A Few Words on Potential Deflation and Real Estate

Deflation is a situation where wide spread decreases in price leads to lower production, which leads to cost cutting, which leads to less disposable income, which leads to less demand, which leads to lower costs in an attempt to spur demand... you get the point.

The scenario described above is not good for the economy-- just look at Japan during 1991 and beyond. Ben Bernanke of the Federal Reserve ("the Fed") recently provided commentary about the state of the US economy and touched on the potential for deflation. Although the Fed believes deflation for the US economy is possible, it does not think it's likely.

It seems like the US economy is and has been in a state of deflation during the period known as the "great recession." Let's take a look at the South Florida housing market as an example.

We have seen price reductions on homes in the South Florida market during the past several years. The over building that took place led to less production of new homes when the economy began to show signs of weakness. In turn, construction workers were laid off and those that were working took a cut in wages; this is a function of supply and demand. Less workers and lower wages led to less disposable income. Lenders responded to lower income and further home price reductions by tightening their lending requirements. Those who can afford homes are waiting on the sidelines for the "bottom"-- this lowers demand. The influx of distressed properties are increasing supply, demand has not increased and lower prices are ensuing.

Will the spiral ever end and what does this all mean to South Florida home buyers, sellers, renters, landlords and investors in real estate?

The distressed property situation needs to be "cleaned up" before we see a price rebound. Foreclosures and short sales have become more prevalent during the past several years. Even if the household members remain employed, wage cuts are causing problems. When you make less money and the mortgage remains the same, it means a larger percentage of household income is related to staying in your home. Loan modification may alleviate some of these problems; but we haven't seen success yet.

Consumer demand has to improve in order for home prices to appreciate. The depletion of goods and necessity for more services has to become apparent. When that happens, and people can no longer wait on the sidelines, we will see the economy pick up. More goods will be needed to be produced and more services provided-- this means hiring more workers. When a new person enters the workforce, they have more money to spend and current workers see potential for job stability. All will begin to spend more, increase demand and push up prices.

Confidence needs to be restored-- the system has to be deemed trustworthy and people have to feel like they know what the rules are and will be. Real estate professionals are essential to getting things back on track. With rules in place and a clear definition of the path going forward, the investment community should return. Investors will help deplete the housing inventory and home buyers will see "professionals" buying with confidence again. That should bring some of the homebuyers "off the fence" and spur more demand.

The Fed and government needs to help increase the transparency of the situation. The fear here is the Fed has shoft-term rates close to zero with no where to go. When people are so fearful about what might happen that they would rather take "0%" interest on their money instead of investing and seeing the assets lose value, more needs to be done to assuage those fears. If people believe the government entities understand the problem and offers potential solutions should the deflationary problem persist, more people might enter the real estate market now that are waiting to see if the "other shoe" will drop.

More deflation seems likely in the near-term. However, just as most people were caught by surprise about how quickly and severely the economy seemed to crash, it's very possible to wake up and find ourselves in an inflationary period. Locking in an historically low mortgage interest rate and buying a home now might turn out to be a very good idea.

Please feel free to contact me with any and all South Florida real estate needs/questions. I work well with buyers, sellers, renters, landlords and investors from all over the country and the world.

Michael Friedman
Realtor, Certified Distressed Property Expert (CDPE)
Lang Realty
561-989-2100

Some South Florida Real Estate Markets Showing Signs Of Price Appreciation

The recent real estate price reductions and favorable mortgage rates have helped bring buyers back into the market; this has driven prices up in some South Florida markets.

I think an overall real estate recovery will begin in the more desirable markets. Buyers with the ability to make a deal will get the most for the money in these neighborhoods. The trends will help spur those on the sidelines to make purchases; this will help end deflation in the real estate market, stabilize it and begin price movement upward.

A positive sign in regards to a real estate price rebound is the average price per square foot in one of the more desirable South Florida markets- Boca Raton, Florida. Despite Boca Raton's great lifestyle that includes beaches, museums, top-notch restaurants and world class shopping, housing was not immune to the "housing bubble." However, the average price per square foot of homes in Boca Raton increased 10.7% from May 2009 to May 2010. The number of homes sold increased by 3.2% and the median home sales price increased 5.0%.


Some home statistics in the Boca Raton, Florida market during March-May 2010 on a year-over-year basis are as follows:

The average price of all homes increased 2.8% to $205,000; this compares with $305,000 five years ago.

The average price of a four bedroom home rose 22.3% to $379,000; was $485,000 five years ago.

The average three bedroom home declined 5.7% to $226,000; five years ago was $333,700.

The average two bedroom home decreased 2.6% to $110,000; versus $210,000 five years ago.

The average one bedroom home increased 29.9% to 51,000; was $105,000 five years ago.

Now might be a good time to buy in the premier locations in South Florida. I recently sold a home in Palm Beach, Florida overlooking the ocean and the intracoastal waterways. My office has many real estate listings for buyers to look at all around South Florida. Sellers might want to list their homes given the more favorable outlook. The marketing power of Lang Realty and my expertise will be helpful in attracting as many potential buyers as possible.

Please feel free to contact me if you are a seller, buyer, renter, landlord, investor, etc.

Michael Friedman
Realtor, Certified Distressed Property Expert
Lang Realty
561-989-2100

Foreclosed Home Pricing- A Big Discount?

The Certified Distressed Property Expert (CDPE) designation prepares real estate agents to deal with short sales in an attempt to avoid foreclosure. The short sale is an important tool to help distressed homeowners avoid some of the credit issues that might arise with a foreclosure on their credit reports.

In Palm Beach County, Florida there have been 208,552 foreclosures year-to-date as of April 2010 with 48,384 in the month of April 2010 alone. During the first three months of 2010, foreclosures accounted for almost 30% of total sales in the country.

During 2009, more than 1.2 million property sales involved foreclosures; that is 25% above 2008 and 2,500% higher than 2005. With so much distressed property activity, especially in "bubble" areas, such as Florida, lenders are attempting to manage the inventory as not to flood the market with foreclosed properties. The reason behind this is an attempt to stablize prices.


What is the discount to market?

With such a large number of home sales being foreclosures, clients that are looking to buy have been asking me-- what is the percent discount to the market? The total savings in Palm Beach County and the nation as a whole is about 25%-30% less when compared with non-distressed homes; this includes both short sales and after bank possession foreclosures (REO).

Nationwide, the REO homes have sold for 34% less than non-distressed homes and short sales or pre-foreclosures have come in about at only a 15% discount. Why such a big difference between REOs and short sales-- the main reason is condition of the home. Foreclosures have more instances where the previous owner could not or did not want to maintain the home any longer.

What does this all mean?

Buyers looking for a good deal or savvy investors seeking good returns, there are opportunties to be had in the south Florida market. If you are looking to buy in the south Florida area, please feel free to contact me.

Distressed homeowners might want to consider a short sale. There is a chance to have the bank foregive mortgage debt and you will not have to deal with going through the foreclosure process. Distressed south Florida homeowners, please feel free to contact me in regards to short sale information and listings.


Michael Friedman
Realtor, Certified Distressed Property Expert (CDPE)
Lang Realty
561-989-2100