Did speculators really accelerate the Florida real estate housing downturn, or am I just speculating?
Maybe a little of both. Here’s how it worked. The real estate market in Florida was booming. Home prices were rising quickly and everyone was looking to cash in on this housing boom.
In step the investors/speculators, from all over the country. Imagine that a speculator in the New England or New York area sees that they can buy a beautiful home in Florida for around 1/3 to 1/5 the price they would pay up in their area. They look at opportunities in Florida to purchase new homes prior to construction. They can get a 100% no money down loan on a $150,000 Florida home before it is built. By the time construction is completed, this same home is worth $250,000. Who can resist the allure of quick and easy money? And many speculators did just this, and made a lot of money.
However, here is where a problem arose. In many cases, these speculators did not sell to buyers who were going to live in the home. They sold to investors (other speculators), who saw prices rising quickly and wanted to get in on the action. Now this second group of speculators are stuck with a whole bunch of vacant homes and condos that they cannot sell or rent. These homes sit empty all over Florida.
So what do these poor speculators do next? They try to get the bank to take some of the burden off their backs by requesting a short sale. This means they ask the bank to take less than is owed on the property instead of foreclosing. Now we see an even more serious problem emerging. Many of these speculators purchased the properties under the pretense of these homes being their primary residences. At least that is what they told the banks who loaned the money. The banks were excited and loaned them money on the homes at 100% (i.e. no money down).
When the speculators ask the bank to accept a short sale, their lie is exposed. They never intended to live in the home, but they told the bank that it would be their primary residence, thus getting a lower interest rate and lower down payments. What they have actually ended up with is the potential for being prosecuted for a type of mortgage fraud known as Occupancy Fraud. Here is a definition of Occupancy Fraud from the wikipedia site for Mortgage Fraud:
Occupancy fraud: Frequently this is seen where the borrower wishes to obtain a mortgage to acquire an investment property, but instead the borrower claims on the loan application that they will occupy the property as their primary residence or second home. If undetected, the borrower typically obtains a lower interest rate than was warranted. Because lenders typically charge a higher interest rate for non-owner-occupied properties, which historically have higher delinquency rates, the lender receives insufficient return on capital and is over-exposed to loss relative to what was expected in the transaction.
Was Occupancy Fraud rampant in Pensacola? I don’t believe so. It was much more common in higher growth areas of Florida, such as central and south Florida. Of the 748 homes and condos on the market on Pensacola area beaches, only 131 are listed as vacant. This is actually a lower percentage of vacant homes on the market than other areas of Pensacola. For this reason, I don’t believe there was enough speculation in Pensacola to really affect the local real estate market. We are just riding with the downturn that is hitting the rest of the country.
Did speculators accelerate the housing downturn in Florida overall? I believe they played a large role in making it worse than it would be otherwise. We are obviously seeing a downturn all around the country. It is just in areas where over-speculation occurred that the housing downturn appears to be much worse.
Please feel free to share your opinions on this subject. I know many local Realtors read my posts and I’d love to know what you all think about this topic.
Here are some links to related articles on this subject:
The Florida Association of Realtors wrote an article that inspired this post.
Broker Bryant also wrote on this topic concerning his area of Florida.
And a wikipedia page on Mortgage Fraud. Don’t do this. It isn’t worth it.
Take a look at Mobile Alabama, a city getting ready for a major upturn.
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