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A Real Estate Market Correction is on It's Way

South Florida is currently in the mist of one of its best winter seasons in many years. The weather has been beautiful with some cool nights and warm days, and visitors from all over the world have been enjoying our beaches and golf courses. Our roads and streets are busy with lots of traffic, and our restaurants appear to be full with snow bird diners. Many of our finest attractions are busy with all kinds of visitors, from children to Seniors, lots of folks are spending freely.

While all of this winter seasonal activity is normal for us for this time of the year, the real estate market is in the process of changing. The Realtor's Association of the Palm Beaches has just published its regular market update, and deep inside the data the message for most analysts is troubling. After many years of being in a seller's market, where inventory was too low, and sellers were generally in control of pricing, the residential real estate market in South Florida appears to be moving into new territory. For a number of reasons, buyers are slowly becoming scarce, while inventories of new and resale homes for sale are rising. The residential market is therefore signaling a new order is about to march forward into our world, and that new order is a market in which buyers are going to take power away from sellers.

So what does this mean? Simply stated, this transition to a buyers market, which, by the way, is healthy and normal, means that prices are going to level off, and in some local and sub markets, even fall. It means that sellers are going to have to do more to attract buyers to their homes, in order to get showings. It means that sellers are going to have to cut prices in order to get offers, and it also means that realtors are going to have to work twice as hard to get their listings sold. The days when sellers could place their properties on the market with "For Sale By Owner" Signs are also about to end. These do it yourself folks are going to need professional assistance to price and sell their homes. So in the next few months, you can expect to see more and more articles about realtors increasing their listings numbers. In some cases, the days of low commissions are also going to come to an end too. Some sellers are going to find themselves granting increases to their agents as incentives to sell their homes. Realtors will see more and more bonuses on the MLS for sales in a shorter period of time, and buyers are going to have the opportunity to request and receive from their sellers more assistance with their closing costs.

How long will this correction last? Well, it is always hard to tell how long any market cycle is going to last, but we can start to answer this question by stating first that the sellers market we are seeing come to an end right now, started in 2008. So this particular sellers market cycle in South Florida has lasted about nine years. Normally, in most real estate markets, corrections are far shorter in length than their counterparts. So, if this trend to a buyers market is anything like a normal real estate market correction, we could see this kind of period for two or three years. That period time is long enough for prices to correct down, and for a kind of washout of the excesses in the current market. But, it could take longer for buyers to start coming back into the market.

You will know that this buyers market counter trend is coming to an end when you start to see the following changes to our economy:

1) The US dollar starts to weaken against the Euro, the Brazilian Rial and the Canadian Loony. International buyers are now pretty much on the sidelines because their currency costs to purchase US real estate are too high. If the Dollar weakens, these buyers will return to our residential markets quickly, and bring their purchasing power back to Florida.

2) Housing starts in South Florida start to fall. Currently, 15,000 new homes are slated to be built in Palm Beach County alone, not to mention the building going on in Dade and Broward County. When all of these new homes come on the market in the next two years, prices will fall further, and builders will be forced to slow their activities. This trend will signal another coming market change.

3) When you see in the news that incomes in South Florida are starting to increase and rise, affordability will come back into a more a favorable relationship to home pricing. This will bring more buyers to the table and create the opportunity for the market to move towards a sellers market again.

John K Brackett, Ph.D

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