having to provide public infrastructure, such as roads and schools.

What's the most pressing concern for your industry in 2006? Concurrency issues-bringing infrastructure into an area we're developing. For example, we're building two schools for the school board and holding them and renting them back for $1 a year until they can buy them.

Another challenge will be limiting builders not to oversell homes. We can't possibly produce as much as we can sell.

BUILDER/DEVELOPER:
Steve O'Dowd

O'Dowd is president of Park Square Homes, a 22-year-old local company that has built thousands of homes priced from the low $200s to more than $1 million.

Do you expect the white-hot housing market to continue in 2006? I expect the demand for quality housing to continue. Central Florida is known worldwide for its climate and quality of life. I think we'll probably stay at the 2004-2005 rate.

What are some of the challenges you're expecting in 2006? Challenges in 2006 will include rising interest rates, material shortages, and buyer qualifying issues as pricing and interest rates continue to rise.

How do you expect rising interest rates will affect your business? With pricing at the present levels, interest-rate increases can quickly put buyers out of range on homes that they qualified for at lower rates. This requires the buyer to come up with more money out of pocket, thus eliminating those with minimal savings.

It makes it difficult even for young professionals-who may be fresh out of college, trying to make it on entry-level incomes-to afford homes.

Do you expect home prices to rise, fall or remain stable? I expect home prices to remain stable for a while longer, and then continue to increase at a milder pace. There'll be a leveling off of the sharp price increases we're now seeing.

The big unknown is with the rebuilding of New Orleans, what kind of demand for materials that will bring.

What homebuying trends are you seeing? I'm seeing many people wanting to become investors and speculate on price increases. I'm also seeing a demand for move-up housing from primary first-time homebuyers, as low mortgage interest rates allow upgrading of home size or location.

Where are the next hot spots? Due to the present shortage of available lots, I expect most communities to be successful and in demand. There's such demand everywhere. Things that used to hold people back, like a marginal school or a little bit of a drive to a hospital, aren't even issues anymore.

I can also tell you that Central Florida builders are reaching all the way to Groveland, Haines City and Dundee for land.

What's the most pressing concern for your industry in 2006? The most pressing concern is for our local governments to understand and accept the fact that the development and housing industries don't cause growth-they simply respond to it.

Our industry continues to be blamed for growth and sprawl. This line of thought must change. The homebuilding community is responding to a need, not driving the cause.

CUSTOM BUILDER:
Todd South

South is president of the Master Custom Builders Council, a professional organization of 38 top custom builders, and owner of Stonebridge Homes, now building in Windermere, Keene's Pointe, Maitland, Bella Collina and Lake Butler Sound.

Do you expect the white-hot housing market to continue in 2006? Yes, I think the market will still be very robust. We have a backlog of probably a year or two of homes to build. We have contracts that are backed up, waiting to go. Historically we have built nine to 12 homes a year. Last year, this year and next year it will be closer to 20 to 22 homes.

What are some of the challenges you're expecting in 2006? The backlog of demand. We used to build a (custom) home in 12 months, but now it can be 18 months. A lot of the subcontractors, engineers, building departments and materials suppliers are so overloaded we can't get the homes started as quickly.

And there's a shortage of developed, entitled lots in custom communities. That's definitely a challenge. If I had more lots in certain subdivisions, I could sell more homes.

How do you expect rising interest rates will affect your business? I don't think it affects our market niche very much, unless it was just a tremendous change. Our market is fueled by two things: relocation and consumer confidence. If they relocate from a $1.5 million to $3 million home, they're going to buy, not rent. And they're going to buy the most home they can.

And as long as the market doesn't change so much that it affects local consumer confidence, business should remain brisk. I think interest rates would really have to get into the double digits for that to happen.

What about supplies of labor and materials? I think that will continue to be a challenge for the next year or two, because there's a lot of demand nationwide and worldwide.

Do you expect home prices to rise, fall or remain stable? They could flatten a little, but they'll probably rise. Land prices are going up, materials are going up, insurance is going up, impact fees are going up.

Very rarely will raw materials costs go down. And labor, with the workman's compensation [insurance] costs, is not going to go down. Framers, for example, pay 50 cents of every dollar to worker's compensation insurance. I wish we could build homes for less money.

What homebuying trends are you seeing? Bigger and nicer. Across the board, we're seeing larger homes, even for empty-nesters. They come to you and say they're downsizing, but they aren't really downsizing. They put in things like $1,000 built-in cappuccino and espresso makers, granite countertops everywhere, including the laundry rooms, summer kitchens and stone decks around pools.

Where are the next hot spots for custom homes? I think anything you can find in southwest Orlando will continue to be hot. If you can find good property in the Lake Mary-Heathrow area, even further west on S.R. 46, that's hot. And Winter Park is obviously still strong.

DEVELOPER:
Steve Kodsi

Kodsi is president of Historic Creations, developer of a number of downtown Orlando high-rise condominium and mixed-used projects including The Sanctuary and Star Tower.

Do you expect the white-hot housing market to continue in 2006? Yes. I think there are projects on the planning boards that might not get started and might have to re-identify their programs, but I think, generally, a lot of projects under way are all going to go.

Locally we have a huge demand and a very limited supply. We offer a product for people who are leaving that 2,000-square-foot home in the suburbs. These people, who are 40, 50, 60, even 80 years old, aren't going to retire on a porch in a rocking chair. They want high-end, low-maintenance living.

How do you expect rising interest rates will affect your business? It may affect some of it. But for my market, as long as interest rates are below 10 percent, I think we'll be fine. Ours is an exploding, emerging market. Our condos are different. They aren't just condos. We call them a vertical street of dreams. People want to live downtown.

What about supplies of labor and materials? I think there's been a rise in prices, but we've had some of our subcontractors for over 20 years, so we should have no problem.

Do you expect home prices to rise, fall or remain stable? I think that they'll keep rising, but not as sharply. Again, unless they expect 20 to 25 percent of the market to be homeless, there'll continue to be a demand for homes.

What homebuying trends are you seeing? The baby boomers are looking for a good quality of life in an urban environment. Of course, the Orlando urban environment is not what some would call a true urban environment. From the 11th floor of The Sanctuary [a Kodsi condominium project], the view is of treetops.

Where are the next hot spots? I look at other downtowns as well as Orlando. Downtown St. Petersburg, for instance. We're looking to do a condo development there.

REALTOR:
Beverly Pindling

Pindling is president of the Orlando Regional Realtor Association and a Broker/Associate with Orlando Real Estate Professionals.

Do you expect the white-hot housing market to continue in 2006? The market is still very healthy. But I don't expect this market to continue forever. Everything has a cycle. But it will not come to a screeching halt.

What are some of the challenges you're expecting in 2006? Affordable housing, or workforce housing. The prices have gone up so much that someone working for Disney, for example, can't afford a median-priced home.

Affordable home insurance, too, is a challenge. With the hurricanes, all the insurance is going up. And if you can't get insurance, you can't get a home loan. And then, of course, there are rising interest rates.

How do you expect rising interest rates will affect your business? Fewer people will buy, and they probably won't buy as much home.

Do you expect home prices to rise, fall or remain stable? If we still get people coming here like we are, and if we still have low inventory, prices are still going to rise.

What homebuying trends are you seeing? Because the median home price is so high, more people are going for condos, even if they may not have liked condos in the past.

Some people are choosing to remodel their homes rather than sell and move. And baby boomers are buying second homes and vacation homes.

Where are the next hot spots? I can't pick an area, and I'll tell you why. It's difficult to determine. It all depends on the home prices in that neighborhood and the growth in the area.

What are the most pressing concerns for your industry in 2006? The discussion about removing the mortgage interest deductions [on federal income taxes] that is going on at a national level is a concern.

Affordable housing is a concern for us. Where are we going to put all these people who are coming? Also finding affordable medical insurance for small businesses, including Realtors.

ASSOCIATION EXECUTIVE:
Beth McGee

McGee is executive director of the Home Builders Association of Metro Orlando, a trade association representing the homebuilding industry in Orange, Osceola and Seminole counties.

Do you expect the white-hot housing market to continue in 2006? I think it will continue to be hot, but not white-hot. It's still going to be an issue of supply and demand. Demand will slow down, and that will help buyers.

This past year, we had people making a decision to buy homes by lottery-and that's not the best way to do business.

What are some of the challenges you're expecting in 2006? What's ironic is that the success of our association is inversely related to the success of our members. In the market we've had, where homes were selling fast without as much need for builders to market themselves, events like the Parade of Homes didn't do as well because builders didn't have product to show.

And builders are so busy that they're not paying as much attention to what government is doing or may do in the future. Those are the kinds of challenges we have seen in 2005.

How do you expect rising interest rates will affect the industry? I think it will slow sales some, but there are still very low interest rates historically. Plus, there are a variety of creative financing tools out there now that weren't available in the past. But interest-rate increases might slow down investor-related buying.

What about supplies of labor and materials? If we slow down enough, we're going to have more labor and more materials available. Still, I think that finding trained labor is always a challenge.

Do you expect home prices to rise, fall or remain stable? They're certainly not going to fall. Yes, I think they are going to rise, but not as fast as in the past. This is a popular place, people want to live here. We're interviewing for a job opening, and we received 200 resumes-half of them from out of state.

What homebuying trends are you seeing? I attended a National Association of Home Builders seminar, and they did a survey that said consumers would rather have smaller homes with more gadgets, more high-end appliances and more luxury items.

I think you're seeing more townhomes in the market mix. Five years ago you didn't see that. Townhomes provide builders with a way to bring more affordable housing to the market.

Where are the next hot spots? Osceola County and Orlando" target="_blank">Lake County. Seminole County is close to buildout.

What I'm seeing is in some of the older neighborhoods, closer to downtown Orlando, and in highly rated school districts, there's a lot of remodeling going on. People in their 50s are moving closer in. They just decided they didn't want to go up I-4 any more.

You're still going to have young families and first-time homebuyers who will go out to the far-flung neighborhoods, where more mixed-use communities are being developed. These are truly places where people can live, work and play.

What's the most pressing concern for your industry in 2006? Affordability and workforce housing. Where are the people going to live? I think that's a challenge that our society as a whole is facing.