Residential markets will follow same road, but at different speeds.

Written by: Denny Grimes
Publicized in: News Press
Publication Date: August 3, 2008

Anyone who has ever driven a car knows what it feels like to be lost, men included, even if they won't admit it. People are feeling that same sense of panic today because they are finding themselves in unfamiliar economic territory. The surroundings look different to them because the changing real estate market is leading them down a road that most have never traveled. A handful of people vaguely remember being on this road before, but so long ago that even they have a worried look on their face.

Relax, there is no reason to be worried or panicked because there is a difference between being lost and not knowing where you are. You can only be lost if there is no one around to give you a road map or directions. We don't have that problem because there are plenty of helpful folks willing to give their opinion as to how to get back on the highway to recovery. In fact, there are too many helpful hands (and opinions) pointing and giving all kinds of different directions. Meanwhile, we sit idling, hoping we have enough fuel in our tank to make it to better days.

All real estate bubble markets and submarkets will follow the same road to recovery. However, not all markets will recover at the same speed. Real estate bubble markets are formed because there is an extended period of irrational growth. Irrational growth is defined as a growth rate that is not supported by the buyers who will actually use the property. It is important to remember that investors can fuel a market, but it takes users to sustain it.

Our market's binge buying spree, which was driven by heavy investor participation, happened in 2004 and the first half of 2005. Prices were driven up to foolish levels, which caused confidence to erode to a point that the market started reversing its direction during the second half of '05. At that point, irrational growth was replaced with irrational decline. This road needs no definition because we have been on this path for three years, and everyone is screaming to the driver 'Are we there yet?!' Greed was driving the irrational growth market, now it is fear's turn behind the wheel. Fear drives too slow for my taste.

Ironically, everyone wants to know when the market is going to recover. That's like asking when a broken leg is going to heal. Technically, the leg begins to heal right after the trauma happens. However, the break will heal faster if the bone is set properly, but the setting process can add pain to an already painful event.

Likewise, our market began healing as soon as the bubble burst, and we experienced the trauma of watching prices plummet, back toward the real value line. The healing process has been slow, but it could have been accelerated if sellers would have endured the additional pain of setting their prices correctly a year or two ago. As it stands, we are beginning the fourth year of recovery, and the condo market is still in traction. The single-family market's recovery has progressed much faster, as some submarkets are actually getting around in a walking cast.

Full recovery cannot happen until buyer confidence returns. However, the buyers' confidence will not return until prices fall below the real value line. It's as if the buyers are going to penalize sellers for getting greedy back in '04. Buyers must feel confident that what they are buying represents a real value, a tall order in a market where perceived value changes as often as gas prices.

A few submarkets, such as closeout inventory from developers, bank-owned property and some of the short sales, are already below the real value line. In fact, it is safe to say that if you can buy anything for less than its replacement cost, that product is below the real value line, which means it's fairly close to meeting the buyer confidence point.

In addition, geographic submarkets, such as Sanibel, Fort Myers Beach and Bonita Springs are closer to reaching the bottom of the curve than others because they do not have as much excess inventory. Therefore, their price reductions will not be as severe, and they will see confidence enter the market well ahead of the oversupplied markets of Northwest Cape Coral and Lehigh Acres.There is only one road to recovery, and like the Autobahn, there is no speed limit. All market segments will fully recover, eventually. But if you are a seller and are tired at moving at the same pace as your market segment, then speed up. All you have to do is drive your price down a little faster and you will find a buyer much sooner. After all, you now know that the buyers are located south of real value, near where confidence enters the recovery highway.

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