Allied Realty Group Blog

Climbing the wall of worry

Party on!  It looks like prices keep climbing in the South Florida residential real estate market, at least through the month of June.   Historically that month has been strong for sales volume and prices, so once we get into the next few months, we should have a better indication if this freight train plans to slow down.

Climbing sale prices

South Florida climbing house prices

During the month of June, the average sale price of a single-family home in South Florida was $493,648.  Although it is down slightly from the recent peak of $505,236 set back in February, this is still an impressive number.  As for condos, the average selling price in June was $282,117.  It appears that the condo sales have cooled already (see the next chart) and should continue to do so as we move through the remainder of 2017.

Residential transaction volume

Real estate sales in South Florida

During the month of June there were 9,048 residential transactions recorded in South Florida, which is a slight drop from 9,141 in May.  The condo market had 4,155 sales, representing a 7% decline month over month.  Single-family home sales volume increased 4% from 4,691 in May to 4,893 in June.  If you look at the April – June period for the past few years, it is usually a good one for sales volume.

Residential Inventory

South Florida houses and condos

As long as you exclude the massive new construction condo product overhang, residential inventory has been declining.   There were 18,439 houses and 29,134 condos listed for sale.  The decline in condo prices is now becoming clear and this trend should continue for awhile.  With the amount of new construction condos not in the MLS and the proposed projects in the pipeline, it could take years to absorb all of the product.

Climbing foreclosure filings

Miami, Fort Lauderdale and palm beach climbing foreclosure activity

Why isn’t this being discussed?  It seems as if everyone thinks that distressed properties are no longer an issue in South Florida, but we will continue to highlight the elevated level of new foreclosure filings in the tri-county area.  In 2016 the monthly average of new filings was 1,266 and so far in 2017 the monthly average has climbed 7% to a monthly average of 1,356.  As speculators are back in full-force and people continue to stretch their budgets to afford housing, the South Florida market will continue to wrestle with distressed properties.  It sure seems as if people have a very short memory!

Mortgage Rates – Not Climbing!

Mortgage rates

As long as rates remain low, the housing party will continue.  Low borrowing costs have fueled this latest bubble in the residential markets and we may not see normalization of rates anytime soon.  We have always stressed the correlation between low rates and higher asset prices, along with the danger of bubbly markets.  If and when rates climb we will see a direct impact on housing demand and prices, so until then, party on!

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Stall speed

Stall speed is the slowest speed a plane can fly to maintain level flight.  That sounds a lot like the state of our economy and the bond market is well aware.  After the November election we saw a noticeable jump in 10-year bond yields and mortgage rates, but halfway through 2017, they simply don’t believe the hype any longer.  The prospects for economic growth appear slim and the economy has stalled (or has simply remained stalled).   Ironically enough, the slight move upward in yields over the last few weeks was a reflex to European bond yields increasing and certainly not a result of economic growth prospects.

Mortgage rates and bond yields

Will sales prices finally stall?

For now, it looks like the average sale prices in the Fort Lauderdale area have remained elevated.  During the month of May, the average sale price of a single-family home was at $408,639 and the average sale price of a condo was $211,018.  Mortgage rates have remained at crisis levels for over eight years and have continued to fuel higher prices.  The summer months will show if the pace of sales and prices will slow.

real estate prices in Fort Lauderdale, Florida

Residential Inventory

Residential inventory around the Greater Fort Lauderdale looks good for sellers.  There were a total of 13,909 houses and condos listed for sale throughout Broward County in the month of May.  Low rates have allowed buyers to pile on plenty of debt and the fear of missing out (FOMO) is still in full-effect.

Fort lauderdale houses and condos for sale

Foreclosure filings – not at stall speed

For some reason nobody cares to report about all of the new foreclosure filings in the Fort Lauderdale area.  You will notice from the next chart that they have been climbing in 2017 and remain at high levels that we haven’t seen in years.  This is all happening during the eighth year of the “economic recovery” nonetheless!  The condo property filings (in red) have been climbing steadily month after month throughout 2017.  Here is a quick snapshot of the past three years of residential mortgage foreclosure filings in Broward County, Florida:

  • 2015 monthly average was  280
  • 2016 monthly average rose 50% to 420
  • 2017 monthly average has climbed another 41% to 593

Fort Lauderdale mortgage foreclosure filings

Our next chart is a snapshot of the tri-county area including Miami-Dade, Broward and Palm beach County Florida.  Through the month of June there have been 8,138 new mortgage foreclosure filings in the area.

Foreclosures in Miami, Fort Lauderdale, Palm beach

At some point the lack of growth in the economy will come back to haunt the South Florida real estate market.  The pace of mortgage defaults remains elevated and new debt will magnify the problem.   The fact that the ten year bond yield cannot reach 3% just shows that markets don’t believe we will see any economic growth in the near term.  In addition, the Fed currently holds nearly 25% of all the first mortgage loans in the country with a total of $2.5 trillion and they keep talking about winding-down their balance sheet.  What will happen to the mortgage market if it relies on other participants to buy all of these loans?  Anemic growth and record debt will not allow us to maintain stall speed forever.

 

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Plotting the next move

When will it be time to begin plotting your next move?  It sure seems like real estate markets have been defying all logic and the charts have showed some resilience so far throughout 2017.  At some point the rally across all asset classes will run out of steam, whether we see it first in stocks, bonds or real estate will be the question.

Plotting average sale prices in South Florida

Plotting South Florida real estate prices

After seeing a multi-year high price of $505,236 during the month of February, it appears that single-family home prices may be taking a breather in South Florida.  During the month of May, prices slipped 5% from the February highs to $480,133.  The question is whether they continue the slide over the summer or make an attempt at another high.  At first glance, we may have already seen the cycle peak in single-family home prices in this market.  As for the average selling price of condos, they appear to have made their 2017 high during the month of March at $286,474 and dipped slightly (4%) to $280,096 in May.  It is noteworthy that condo prices have failed to surpass the $300,000 mark and repeatedly meet resistance at that level.  If condo prices are failing to reach new highs with all of this accommodation, there is a good chance their next move is downward.

Plotting the Peaks and Valleys in Transaction Volume

As for transaction volume, South Florida has seen some peaks and valleys.  January saw a seasonal drop to 5,794 residential transactions, but deal volume has rebounded nicely to 9,141 closed transactions in May.  The month of June has been strong for the past few years, so we shall see if we reach the previous highs next month.  A failure to reach previous highs in deal volume will most-likely lead to a downtrend throughout the summer and lower prices across the board.

Plotting Real estate transactions in South Florida

Residential Inventory

As long as we don’t include the massive shadow inventory of new construction condos, the existing inventory of available properties looks o.k..  As of May, there were 18,937 houses and 29,922 condo / townhouse properties listed for sale in Miami-Dade, Broward and Palm Beach County Florida.  If you compare these numbers to 2011 it seems like the current levels remain healthy for now.  Remember that the far left of this chart shows when the major banks removed all of their foreclosure inventory from the market because of pending litigation.  Believe it or not, many of those properties are still lingering in default and may return to the market.

Plotting inventory South Florida houses and condos for sale

We have discussed at length how keeping interest rates at crisis level lows for so long will eventually damage a market.  A low cost of borrowing encourages buyers to pile on debt and overpay for assets.  Since there is an inverse relationship between interest rates and asset prices, the question remains of who will be the bag holders when rates eventually climb and asset prices drop?   We all know how that story ends, and apparently repeats itself.  Stay tuned.

 

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Pops & drops

Real estate data has a tendency to be seasonal and from the looks of this latest batch, we are right on track again in South Florida.  Today we will take a look at the “pop” in transaction volume last month, along with price trends, foreclosure filings and distressed sales.

A seasonal “pop” in deal volume

It’s a good think that transaction volume increased during the month of March, otherwise it would have signaled a warning moving forward through the spring.  If you look at the previous years in the chart below, you will notice the same pattern during March and April of each year.  You will want to see one more month of strength in deal volume before it tapers off for the summer months.  The first chart breaks out the condo and single family home sales and the second chart is combined.

Seasonal pop in South Florida real estate sales

Seasonal pops and drops south florida real estate

A slight drop in single family home prices (not seasonal)

This isn’t much to worry about right now, after several years of an upward trend.  However, if the April numbers are soft it could be the start of a downward trend in single-family home prices across South Florida.  The average sale price of a house in South Florida declined by 5% month over month from $505,236 in February to $477,764 in March.  Meanwhile, the average sale price of a condo climbed 6% from $270,277 in February to $286,474 in March.  Always keep in mind that the average sale price tends to be more volatile than the median, and one month in either direction does not signify the start of a new trend.  We do anticipate softening in the condo market over the summer months and it will be interesting to see if house prices follow condos South.  Mortgage rates have declined once again, so that may provide price support until rates resume their uptrend.  Be careful not to cheer low rates for much longer, because they fortell much larger problems in the economy.

South florida house and condo prices

Foreclosure activity

New foreclosure filings continue to climb throughout South Florida. During the month of march there were 1,495 new foreclosure filings in the condo and single-family home segments in South Florida.  This is a jump of 18% month over month.  So far in 2017, the monthly average of new filings is 1,304.  The monthly average in 2016 was 1,262 and it was only 796 in 2015.  Do you see a pattern here?  Just look at the chart.

Foreclosures in Miami, Fort Lauderdale, Palm Beach

Distressed property sales

Finally, here is a look at the pace of short sale and foreclosure transactions in comparison to the new foreclosure filings.  Obviously the properties that are just now receiving foreclosure notices have awile before ever hitting the market, but this chart and the one above really add some perspective to the “recovery” in the South Florida housing market.

Foreclosure sales and short sales in South Florida real estate

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Hanging around

The Counting Crows had a cool song years ago titled “hanging around”.  It had a great beat and reminds me of a few market conditions lately.  Today we will highlight a couple of our charts that may be worth monitoring and will help you determine if the real estate market recovery is for real.

Rates are hanging around

The fact that the 10-year bond rate failed to rally over the 2.63% mark is disturbing.  A close over that level would have sent the 10-year yield closer to 3.00% and mortgage rates would have been much higher.  Rather than cheer the fact that rates are still low, people should be wondering why.  Our guess is that the market no longer believes in the post-election pro-growth trade.  If you want to know which way the economy is headed, look no further than the bond market.  Right now it does not fortell a booming economy and if rates continue to drop we will have some serious issues across all asset classes.

mortgage rates

Foreclosures keep hanging around

Hey wait, I though we were done with these things!  Why do they keep coming back like a boomerang?  This is what happens when you kick the can down the road and don’t fix a problem.  At the end of 2016 we discussed how the decison in the Bartram case in the Florida Supreme Court would clear the way for lenders to start filing their foreclosure cases again. Until there was a decision in that case the banks were worried that their cases would be challenged and/or dismissed on various technicalities.  Yes, plenty of these properties have bounced in and out of foreclosure since 2008, but the lenders are finally on firm ground to file again.  Case filings in Broward County are escalating quickly and it is our guess that Miami-Dade and Palm Beach will follow.

To add some perspective, here are some monthly filing averages for houses and condos in the tri-county area:

  • 2015 averaged 796 monthly filings
  • 2016 averaged 1,266 monthly filings
  • 2017 so far is averaging 1,300 monthly filings

South Florida #Foreclosures

This next chart shows the trend of total filings.  Look at how there were so few back in 2015!

Miami, Fort lauderdale Palm Beach #foreclosures

This chart of Broward County is no bueno!  We haven’t seen this many filings in years.

#Foreclosures in Fort lauderdale

Transaction volume is hanging around the lows

How about transaction volume?  This chart goes through February, so don’t panic just yet.  If you look at the chart, you will notice a dip in transaction volume each year around January and February.  We have stated previously that the South Florida residential market peaked in the spring of 2016.  Typically prices will lag transaction volume and if there isn’t a significant uptick in sales during the second quarter, you will continue to see downward market pressure followed by another leg down in prices.

South florida real estate deal volume

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What to watch in 2017

There are a few areas to watch as we begin 2017 and we will highlight them with new charts.  After eight years of artificially suppressed interest rates, all asset classes could enter a new era of volatility.  Here are a some data points worth keeping an eye on as we move through the year:

Watch new foreclosure filings

Major lenders took yet another break from filing foreclosures in the last few years until a recent decision in Florida Supreme Court.  In a nutshell, they will now be able to refile cases outside the 5-year statute of limitations.  There are still tens of thousands of cases and several hundred million dollars in assets held in limbo up to this point.  People forget that many of the unresolved cases date back to 2008. Look for new filings to gain momentum as we move through 2017.  As for the average number of residential filings in South Florida over the past few years:

  • The 2015 monthly average was 796
  • In 2016, the monthly average climbed 59% to 1,266

Watch South Florida foreclosure filings

 

Watch bond yelds and mortgage rates

Bond yields rallied after the election, but tapered-off as 2016 came to and end as investment portfolios needed to be re-balanced.  After reaching close to 2.60% in mid-December, this week the 10-year bond yield closed around 2.42%.  It is likely that bond yields will slide in the near-term, but will resume their climb as we progress through the year.  A few key levels to watch on the upside are as follows:

  • A close over 2.62% should send the 10-year bond yield higher to the 3.00% level
  • If the 10-year bond yield rallies and closes over 3.00% (3.03% to be specific), it is highly likely to rally much further, with mortgage rates climbing over 5.00%.  These levels are still very low by historical standards, but could be problematic for real estate markets.

Watch mortgage rates and bond yields

Transaction volume

Deal volume has dropped, but we will have to watch the first few months of 2017 to see if this translates to something more than a seasonal slowdown.   You will notice from the chart below that transaction volume declined toward the end of the past few years, reaching lows in January.  Typically extended periods of lower transaction volume are followed by price declines, so we will have to look toward the second quarter of 2017 to see if this continues into the spring.

  • In 2015, the average monthly transaction volume was 8,034
  • Through November of 2016, monthly deal volume has declined 5% to 7,602

South Florida real estate sales

Inventory levels

The residential inventory reached a low point back in may of 2013 with 35,123 houses and condos listed for sale.  Since that point, inventory has climbed 39% to 48,822 in November.  As you will notice from the next chart, houses are at a reasonable level at 19,355.  Keep an eye on condo inventory, as it reached 29,487 units without the shadow inventory of new construction projects.

South Florida real estate inventory

Sale prices

The average selling price of condos actually rose slightly to 268,753 in November, as house prices dropped $409,216.  Obviously the above charts of inventory, transaction volume and mortgage rates will determine where prices go in 2017.  The foreclosure filings will have a lesser impact, because the timeline of filings to sale date are still ridiculously long in judicial states like Florida.

Watch eal estate prices in South Florida

 

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Let’s make real estate markets fun again!

Let’s face it, real estate markets have been boring since the financial crisis.  Once the government intervened by dropping rates to crisis levels and bailing out banks and distressed borrowers, the markets have been anything but normal.  The goal of the government stimulus was to reflate asset prices and make people think this was a true recovery.  Not only has this not been a real recovery,  but people have forgotten what “normal” rates look like and what would happen if they ever moved higher. For the first time in years, anyone buying or selling property may actually have to do some homework.  Mortgage rates are beginning to normalize on their own and real estate markets may actually be fun again!

Fun with rates

After luring everyone back into the real estate market with these artificially low rates, we have recently seen an unprecedented rise in bond yields.  These increases will put the brakes on the housing market and deflate the existing bubble.  Plenty of speculators rushed into the markets and will once again be stuck with properties they thought would be quick flips.  Does this sound familiar? Look at the far right side of this chart of bond yields and mortgage rates.  We haven’t seen the 10-year bond (where it is today) at 2.45 since October of 2014.  We will see if it closes there today and if it does, it will most likely continue the trek upward.   The real fun begins after the 10-year bond yield climbs over 3% and mortgage rates move closer to 5%.

fun with bond yields and mortgage rates

Sales by transaction type – single family home market

We focus on the closed sales because they are a good leading indicator for where prices are heading.  If sales volume declines for several months in a row, prices will typically follow them down.  here is a snapshot of the Greater Fort Lauderdale residential market for single-family homes.  Traditional (arm’s length) transactions are usually the best indicator and they have dropped 30% since June, when we believe the residential market peaked in South Florida.  Keep in mind that these numbers are just through October, before bond yields and mortgage rates made their dramatic jump.

house sales in fort lauderdale

Sales by transaction type – condo market

Now let’s take a look at condo sales and you will notice a similar pattern.  Traditional condo sales declined 22% since the month of June.

condo property sales fort lauderdale

Average sale prices

Prices of houses and condos haven’t seen the impact of higher borrowing costs yet and therefore have not dropped.  Our prediction is the the November sales numbers out later this month will start to really show some cracks in the market.  Condo prices started to slip a few months ago, but the single-family homes held up through October.  November, December and 2017 should bring an end to their Fed-induced price rally.

sale prices houses and condos fort lauderdale

Bonus chart – New foreclosures & distressed sales

We have included a bonus chart today, because most people think that foreclosures will no longer impact the South Florida market.  Think again.  After years of kicking the can down the road, some of the foreclosures from 2008 will eventually get to the market.  This final chart shows that although distressed sales have been declining, new foreclosure filings have been creeping higher.  This trend is worth watching as we move into 2017.

short sales foreclosures fort lauderdale

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Are property prices poised to head South this winter?

Property prices around the country have had quite the rally since the Fed decided to drop interest rates to stimulate the economy back in 2009.  After seven years of asset price reflation aka “the recovery”, there are a variety of factors that may send property prices downward.  Today we will look at the decline in sales volume, which is usually means that price drops are not far behind.

Prices of houses and condo properties

During the month of October, the average house price in the South Florida market dropped slightly to $430,856.  That represents a 6% decline from June, which is the point where we believe this market peaked in sales price and volume.  As for condos, the average price has already declined to 237,889 in October which represents a drop of 10% since June.  Also worth noting is that the average sale price of condo properties has declined for six months in a row.

Sales prices of South Florida houses and condos

House transactions by type

Our next chart has a breakdown of house sales by transaction type.  There were a total of 3,552 closed sales in October, which is a noticeable drop from the 4,923 deals that closed in June.  What is troubling about this chart is the sharp decline in traditonal (arm’s length) transactions.  These sales are usually what will keep prices up, while distressed sales drag the averages down. Here are the numbers by transaction type:

  • 3,132 traditional sales in October, a decline of 27% since June
  • 295 foreclosure sales in October, a decline of 37% since June
  • 125 short sales in October, a decline of 25% since June

Short sales foreclosures in houses

Condo transactions by type

There were 3,225 condo sales that closed during the month of October, down from 4,180 in June.  That is a 23% drop in deal volume and this is just listed condo properties and does not include the thousands of pre-construction condos that are available and new ones under construction and ready to flood the market.  Once again, notice that large drop in traditional sales. Here is a breakdown of the closed sales by transaction type:

  • 2,882 traditional sales in October, a decline of 22% since June
  • 292 foreclosure sales in October, a decline of 32% since June
  • 51 short sales in October, a decline of 32% since June

condo short sales foreclosures south florida

Total sales volume for the area

Here is a snapshot of the total sales volume for Miami-Dade, Broward and Palm Beach County Florida.  The reason we believe this is a set up for price declines is that this chart does not include November where rates started to climb substantially.   If deal volume was dropping before rates climbed, what will happen if rates normalize?  Existing inventory will have longer days on market and will be followed by price declines.

Houses and condo sales in South Florida

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How will rising rates impact real estate market activity?

Interest rates have been rising since the election and within a few months we should begin to see the impact.  We have discussed this topic at length on our blog because the Federal Reserve has kept rates at crisis levels for the past seven years and now they may have lost control.  Take a look at our first chart and notice the recent spike on the far right.

Rising mortgage rates

Mortgage rates

Transaction volume

The question for the real estate market is how much of an impact the recent rate spike may have on sales volume.  Usually a rate increase will pull some buyers off the sidelines, but having rates too low for too long may have already extracted the last few drops of demand.  You will notice from this next chart that sales volume most likely peaked in June with a total of 9,103 house and condo sales.  In October, that number has declined 26% to 6,777 transactions.  Keep in mind that does not reflect the recent increase in rates that took place in November.

real estate sales

Average sale prices

The average sale price of houses and condos in South Florida has remained stable prior to the jump in rates, so the next few months will be interesting.  Single-family home prices in South Florida have declined 6% since June and condo prices have dropped 17% for the same period.  Price follows volume, so if the number of transactions continues to decline, you will probably see prices drop as well.

South Florida real estate prices

Residential Inventory in South Florida

Finally, let’s look at residential inventory in South Florida.  There were 18,973 houses on the market during the month of October, which has remained rather stable and only shows a slight increase month over month.  As we close out 2016 and move into 2017, we may see some clouds on the horizon for the condo market.  In October there were 28,489 condo units listed for sale and that figure does not include the thousands of pre-construction units that continue to flood the market.  The combination of rising rates, a stronger dollar and a gradual increase in available inventory will impact this market into 2017 and beyond so it will certainly be worth monitoring.

South Florida residential inventory

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What happens when the training wheels come off?

For the past seven years, abnormally low interest rates have served as “training wheels” for the U.S. economy.  They have propelled stocks, bonds and real estate prices higher.  Under normal interest rate policy, the markets would not have reached these levels without better fundamentals.   Higher interest rates may be just one of the many factors that will lead to a widespread market correction.

Training Wheels for the Weak Economy – Low Interest Rates

The only time we have seen rate rise since the financial crisis was the “taper tantrum” back in the middle of 2013.  The 10-year bond touched 3.00% twice after that, but have been on s steady grind lower since then and basically remain at levels that were needed to rescue the economy after the crisis. People need to ask themselves the following question:  If the economy is really in “recovery”, why do we need to keep interest rates at crisis levels?  The 10-year bond rose to 1.67% this week and may be on the rise, even if the Fed doesn’t hike soon.  If bond yields continue to climb, we may slowly begin to see an impact on mortgage rates and downward pressure on real estate prices.

Low rates are training wheels for the economy

Real Estate Transaction Volume

We haven’t even seen a rate increase yet and transaction volume is slipping.  From June to July condo sales dropped 15% and single-family home sales dropped 16%.  One month does not make a trend, but transaction volume is certainly worth watching as we move into the end of the year.  Low rates have a tendency to pull consumption forward.  People calculate their payment and run out to buy cars, houses and other items they normal wouldn’t buy.  Whats happens if that consumption disappears?

transaction-volume

South Florida Real Estate Prices

This chart of sale prices goes all the way back to January of 2011.  The single-family home prices rose steadily over the 5-year period, thanks to all of the economic stimulus thrown at the market.  Condo prices climbed, but not as much.  Lately, condo prices have suffered and this may just be the beginning of a prolonged correction in that segment.  The average sale price of a South Florida condo has declined 14% since April.

Sale Prices - South Florida real estate

Inverse Relationships of Interest Rates and Prices

We may not be artistically inclined, but the following simple drawings are good enough to show the inverse relationship of rates and prices:

The first drawing shows a normal interest rate environment, where prices are held in check with “normal” rates.

Training Wheels- Normal rates

Next, this is a snapshot of our current market , where low rates for seven years have artificially inflated prices.

 

Training wheels - low rates

Our last drawing shows what happens to prices once rates rise.  (The next market)

training wheels removed

 South Florida Foreclosure Activity

We have added a trend line to this next chart of new foreclosure filings.  The chart represents new residential filings in Miami-Dade, Broward and Palm Beach County Florida.  The trend rises from the lower left to the upper right of the chart.  Yes, the pace of new foreclosure filings has been on the rise.  Even though real estate prices have risen due to low borrowing costs, there is clearly a big difference between asset price reflation and a true economic recovery.  We will eventually see what happens to the markets once the training wheels come off.

Foreclosure activity in South Florida

 

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