What the housing turnaround will look like
Cape Coral, Fla., not long ago one of the foreclosure capitals of America, is now seeing a rebound as home prices hit once-in-a-generation lows.
Melanie Stetson Freeman/Staff
Cape Coral, Fla.
The basic three-bedroom house at 711 S.W. 27th Terrace looks like a lot of other homes that are in foreclosure here, with its empty beige stucco walls and a child’s room done up in yellow and pink. And like many others, it is also sunk in an everglade of debt.
But by mid-June, the bank that owned the property was willing to deal. It no longer expected to get back much of the $359,000 borrowed on the house. Instead, it wanted to hand the keys over to someone else to mow the lawn and pay the electric bill. It asked real estate agent Denny Grimes to look for buyers.
He didn’t have to look very far: Potential buyers found Mr. Grimes – quickly. He describes one of the open houses as resembling a tryout for “American Idol.” Dozens of real estate agents lined up to trek through the house, now listed for $65,000, to inspect the tile floors in the bathrooms and the stainless-steel appliances in the kitchen. Within two weeks, Grimes had 34 bids spread out on his boardroom table –
several well above the asking price and some offering all cash.
The story of 711 S.W. 27th Terrace shows how the housing market in Cape Coral, not long ago one of the foreclosure capitals of America, is undergoing a revival – in what may be a harbinger for the nation.
Every day Lee County, on Florida’s west coast, auctions off foreclosed properties that draw everyone from professional investors planning to renovate and resell the homes to retirees from Ohio and Michigan. Real estate agents who spent most of last year on chaise longues are now starting to haul cash-laden buyers around subdivisions to check out the granite countertops. One company, Foreclosure Tours R Us, ferries potential buyers around by boat.
Behind the sudden renewed interest is simple arithmetic: Prices have dropped so low that many people now think this is a once-in-a-generation chance to get a piece of the Florida sun. “It’s not just the new home buyer,” says Grimes. “It’s also the guy who is retiring within nine years who knows this is the best opportunity he’ll see.”
While many parts of the country may not see a housing turnaround for another year or two – particularly given the vacuum-tight credit demands of banks – others are finally clawing their way up from the bottom. The first faint signs are there – stabilizing prices, an uptick in sales, and, most important, a reduction in the inventory of foreclosures compared with earlier in the year. The National Association of Realtors estimates that 45 percent of all home sales right now are “distressed” properties – many foreclosures. “This is part of the catharsis,” says economist Richard DeKaser of Woodley Park Research in Washington. “This is a sign we are at the bottom.”
As much as anyplace, Cape Coral offers a keyhole into what the nation’s housing turnaround may look like.
LEE COUNTY, with its location along the sun-dappled Gulf Coast and low cost of living, has long been a magnet for retiring blue-collar workers. Housing is far less expensive than in tonier areas like Naples and Collier County, just to the south. There, it is Neiman Marcus or Nordstrom. Here, it is JCPenney and Sam’s Club.
Three years ago, Lee County was steeped in the housing boom the way the rest of the country was – only more so. Between 2002 and 2006, prices in Florida’s Miami-Dade County rose 129 percent. In Palm Beach County, they climbed 189 percent. In Lee County, they soared 280 percent.
Grimes jokes that it was a time when money was so easy to get and people were so eager to cash in on the seemingly endless boom, that they could run out during the half time of a football game and buy a house.
But then someone blew a whistle: The housing market collapsed. As in other parts of the country, homeowners became wildly overextended. Credit lines seized up. In Florida, the market imploded even more than elsewhere. In most states, 10 percent of employment is real estate-based – contractors, salespeople, lenders. In Florida, it is 24 percent.
Compounding the problem, the state, much like California, Nevada, and Arizona, also began to experience a slowdown in population growth. In the past, the influx of new faces helped buoy the real estate market.
But many people have been leaving the area. As evidence, Charlie Green, the clerk of Lee County, cites a decline in fees obtained from such things as traffic tickets. He estimates the school system has lost 3,000 students.
A significant part of the outflow is because of the lack of jobs. The unemployment rate now stands at 12 percent. All this has helped contribute to a foreclosure rate that until recently was among the worst in the nation.
Yet in the housing business, there is very little that a big enough price drop won’t cure. And that is now happening in Lee County. Grimes notes that at the peak of the market in 2006, only 12 homes in the entire county were selling for under $100,000. Now there are 3,554 listed. At least 50 homes are selling for under $25,000.
As a result, home sales have been increasing, in some months dramatically. Houses “are coming on the market and going into multiple-bid situations,” says Suzanne Sherer, president of the Realtor Association of Greater Fort Myers and the Beach, Inc. “So we’re almost seeing the situation where investors are pushing out the first-time home buyer. That could be a clear indication we are out of the bottom.”
With the rise in sales, inventories are declining as well. Across the country, the National Association of Realtors estimates there is now a nine-month supply of homes on the market – down 15.8 percent from a year ago. In nearby Fort Myers, the supply is 3.8 months. Professional investors and even average homeowners are actually clamoring for more foreclosed real estate to be sold by banks.
Woody and Gloria Turner, for instance, are searching for a warmer place to live after several decades in Dayton, Ohio. He’s a boat broker, she’s retiring. They’ve just driven 17 hours to attend an auction, but, in the end, didn’t bid because the minimum price was too high. The foreclosed property had a $651,000 mortgage. They hoped to pay no more than $250,000. They haven’t given up, though: They’re searching for a broker to negotiate with the bank.
“In the past, we weren’t able to do this,” says Mr. Turner. “It would have been just out of reach.”
The single-story ranch house at 711 S.W. 27th Street also illustrates how much the real estate market in Lee County has vacillated. In 2003, the lot itself was listed for $28,500. It was on the market for 276 days and sold for $26,000 at the end of March 2004. The buyer, First Home
Builders of Florida, resold the lot for $35,900 three months later. Within a year, the new owners put up a house and listed it for $344,900.
The home carried a total of $359,600 in mortgages. Within six months, it was in foreclosure.
When Michael Polly, who works for Grimes, initially listed the house this spring at $65,000, it represented a potential loss of 82 percent. “To determine the value, we look at the last six months of sales and the competition in the area,” says Mr. Polly.
In the cold-numbers world of real estate, however, one person’s loss can be another’s gain. Take Robert Bernard, an information systems specialist for a cable company. He was looking for a house not unlike the one at 711 to buy for his family. He wanted to spend under $80,000.
He’s found it in the form of a duplex in Lehigh Acres, a suburb of Fort Myers.
“Previously, when I looked at houses, they were over $250,000, which is completely out of my budget,” he says.
Now his father talks about planting lemon trees around the property. His entire family, originally from the Dominican Republic, will squeeze into the duplex. He has only one frustration: He has made offers on a number of properties, only to lose out to investors loaded with cash. “It’s traumatic because of the investors,” he says.
JUST HOW FRENETIC the investment-buying market has become is evident at the Lee County courthouse, part of the Justice Center, a six-story concrete building in downtown Fort Myers. Every day, investors and individuals go through the security-check system and head for the county clerk’s office, where they hope to bid on foreclosures.
They end up in a room normally used to hold jurors waiting to be called for a trial. Instead, on this day, 60 to 70 people are filling seats to buy a home. Some sit cross-legged on the linoleum floor.
Representatives of banks congregate in one part of the room. They signal to buyers what the minimum bid is they will accept on a property.
One potential buyer, who has a cashier’s check for $5,000 stuffed in his shirt pocket, identifies about 20 professional investors around the room. Most of the other people seem to be retirees, first-time home buyers, or others just trying to acquire a property cheaply.
Even they will need to have their money in order, though: All sales have to be wrapped up by 4 p.m.
In fact, the banks make no secret of it – they prefer the equivalent of bundles of greenbacks. Realtor Marc Joseph, who does the pontoon tours of homes, says he recently sold a house for a bank. Seven bids came in, three of them for cash.
“The cash deals were the only ones we talked about,” he says.
Through May, 66 percent of the properties sold in Lee County were owned by banks and 64 percent of those were cash deals.
The professionals who come to the auctions are well prepared. Michael Cuevas of Sandbill Realty had visited several of the 132 properties being sold on this day and knew exactly how much work each would take to be ready to resell. He wasn’t buying the homes with his own money. His company represented an investor, Scott Logue.
Mr. Cuevas ended up purchasing one property, for $100,000. The 1,800-sq.-foot home, which sits at the junction of two canals, carried a delinquent mortgage of $442,000. Sandbill plans to install a pool and fix up the property. “It will probably cost us about $45,000 to get it ready for the market,” says Cuevas. “We hope to sell it for $200,000, which is not a bad profit for 60 to 90 days.”
Sandbill has purchased 11 homes so far at courthouse auctions, plus others directly from the banks. The goal, says Cuevas, is to buy and sell 20 homes a month.
The prospect of such quick profits is increasingly attracting buyers from across the country. One of Mr. Joseph’s clients is from Burlington, Vt. “He just sold his company for $1.2 billion,” he says. “He gave $10 million to each of his sons to invest, and they are buying properties. Cash is king.”
Cuevas, in fact, says Sandbill is talking to an investor about taking the concept national – getting more deep-pocketed people from around the nation to invest in Florida properties as well as foreclosures elsewhere.
“If you can get houses at these prices, it’s a no-brainer,” he says.
NONE OF THIS FRENETIC buying is to suggest that Florida has now fully recovered from one of the worst housing slumps since the Depression. Far from it. The state remains one of the hardest-hit in the nation, which is why any signs of a turnaround, however nascent, are so important.
Broward County, which includes Fort Lauderdale, has seen 40,000 foreclosures in the first five months of this year – the same total as all of last year. Some experts speculate that foreclosures there will hit 80,000 by the end of the year. Three years ago, Broward had 5,000.
The severity of the slump certainly carries an element of déjà vu. Few places have experienced more dramatic boom-and-bust cycles than Florida. This, after all, was the place where the first real estate rush began in the 1920s with an enterprising developer who posted a sign in New York’s Times Square during a particular harsh winter that said: “It’s June in Miami.” Almost overnight, builders touted developments in cities that didn’t exist, and some sold lots that were under water.
The land rush ended just as abruptly as it began – with a massive hurricane in 1926. “It was a catastrophe for the real estate market,” says Jack McCabe of McCabe Research & Consulting in Deerfield Beach, Fla.
If the past is any guide, it might take as long as a decade for parts of the state to recover from the current slump. “Some people may never live long enough to see their homes return to the upside,” says Mr. McCabe.
Still, the presence of discountbuying by firms such as Sandbill, sophisticated investors who have a lot of cash and know how to rehab a home, is one of the first signposts that an area is climbing out of the abyss. So is the return of the bidding wars, which the house at 711 in Cape Coral benefited from. The winning bid on the $65,000 house came in at $80,000.
• Affordability improves. Prices stop declining and begin to stabilize at a level that buyers can’t resist. Currently, the median price of an existing home has dropped 26 percent since the 2006 peak, pushing affordability to an 18-year high. In Lee County, the median price has dropped from $322,300 in 2006 to $88,500 in May 2009, down 73.5 percent.
• Foreclosures slow. For now, they continue to rise nationally. RealtyTrac Inc. reports that foreclosure filings in May were up 18 percent from a year ago, though they dropped 6 percent from April. Filings exceeded 300,000 for the third straight month, a record. But in Lee County, they have dropped 28.2 percent since peaking in October 2008.
• Banks unload bad loans. Last March the National Association of Realtors (NAR) estimated 18 percent of homes were bank-owned. In May, it was 33 percent, down from a peak of 49 percent in March. In Lee County, 66 percent of all single-family homes sold were bank-owned.
• Professionals start buying. In a national survey, the NAR found 21 percent of purchases were by investors. In Lee County, 42.2 percent of homes sold in May were sold for cash, usually a sign of investor purchasing. Savvy buyers often start a turnaround.
• First-time buyers enter the market in significant numbers. NAR estimates that first-time buyers represented about 41 percent of sales in 2008 and 50 percent in the first half of 2009. No statistics exist for Lee County, but real estate agents believe it is about 30 percent.
• Home sales increase year over year. This has not started to happen yet nationally. Pending sales in May were 6.7 percent higher than last year but actual closed sales were down 3.6 percent. But in Lee County, sales were up 101 percent in May over the same month in 2008. They have been rising since October.