Is the Northeast Florida Real Estate Market Sustainable? Home Prices on the First Coast Have Reached Some of Their Highest Levels in Decades, Bringing Concerns a Housing Bubble May Be Near

By Geddes, Ryan | The Florida Times Union, June 6, 2005 | Go to article overview

Is the Northeast Florida Real Estate Market Sustainable? Home Prices on the First Coast Have Reached Some of Their Highest Levels in Decades, Bringing Concerns a Housing Bubble May Be Near


Geddes, Ryan, The Florida Times Union


Byline: RYAN GEDDES

When Alan Greenspan, chairman of the Federal Reserve, mentioned "froth" at a recent meeting of the Economic Club of New York, he wasn't referring to his cappuccino.

He was talking about the piping-hot housing market.

Fueled by historically low interest rates and other economic factors, home prices in Jacksonville and around the country have reached some of their highest levels since before the real estate bust of the 1980s, causing industry analysts to fret about a possible housing bubble.

When there is rampant speculation in a market -- whether in stocks, bonds or real estate -- prices can artificially inflate, eventually reaching unsustainable levels. The result can be a frenzied sell-off and a swift drop in prices. An investor who wants to unload an asset, like a house or a stock, and can't sell it at or above its purchase price, is forced to take a loss.

When rampant speculation in technology and telecommunications stocks in the late 1990s triggered an eventual crash in late 2000, prices fell sharply. The double-whammy of the bursting tech bubble and the recession that followed the terrorist attacks of Sept. 11, 2001, led the Federal Reserve to vigorously slash interest rates. The increased liquidity in the marketplace encouraged consumers to borrow heavily -- and invest in real estate.

Greenspan stopped short of suggesting a nationwide real estate bubble, but he acknowledged that there could be "little bubbles" in cities around the country.

Jacksonville real estate analyst Ray Rodriguez said he agrees with the Fed chairman's assessment and describes the Jacksonville housing market as being "on the tail end of rapid growth in appreciation."

"We have overextended ourselves. The consumer is at a point where they are up to their noses in debt, and you hear stories that people are taking out home equity loans to buy real estate," said Rodriguez.

As interest rates hit historic lows, banks continue to ease credit restrictions, and more homebuyers are qualifying for loans, taking advantage of a blend of products like home equity lines of credit, adjustable-rate mortgages with fluctuating interest rates, interest-only loans with tiered payment plans, reverse mortgages that use home equity to pay dividends and down payment assistance programs.

The Fed can only abide such a credit environment for so long and will eventually push banks to tighten lending conditions, said Sid Rosenberg, the William F. Sheffield professor of real estate at the University of North Florida.

"The Fed can jawbone a bank in a hot market and say, 'We don't think this is a sound investment,' " said Rosenberg. "I think that a lot of lenders are being put on notice."

But it's not just borrowers who are propping up the market, said Grant Thrall, a real estate and economics professor at the University of Florida.

"We are undergoing the largest wealth transfer in human history right now as the parents of the baby boomers pass away," said Thrall.

The recipients of that wealth are reinvesting much of it in second homes, often in Florida cities, Thrall said.

Although Jacksonville is not seeing as much second home activity as other parts of Florida, prices here are still climbing intensely.

From April 1995 to April 2000, the median price of an existing house here rose 19 percent, from $85,000 to $101,000. But from April 2000 to April 2005, prices jumped 72 percent, to $174,000, according to the Florida Association of Realtors.

The median is the price at which half of the homes in a market sold for less and half for more.

But despite the sharp short-term rise in prices, Jacksonville still trails the state and many of its largest cities. Since April 2000, the statewide median home price shot up 89 percent, to $219,000.

In the first quarter of 2005, the National Association of Realtors reported that 8 of the top 10 metropolitan areas with the greatest increase in median home price were Florida cities. …

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