Real estate has been a major Florida problem since 2003. That’s when prices started to go nuts. Now, finally, things are getting back to normal. I think we still have another six months, possibly a year, before most working people can afford to buy houses here again without major financial risk. But even now, with a little careful shopping, there are decent deals out there.

You say, “But… but I thought the Florida Real Estate crisis was about dropping prices, and that ending the crisis would mean the market would pick up again.”

No. The real housing price problem here has been excessive greed. Developers decided to build houses that cost too much for middle-class families to buy without stupid adjustable-rate mortgages or other high-risk financing, and lots and lots of speculators figured they could buy $80,000 houses and resell them for $125,000, $150,000, even $200,000, so that by 2005 there were no reasonably-priced houses in reasonable neighborhoods that anyone relying on a local salary could afford to buy,

Advice for Florida homeseekers: look at what houses near where you want to buy sold for back in 2002 or 2003 (this is public information in Florida) and base any offer you make on those prices, not more recent ones. A Realtor may excitedly tell you a property you’re considering was “just reduced” from, say, $299,999 to $249,000. That’s nice. But if similar homes in that neighborhood sold in the $180,000 range in 2003, $249,000 is still way too high — and $180,00 is as much as you should offer for that property today.

Busting the baby-boom boom myth

One big line Realtors have used to justify endless price inflation in Florida is, “Before long 17 zilliion baby boomers will all retire to Florida, and they’re all so rich that they’ll run real estate prices up even higher than they are now. You just wait.”

Wrong. Maybe the richest 10% of the baby boomers have more retirement money then their parents had, but most don’t. Union and union-style fixed-payment pension are just about gone, because unions are just about gone. Most baby boom-type people I know (around my age) aren’t really going to be able to retire at all in the traditional sense. We may have a few bucks socked away in IRAs or 401(K) plans, but not nearly enough to buy any of the “deluxe retirement villas” and “adult lifestyle condos” we see advertised all over the place. About all we’re going to be able to afford in the way of retirement housing is cheesy little trailers — and we’ll probably have to work, even so, if we want to have much in the way of luxuries — like regular meals — during our “golden years.”

The funny thing is, most of the developers and other real estate profiteers I know around here are staunch Republicans, proud of their efforts to keep unions out of Florida and to make sure laws here favor employers. not workers. They are the people who cheered when Reagan “busted” the air traffic control union and complain constantly about people who want to work for decent salaries instead of subsisting on dribs and drabs that trickle down to them from the barely-taxed wealthy.

Republican developers and financiers who are now having a hard time got what they wanted: an underpaid working class with no pensions or savings and not much in the way of other assets, who are easily thrown into bankruptcy by an illness or job loss. Maybe those real estate Republicans need to stop building houses hardly anyone can afford and start developing permanent campgrounds that offer absolute minimum accommodations to people who can’t even afford a trailer. They wouldn’t make as much as they thought they’d make building $100,000 houses and selling them for $250,000, but at least they’d make something. (And do some sort-of good for society at the same time.)

High taxes and insurance

The usual suspects here in Florida spend a lot of time whining about high taxes. This is a state with no income tax, a reasonable sales tax that is levied only on physical goods instead of on the growing service sector, and property taxes that, for full-time residents, are lower than in many other states on the east coast. If you are seriously rich and bought your Florida home before the Real Estate Madness years, you are in tax heaven in this state. I do pretty well myself, too, with my decent (but not spectacular) income and modest home, Indeed, I estimate that I pay about one-half as much total state and local tax as I did in Maryland before my wife and I moved to Florida.

The people paying high property taxes in Florida are typically those of modest means who own second homes (often very modest house trailers) here, and those who own rental property or business real estate. O.J. Simpson, Rush Limbaugh, and Matt Drudge — all Florida-resident homeowners — pay a lower property tax rate than the owner of a crappy strip mall worth a fraction as much as a resident Rich Person’s mansion. It’s not that the Florida $25,000 “homeowners exemption” on property taxes is that big a deal to The Rich here (although it is to me), but that their property taxes, same as mine, can only go up 3% per year by law, while non-homeowners’ property taxes can and do go up, up, up.

The worst property tax inequity problems in Florida can be traced to two things:

1) A “highest and best use” valuation system that taxes a humble seaside motel as if the land it’s on was occupied by $10 million “worth” of high-rise condos.

2) Excessive pricing, which means a crappy strip mall may be currently “valued” at an inflated $500,000 instead of at its long-term (2002 or 2003) worth of $250,000 or $300,000.

A big line we hear from people in my part of Florida who feel overtaxed is that Manatee County “spends money like a drunken sailor.” I don’t think so. From what I see, most of the big county expenses are capital investments needed because of incessant (over)development. A drunken sailor may get a tattoo and spend the night with a whore, but he doesn’t spend millions or tens of millions subsidizing developers. I’ve already written about this, and there’s no need to repeat myself. But I believe we could cut county spending most effectively by stopping all new growth — or at least by making the developers pay all the costs associated with their activities. I also think developers should pay current residents “quality of life” compensation for overcrowding our beaches and roads. This is a very Republican “user fee” thought, but I don’t expect a single Republican developer to agree with it even though it would solve a lot of our problems, including high property taxes.

Assuming our property tax appraisers do their jobs honestly and correctly, we are going to see a lot of property taxes go down. And if we can get rid of the “highest and best use” fiction, too, you’ll hear a huge, collective sigh of relief from Florida’s rental unit and commercial property owners.

Naturally, since our roads and other infrastructure still need maintenance, and most of us like having police and fire protection, we’ll need to find a way to make up for lowered property tax income. We could do that rather easily by extending our sales tax to services. We could exempt services used heavily by Florida’s poorest residents, such as haircuts and taxi rides — which would be almost impossible to collect taxes on anyway — and stick to taxing “luxury” services including accounting, landscaping, yacht rentals, and so on. I think we’d find that a service tax would more than make up for any shortfall caused by making our property tax system more rational. Whether the current Republican-dominated legislature would see the sense to this idea is another story, but the nutcase, rich-sucking Republicans have been mismanaging our state’s economy so badly in recent years are going to get voted out of office in the next couple of elections, and once we have a combination of Democrats and rational Republicans running things, I think we’ll be able to do some decent government fiscal planning

On the insurance front… right now the only thing propping up the Florida property insurance system is pure-out socialism. The same Florida Republicans who cry like babies when anyones suggests that the government should offer some sort of minimal medical care to all U.S. citizens have turned the state-owned Citizens Property Insurance Corporation into the state’s largest property insurance company.

In other words, we have socialized homeowners insurance here — all brought to you by Republicans who spout about free markets and private enterprise when it comes to health care and even (in some extreme cases) public schools.

The insurance industry people are no more honest than Florida Republicans, though. After Hurricane Charley and then Katrina, they all whined about how they had to raise their rates because of their huge losses, even though most of them racked up record profits despite their payouts in the worst hurricane years. And now that we’ve had a hurricane-free 2006 and seem to be headed for a hurricane-free 2007, you don’t see them lowering rates. Hmm…..

I have no easy solution for the insurance problem, except on an individual basis: buy a cheap house and you won’t pay as much as someone who owns an expensive house. Or buy a crappy house trailer real cheap and don’t insure it at all, but make sure you have money to replace it if it blows away.

Where we go from here

I have faith in the market. I expect Florida housing prices to become fully rational within the next year. In my neighborhood, one overextended investor just sold a “fixer upper” house to an artist who was renting nearby at a 2002 price, and I suspect we’ll soon see many other investors grit their teeth and decide to give up their profit or take a loss in order to get out from under properties they probably shouldn’t have bought in the first place.

Some new homeowners are going to see their houses worth less than they paid for them for a few years, but those who got sensible mortgages and have stable lives won’t be hurt. As one young couple we know who recently bought their first house said, “It may not have been a great time to buy as far as the market is concerned, but it was the right time for us to buy, and we aren’t moving for many years so a temporary price drop doesn’t affect us.”

These are people who took out a fixed-rate conventional mortgage and made a realistic down payment. They aren’t speculators. They bought a nice home and like it. They are enjoying their new place a lot more than they enjoyed the apartment where they lived before — and paid nearly as much rent as their mortgage costs now — and now they’re getting a substantial income tax deduction because of their mortgage interest.

Investors and others who bought more property than they could afford or got into flaky home loan deals are another story. My sympathy for people in those situations is limited. You might even say it’s nonexistent — especially for the many investors I know who now rent to illegal aliens and other undesirables in order to keep their financial heads above water. These people are screwing up my neighborhood, and I’d just as soon see them all sell out (or default) and go away.

I don’t even have a lot of sympathy for ordinary working people who got conned into bad home loans that are now going sour on them. I’m sorry, but not everyone should own a house. And people who can rationally afford a $140,000 house that needs some work they can gradually do over time with cash and possibly their own labor shouldn’t be lured into buying a $250,000 or $300,000 house they are going to lose if anything negative (like a job loss or illness) happens to them. Optimism is nice, but when it comes to major financial decisions, prudence is better, and you can’t rely on real estate agents or mortgage brokers to look out for your interest. Their job is to make the deal, not to make the best deal for you.

Before you commit yourself to a $1000 or $2000 or $3000 monthly liability for two or three decades, you must figure out if you can really make those payments — and make them even if the insurance and taxes go up and one of two incomes in a two-income family goes away. Otherwise, rent. And no, each kid doesn’t need to have his or her own bedroom, and you don’t really need more than bathroom for a family of four. These are luxuries, and previous generations didn’t have them. A small house and money in the bank is always better than living in a large house and coming up $10 short every payday.

The Florida property tax situation will get solved within the next two years or so, even if we need to get rid of a lot of incumbent legislators to do it.

Property insurance is a whole ‘nother fine kettle of fish. Right now, it looks like Florida is going to rely on state-financed insurance for a while, but the insurance business tends to be cyclical. I expect to see rate competition come back within the next few years. Maybe the legislature can hasten this by preventing insurance companies from setting up separate Florida subsidiaries, which wasn’t allowed until comparatively recently. And when we see rate competition, I suspect that fewer Florida property owners will rely on the state-owned Citizens system, so that problem will gradually go away on its own.

And the big tax-sucker and general ruiner of life in Florida, namely excess development, has effectively stopped at this point because of market conditions. Yes, we’re going to have to suffer some half-built condo ruins and other abandonments for a few years, but eventually that problem, too, will shake itself out if we leave the market alone.

One big thing I do see happening here in Florida for many years to come is slower growth. If you’re a builder or construction worker, this is bad (maybe you should move to Arizona, eh?) but for the rest of us, no problem. The local economy has been far too dependent on development for far too long.

We have, at least in the part of Florida where I live, beautiful beaches, lots of talented people, and the potential for building many businesses that do not depend on development.

I remember, back in the early 1980s, how Austin, Texas, got itself into a construction boom cycle that was inevitably followed by a construction bust. Now Austin has a vital local economy based on technology and the arts, not endless development.

Once we get done recovering from Real Estate Madness, I think the same thing could happen here in Florida. And I’m willing to stick around and help make it happen, too.

This entry was posted on Monday, October 22nd, 2007 at 10:35 am and is filed under Bradenton/local, Business. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.