December 30, 2006
View From Florida (Part II)
(c) copyright, View From Silicon Valley, 2006. All rights
reserved.
One afternoon during our Florida
vacation we decided to check out the sales office for the Orlando-area subdivision where a family relative lives.
This relative bought several years ago because it was more convenient to his job on the Atlantic coast but Orlando was still
reach-able. (In other words, it was remote but reasonable for his relatively-unique employment circumstance.)
Over the last few years, prices have jumped to levels he could not reasonably afford today. (Even so. he
knows of co-workers who have bought, and are struggling, at current prices.)
This area, outside the previously-remote
"Greenbelt" toll road, has become very "hot." Houses, schools and retail are going up left and right. There
are no new companies moving in that anyone could name but the hosing-price strength was argued to us as sustainable
due to an on-going influx of defense industry hiring on top of doctors, bankers and "business executives."
In case this wasn't proof enough of the depth of the demand, we were reminded repeatedly that several of the real estate
agents selling these houses had also bought, and now lived, in the development.
The only cars in the sales
office parking lot were a Corvette and BMW which, unlike Silicon Valley, stands out as unusual in Orlando.
However, these cars turned out to belong to the sales agents. There were no customers (besides us) on-site.
"Phase IV" was divided into lake-front,
across-the-street-from-lakefront and land-locked options. They were predominantly still undeveloped lots,
but several of what the agent described as "spec houses" were being built (only on the land-locked lots).
Unsurprisingly, the agent was very excited and trying left and right to imply we needed to hurry if we wanted to get
exactly the lot we wanted.
Hearing we were from California,
the agent immediately focused on the high-end "lake front" houses. The remaining lake front lots ranged from $220K to
$375K with what appeared to our eye as the "best" three or four lots already marked "sold." (How much do you
want to bet these lots were taken by flippers figuring they could, for the price of a small deposit on just the land,
make a quick buck?)
The agent explained buyers have
12 months to break ground. Left unstated was you can only choose from the models the builder offers. In other
words, you don't actually own the lot after you "buy" it? You're only buying an option until one
of their six house options is built on it. (Or you flip it to someone else.)
"What if you don't break ground
within 12 months?" The agent smoothly explained the owner had to sell the lot back to the builder --at only 80%
of the purchase price.
Further discussion revealed the
four of 16 lots marked as sold were actually only "doing the paperwork." The buyers had apparently not yet actually
parted with any cash.
A little arithmetic suggests 20%
of $300K = $60K is the maximum downside risk for a flipper. However, the actual downside risk is just the
amount of deposit, which would be zero while I was negotiating the rest of the options and simultaneously trying to find someone
who just "had to have" the prime lot is the development.
Speaking of options, the builder's
literature started with "free" upgraded "Level III" cabinets, floor tile, carpeting, shower tile, granite countertops,
"Super Kitchen" appliances, crown molding, lighting, faucets, landscaping (and landscape design architect) and half-circle
brick driveway. (I probably missed a couple items in that list.) Based on experience, these options were easily
selling for $50K to even $80K.
On top of these "free" upgrades,
buyers were entitled to another $50K credit for additional upgrades. (What's left to upgrade?)
The house-only options for these lots were ~$600K to $750K which works out to a "minimum" of $820K
to a high end of $1.125 Million! (Before you spend anything for options.)
This works out to a range of 12x to 17x the local median family income of
$66K. (By way of comparison, Santa Clara County's median family income is $96K which is only 7x the county median
price. Using our zip code's median income and currently-ridiculous real estate median price, the ratio is "only"
9.6x!)
Florida prices are even higher than these ratios imply since California taxes are capped
at 1% and tend to run ~1.2% in local municipalities while this area in Florida runs ~1.9% (pending increased assessments
for all the new schools and infrastructure being built).
A difference of only 0.7% may sound trivial, but it's an extra $5,740 on an $820K house, and
$7,875 on $1.125M, per year, every year. This premium must be paid, on top of financing costs, out of your
$66K family median (gross) income.
Conclusion:
The first sign Orlando-area's (or
any area's, for that matter) real estate prices are seriously heading down will be when builders start
actually discounting prices, instead of throwing in "free" upgrades. (Duh!)
Measured against median family
income, Florida real estate prices, even in remote subdivisions of Orlando, are even more (pick your adjective:) aggressive,
outlandish and/or ridiculous than Silicon Valley.
Coming next: "Guts game"
in another Orlando-area suburb.
* * * * * *
The above is
not intended as advice to buy, sell or hold any stock, bond, real estate nor any other financial product or service. Buy and
sell at your own risk (just like we do.)
