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MAKING CENTS OUT OF THE NEWS
Blog #09
(March 4th, 2010)
SNOWBIRD INVESTING - IS IT TIME?
By Tom McAllister, CFP®
Now in my fifth winter as a "snowbird" in southwest Florida, I look back to my snowbird "debut" in December, 2005, at precisely the time the residential Sunbelt real estate bubble had begun to burst. I'd been warning my cruise audiences for months about the unsustainable run-up in residential real estate prices in “hot areas” of the United States, predicting that 50-75% of the gains of the previous five to six years would be lost.
As things turned out, I was far too optimistic! Home prices in states such as California, Florida, Arizona, and Nevada proceeded to drop in half or more in total price. Mortgage lenders had offered loans to people with little to no ability to repay them, then sold those mortgages to Fannie Mae, Freddie Mac, and Wall Street investment bankers, who in turn packaged them for sale to unsuspecting investors. At every step of the process, borrowed money was being used. When the sorry mess broke apart, it nearly took down the entire world financial system.
I have carefully followed the downward plunge in home prices, particularly those near Sarasota, and believe prices have reached - or at least are nearing - a bottom. In fact, I observed, home sales are up substantially versus last year, albeit at very low prices. It would appear that foreclosures by lenders will continue at a high rate for some months, keeping heavy pressure on prices. Short sales have become the norm. (A short sale in real estate is one where the lender agrees to accept sale proceeds for a property that are less than the amount of the mortgage.) While what I don't expect is a sharp upswing in either demand or price, as an investment advisor, I find Florida real estate is beginning to catch my attention.
The market for condominium homes was particularly hard-hit, which is making for some very attractive pricing on these (mostly) winter homes. In my Englewood area, for example, nice, two-bedroom, two-bath condos are selling for less than $100,000. Condos with a water view can command a price in the low $100s, with prices for luxury homes as high as many hundreds of thousands.
It's not all about price, however. At this point in the discussion, I need to don my financial planner hat, cautioning potential buyers to carefully consider their own personal circumstances when determining if buying a Sunbelt home makes sense for them.
In the "old days", people would come down to Florida for vacation, buying property almost on the spur of the moment, thinking to rent it out while they spent summers back home in Indiana, Wisconsin, or Michigan, relying on the services of the realtor who'd sold them the property to take care of the rentals. Actually, even before the real estate "bust", rarely did such rental arrangements pay for the carrying costs of the homes, much less produce a profit for the owners. Maintenance and rental costs, and especially high insurance and property taxes, ate up all the cash flow. Single family homes were the worst, in that they needed grass mowed, trees and bushes trimmed, regular termite and insect control applications, frequent washes or paint jobs, and general maintenance of various sorts.
It's always tempting to buy an investment at a low, but, in the case of real estate, it's crucial to look at where potential buyers are in their lives:
The soon-to-be or newly retired couple in their late 50s or early 60s:
If they desire to relocate to Florida (or Arizona, Nevada, or Texas, but NOT to California) then this is probably a very good time to purchase their primary residence in the Sunbelt, or even to buy a second home, with the idea of spending a good part of each year there.
The retiring (or retired) couple in their late 60s or early 70s:
If they plan to keep their primary residence up north, then they will probably be better off renting their winter homes. Here's why: I notice folks in their mid-70s having health problems which delay or even completely defer their time in their winter home. If, on the other hand, they plan to make the Sunbelt home their primary residence, returning for only a few weeks in the summer to their old stomping grounds, then they should buy here and now, either a condo, or even a single family home.
The couple in their late 70s or 80s:
A winter home soon becomes a burden, as the almost inevitable health challenges of old age set in. Many homes here are vacant for most, if not all, of each winter. Recoveries from major surgeries or illnesses often interfere with the ability or willingness to travel, not to mention the physical ability to handle home ownership. There exists the dreaded possibility of one or the other of the couple moving to a nursing home. Renting probably makes more sense for this couple, even at today's bargain prices.
In short, there are many factors to consider in addition to price before making an offer to buy a home in a better climate. Careful discussion with your spouse, your heirs, and, of course, your Certified Financial Planner will probably be helpful.
(Of course, if you have access to the company jet, and can come down for a weekend or a week or so whenever you see fit, then all bets are off. By all means! Do whatever you please!)
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