Florida is doomed...

Posted by: Dean Foust on May 18, 2007

One of my favorite Wall Street economists, Jan Hatzius of Goldman Sachs, put out a report recently predicting that Florida — not California or New York or DC — would be the “epicenter of the U.S. flamingos.jpgHousing Bust.” To appreciate the context for Hatzius’ prediction, you first have to take a step back and realize that Hatzius isn’t a housing gloomster. He’s not predicting a dramatic 30% plunge in values that sends us into recession or depression the way some seers have it. He believes the direct and indirect housing drag on GDP will “only” be a cumulative 3-4 percentage points, with that spread out over 2-3 years. Not enough to cause a recession because he thinks that improvements in the trade imbalance — read: higher exports — will help pick up the slack from housing.

But he DOES predict a recession will hit one state: Florida. And the hit will be hard: Hatzius estimates that the direct and indirect drag from housing will be six to eight percentage points, or twice the impact on the country as a whole. Here’s his argument …

For starters, Hatzius notes that Florida has the largest amount of excess housing supply: In 2006, unsold homes for sale made up 4.3% of all homes for owner-occupation, twice the percentage of the nation as a whole. Inventories of unsold homes are as high as 30 months in some counties, vs. a national average of 7.3 months. Already, homebuilders have responded by cutting the pace of new construction by half. That will trim two percentage points from Florida's economic growth, and the residual cutbacks in related services -- commissions paid to real estate agents, cutbacks in production of building materaisl, etc. -- will trim another two points.

Another concern Hatzius raises is that the dramatic increase in housing values in Florida has left a sharp disconnect between home values and incomes. Nationally, Hatzius calculates that the average homeowner is paying 23% of their income on housing, vs. 20% in the 1990s (hence, he believes housing values nationally will have to fall 15% to get back to equilibrium, though a boost in incomes could also help close the gap).

In Florida, the disconnect is worse. The average mortgage there eats up 31% of incomes, vs. 18% in the 1990s. Hence, Hatzius calculates that house prices would have to fall by more than 40$ to get back to fair value. He expects a decline of 10-15% this year, and further declines thereafter. Comparing the historic links between drops in housing values and consumer spending, Hatzius figures falling home prices will trim consumption by another two percentage points, as consumers feel poorer (or simply can't tap home equity loans anymore. Hatzius nots that mortgage equity withdrawals in Florida were running at 13.8% of disposable income in the third quarter of 2006, vs. 8.9% nationally).

Hatzius makes one final point: Florida has a comparatively small manufacturing sector, so it won't enjoy any of the strength in manufacturing that Hatzius expects to occur elsewhere as a result of the falling dollar. On the other hand, he acknowledges that Florida's tourism economy could benefit from a weaker dollar as Europeans and Asian find it cheaper to visit Disney World. Good if you work for Walt Disney. Bad if you work in the Florida real estate industry, or simply used your home as an ATM during the boom years.

Reader Comments

Edward J. Dodson

May 19, 2007 9:54 AM

Florida is only the tip of the iceberg. The key indicator of where we are headed is the overheated nature of land markets all across the United States. Land prices have escalated at multiplies of the CPI, fueled in part by low interest rates and heavy speculative investment in land and some income-producing properties (at prices far above what capitalization of cash flows would dictate as prudent).

Economists need to remember the lessons taught by David Ricardo, John Stuart Mill and Henry George -- their predecessors who understood land markets and the unique nature of location rent as a claim by nonproducers on production. Land markets have climbed far above the level where producers can absorb land costs and still compete in global markets. The historic response by producers is to close down operations in high land price markets and relocate in order to protect profit margins.

While this tactic will work in the short run for individual producers, the aggregate impacts are easy to see: falling household incomes among a greater percentage of the population; huge levels of consumer debt, bankruptcies and foreclosures; rising structural underemployment; eroding of the tax base during a period of rising demands on the public sector for social welfare (and criminal justice) expenditures.

If our elected representatives and their economic advisers have any desire to end this downward cycle, I urge them to look at the policy solutions proposed by Henry George in the late 19th century. His observations, sound in his own time, are even more urgent today.

Cheryl

June 14, 2007 11:53 AM

Florida, has over priced it self right out of the market. I lived in Florida for at least half of my life, but can no longer afford to live there. In the Florida Keys, the working person can no longer afford to live there. What happens when people like Bill Gates starts having to sack his own groceries. My husband and I are both disabled, we miss Florida terribly. I always thought we would be able to live out our golden years there, fishing and enjoying life. When my husband suffered a massive heart attack we lost everything. Now we reside in a RV,(not a FEMA trailer), it's a very nice RV, but we would love to have an acre or two just to grow our plants. Yes, I agree, Florida has out priced itself. How I wish I could go home!!!

Todd

June 15, 2007 5:37 AM

Yes, Florida is over priced but we can blame our state and local officials for allowing it to happen. I am a native Floridian and I could not afford a home in a neighborhood I would want to live in today. What we have seen is out of control growth and development. Tampa has become one, big, giant nightmare traffic jam. The next Atlanta, perhaps? Our local officials did nothing to stem the tide of snow birds...specifically no impact fees to force newcomers to contribute. Just "come on down, stick your kids in our public schools and enjoy the services the natives have been paying for for years". The one thing we do have to force newcomers to contribute is property taxes. However, all those who come here and rent don't have to worry about that. Add in the insurance companies who have fled the state to avoid actually having to insure anyone and you get a situation like mine...my insurance tripled from 05 to 06, then went up another 30% from 06 to 07. Our fearless state officials are supposedly going to do something about property taxes. We'll see if it amounts to anything or is just a campaign slogan. Cheryl, sorry you couldn't stay but there will probably be many more following you. I will stay because I've never lived anywhere else and any other state I'd be willing to move to (California) is more expensive than it is here.

Crazy G

June 15, 2007 7:22 AM

I agree...FLORIDA IS DOOMED!!!!
Things will NOT return to normal until all these 'flippers' are outta here..
I live in an upscale community, in Daytona area, where there are numerous flippers who own 3 to 5 houses...all for sale/rent..one guy is from California and another from West Palm Beach..
The major upscale developer in here hasn't sold a unit in here this year YET!!!
They're sitting on about 400 houses in numerous developments along the coast, and finally getting around to finishing 'all' their unfinished houses...[50 in our community alone]..
This will just add to their whoes!!!
This is going to take a VERY VERY long time to play out....well beyond 2009 for sure........

"""WHO IS GOING TO LIVE IN ALL THESE EMPTY HOUSES???""""

When you get the answer to that, the riddle is solved!!!

Dale Durthailer

June 18, 2007 6:05 AM

Its horrible! FLORIDA IS GOING DOWN THE TUBES FOLKS because of the RICH PEOPLE that have moved in!
No place for the poor to medium income family anymore.

Crazy G

June 18, 2007 8:31 PM

Dale:I'm sorry to disagree with with you..."BUT", it's not the rich people who have moved in, as you refer....."""It's the people who couldn't afford a house to begin with""" who have created ""PART" of this problem....

Negative mortage rates, and Interest Only loans comming due, will ""COLLAPSE"" this market..
Sub-prime "slime", will peak sometime this fall/winter season, and the after-math will carry this into 2008 for sure...
THE WORST IS JUST BEGINNING...

Wes

June 18, 2007 10:15 PM

Florida is doomed, but the real reason has only been slightly touched. It's the out-of-state speculators who have ruined this area. In Tampa, we hear about good paying jobs are $70,000. That salary will buy you a nice trailer, or a house so far away from the city that you will need to take a second mortgage to afford the gas. The guy who sits next to me drives 2-hours r/t to work. I have friends who bought condos only to have 3 roommates move in to afford the rent, how is that freedom?

Another issue is the geography. In Tampa, the corporate jobs are all spead out, but few are near the new bedroom communities. Hence, unless you are willing to sit in traffic for an hour each way, you should be resigned to never buying in this area. Secondly, a lot of the jobs are kind of dead end in nature, and if you lose your job, you might not be able to find a suitable replacement.

It's really not a good situation here for the jobs, but I seriously enjoy waking up in the sunshine every morning, and hope that once the speculators have gone and this horrendous exurb movement has passed, Florida will once again be a great place to live and raise a family.

Bill Burress

June 26, 2007 9:19 AM

Florida is not doomed! Real estate cycles come and go. Sure, the bubble was bound to burst. What we have here is a market correction.
I am a commercial and residential mortgage broker and have been originating mortgages for over 25 years.
A good point in the article is how mortgage payments are such a large percentage of a borrower's income. With this in mind, what is not needed is increased or over reactionary legislation in this area. IE: Many mortgage loans were funded in Florida on alternate doc, stated income or no doc. If the legislators take these products away or continue to force lenders to tighten underwriting guidelines foreclosures will continue to go higher because borrowers will not be able to refinance out of them.

Bill Burress, Cincinnati Mortgage, LLC of Florida

Bob Tankel

June 28, 2007 12:47 PM

Say what you will, 1900 people a day move here and 900 move out. I figure that adds the population of Arlington, TX every year. Once the disaster caused by JEB! and his lackeys in the Legislature are corrected over the issue of taxes and insurance, we will be fine. There are 85 million baby boomers;I bet at least 10% of them will move here. Besides, do you really think they want to live in Arkansas with Eric Estrada???

tom

July 1, 2007 12:26 PM

I've lived here most of my life and have watched the cost of living go through the roof.
Houses that cost $30,000 back in the mid-1980's are now $300,000 plus the insurance has gone through the roof along with land taxes.
Food, Gas, College Tuition, Health Insurance have all increased in the double digits per year.
The average wage goes up maybe 3 % a year so what is going on here?
It's not just Florida, the U.S. produced 6 dollars in new debts for every dollar of GDP income in 2006(Mortgage debt, Credit Card debts, Trade Debts, Government Debts,Corporate Debts)! 6 to 1, in the 1970's it was 1.79 dollars of debt to every dollar of GDP Gain and on top of that the Gini-index is near 50 for the U.S.
I went to University of Tampa and Graduated after 5 years of business school(BBA).
Also went to Hillsbourough Community college and was certified as an Emergency medical Technician.
Attended Florida Fire Academy for Fire Science.
Attended Clayton State University for Conductor Training while working for CSXT Railroad.
Work as an administrator for my Families Adult living Facility.
And you know I have nothing to show for it living in the supposedly richest country-it's not! We are the world's largest debtors!
Making $10/hour is Crap!
Education wise I'm in the top 5%, especially for Florida.
Anger is not the word I feel for what this f..king Government has done to our economy and are freedoms.
All the stats back what I say.
Do we get 8 week Vacations like the Europeans?
Do we get their unemployment and injury safety nets?
Retirements?
Free College education?
Univeral Health Insurance?
Why has the European Union Produced more jobs then the U.S. since 1999?
Why is the U.S. 7 million jobs short of keeping up with population growth since 2001?
Why is U.S. pay ranked 20th in the 2006 mercer survey when compared to other countries?
Why do we have 30% of the world's prison population?
Why do we have 8 million people in the correctional system(parole, Probation,Prison,etc)?
Why is our healthcare ranked 37th in the world?
Why do we have the largest rich/poor gap in the industrial world?
Why does the European Union have 40 million factory jobs and we have 14 million?
Why does European Union export twice what America exports?
Why is the average american lifespan ranked only 47th in the world? We were in the top 5 in the early 1980's!
Why have we fallen behind in Renewable Energy and Environmental standards?
Why is our National Infrustructure falling apart and the Government does not spend the money to fix the roads, Bridges, schools,ports,water systems,dams,etc.?
All Good Questions,No/Yes?

stan

July 3, 2007 8:35 PM

Our great nation is going down hill is because of our selfish and incompetent politician,plus a lot of selfish people in this country.

Marilyn Blackwell

September 2, 2007 12:26 PM

Bitch, bitch, bitch, if you put a hog in a flower bed and over-feed him, don't whine when he shows no respect for the beauty of the flowers and over-eats the food you provided.

The fault lies within, "We the People."

Rubin

March 6, 2008 11:36 AM

Well there is no denying that average American has nothing to gain in America any more dont laugh at my words as i know much more than most
This country was always capitalist but now its at hight of it ,no one is thinking about the average Joe ,Its all for the rich while an average American can loose his job for sub prime any body can come and buy stake in cit bank from any part of the world cause when citi cracks he get a cheap share and when citi sends job to India Philippines and earns that middle Eastern share holder gains

Why did all jobs go to Asia china has finised our manufacturing its only a while and cards of industrialization will fall like cards of property have fallen and who will loose average American like he lost previously ,but i guess no one gives a damn its a global world where profit of a rich man are more important to the politicians then loss of average Americans

Those who re still getting 25 $ an hour and dont feel the pain wait for a while . your jobs will also move out side, and no we cant stop what we started if you stop jobs going out share holder is smart enough to take the business out of America even though he is very much American ,American values are lost some where in sea of money

becky

May 12, 2008 12:31 AM

Perhaps if more people were interested in the real news instead of what is going on with Britney Spears, we would be in a much better place. We are guilty of being ignorant and placant. The internet is the only reliable source of true information - defnitely not Fox Network.

ladywolve

November 2, 2008 11:42 AM

I am a Native Floridian. Most of my family is Native Floridian. I have seen
Florida change from the southern neighborley state to the shoot'em up and
dump on the hardworkers, allowing those
from up north to come down and take over
jobs, businesses, etc., just by catering
to their whims. The reason is simply that someone idiot decided that Florida
needed Northern money to exist. That was the biggest misconception of all time. So for all the Northern folks that complain, do us both a favor AND
LEAVE!

Northerner says get off your soapbox

December 4, 2008 12:07 AM

ummmm... I was a northerner that moved here. How the heck did I affect any of you? I pay my taxes and my mortgages regularly. I agree with those people who say that it's those with too much money to spend that ruined all of this for you/us. It's not JUST Florida anyway! It's the wholes damn country. The housing market crashed because we had people buying up 6-10 houses apiece to flip them, which only makes fewer $100,000-$200,000 homes for us to buy and those same houses simply double in cost, becoming unattainable by the average Joe. Too much development too soon- simple as that. I came from Massachusetts, and let me tell you something... $119,000-$300,000 houses are a blessing when compared to a two floor, very narrow, townhome going for $750,000 in the greater boston area (that means Cambridge, Everett, Somerville, etc...). Not enough? try small 1 bedroom apartments that are considered extremely cheap at $1200 per month. You want to know why people are coming from the north? There you go... More dumbasses flipping and burning the economy. I guarantee you that it was the greediness of the housing market that stemmed from the rich that caused people to fight for their lives just to keep their homes and the domino effect took over from there. You want to blame someone? Blame the idiots that should regulate the "flipping" of these homes to be a designated maximum before being considered a small business, which is subject to paying business fees and taxes because it generates large income and monopolizes the realestate industry and is not regulated at this time as it should be. There is a business of being an entity like Century21. If people think they can come in without screwing up the market without the same regulations as an actual RealEstate company, they have something coming. Again, stop blaming the North- this is a global economy... They don't even care about this country, let alone 1 freaking state!

Perry

June 21, 2009 9:39 PM

I left Florida last year because rental prices got so out of hand. One point you are missing... If the predictions of global warming are correct, In 10 or 20 years homeowners will realize that in an additional 10 or 20 years their property will be valueless. They won't be able to sell their overpriced houses for scrap. Its a scary proposition.

howard

November 23, 2009 7:28 PM

Florida is doomed because of over priced houses,no manufacturing base,to many enviromentalist,to many taxes by way of liscenses, fees,and no planning, but most of all paid for politicans

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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