- November 25, 2024
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Distressed sales (lender-owned via foreclosure or deed-in-lieu and short sales) comprised 55.6% of all Flagler County Multiple Listing Service home sales in December. The national average is about 30%. As painful as it is to watch the process, it is necessary. It is the first step in recovery. The real estate market was addicted to the concept of ever-rising prices. Expectations were irrational.
But what made this housing bust so much worse than past downturns?
Historically, the downside of real estate cycles was in the minus-10% range, leaving most homeowners with some equity. The slight drop represented a market correction — a return to intrinsic value. Sellers could move on. They may have to take a loss, but there was enough money left over to pay off the loan.
The upside of the most recent cycle combined over-easy credit (little or no down payment) with euphoria, driving prices well above intrinsic value. It was more than a cyclical rise. It was a true bubble. When the bubble burst, prices plummeted. Once prices dropped below the loan balance, the downward spiral was guaranteed. Property owners were “frozen in place.” They could not sell. They could not move. Lenders had not begun to gear up for the upcoming flood of loan modification requests, foreclosures and short sales. Prices continued dropping.
The total sales value of single-family homes in Flagler County peaked at $88.2 million in June 2005. By June 2009, four years later, it had dropped to $22.3 million; a whopping 74.7% decline. The number of homes sold dropped 63.6% during the same period. The median price fell 48% over four years.
As the pendulum swung, so did prices — to levels well below the underlying property value. The gap between prices and intrinsic value represents a great investment opportunity for buyers. But this opportunity is unavailable to the present owners. When prices return to normal levels, they will still be underwater. That is why the sale of distressed properties is so necessary for a recovery.
The recovery is under way. Prices are still languishing, but 2011 homes sales are up 12.7% from 2010. 2011 sales were the highest since 2008. The total value of 2011 transactions was up 8.5% from 2010.
The flurry of distressed sales will continue through 2012 for the necessary cleansing of inventory. A lot of wealth was wiped out in the collapse. Now, new money is entering the market at price levels at which profits can be achieved. The 340 lots in The Conservatory, which surrounds a Tom Watson signature golf course across from Matanzas High School, sold in 2005 for prices between $329,900 and $529,900, generating over $141 million in sales. Nearly all are now appraised at $20,000. That represents more than a 95% drop in value.
Several Conservatory lots have recently changed hands in the $20,000 range. The new buyers will be well positioned for a possible resurgence of interest in that community. Dreams of a return to the original prices should be put to bed.
