Wild card

REVIEW SUMMARY
Industry: Residential real estate
Trend: Naples could lead the recovery.
Key: A rebound in the residential real estate will help boost buyer confidence.
By the numbers: Click here to review sales data for the Naples real estate market.

If you think Realtors are an optimistic bunch, then Lawrence Yun is their Optimist in Chief.

Yun, chief economist for the National Association of Realtors, told a group of Naples real estate agents recently that existing-home prices here could rise 15% this year.

“It would not surprise me,” he told the group.

Yun calls the Naples area a “wild-card” market that could surprise with a bigger-than-expected price increase. Yun ticks off the reasons for his forecast:

• Favorable Baby Boomer demographics

• The recovery in the stock market

• Improved economic conditions nationally

• An influx of foreign buyers taking advantage of a weak dollar.

What's more, home prices fell more steeply in Naples than they should have, he says.

There's evidence Yun's forecast may be accurate. The median price of an existing single-family home jumped 13% in Naples in 2010 compared with 2009, according to the Naples Area Board of Realtors.

Naples was the only metro area in Florida ranked among the top 20 areas in the country with the highest rate of annual house-price appreciation in 2010. Naples ranked 13th highest in the nation with a 1.9% increase in 2010 compared with 2009, measured by the Federal Housing Finance Agency using mortgage data. The federal government's mortgage data may actually understate the rise in home prices in Naples because a majority of homebuyers here pay cash.

In the first nine months of 2010, Naples was the only metro area on the Gulf Coast that showed any annual house-price appreciation, according to FHFA data. (Cape Coral-Fort Myers joined Naples on that list in the fourth quarter, while Punta Gorda, Sarasota-Bradenton and the Tampa Bay area continued to show annual price declines).

Of course, real estate agents in Naples paint a more nuanced picture of the situation, reflected by relative strength and weakness in various price ranges, neighborhoods and whether you're talking about single-family homes or condos. For example, the prices of single-family homes costing more than $2 million fell 5%, and condo prices fell 4% last year in Naples.

And there's plenty to worry about too, such as the unknown pipeline of foreclosures and people waiting for more favorable conditions to list. While more than 7,800 condos and single-family homes traded last year, those sales hardly made a dent in the inventory of homes for sale. At the current sales pace, there is still more than a year's supply of condos and single-family homes for sale.

But price stabilization in the existing-home market is attracting new-home builders and developers, a sure sign of market improvement. For example, Stock Development recently acquired foreclosed lots from banks in the desirable north Naples market where the median home price is $352,000.

Better than last year

While month-to-month data and relative strength in various price points may fluctuate, real estate brokers report improved conditions overall. For the year ending Jan. 31, Naples-based John R. Wood Realtors reported a 17% increase in dollar volume of transactions to $1.3 billion compared with the same period one year ago.

In the last few weeks, there have been several home sales of more than $10 million each, an indication of buyer confidence, says Phil Wood, president of John R. Wood.

Wood says buyers are cashing out of the stock market and buying real estate. In particular, Wood has seen a substantial jump in the volume of sales in what has been the weakest price point in the bust: single-family homes priced from $500,000 to $1 million. The Naples board reported a 21% increase in sales and stable prices in this category in 2010.

One statistic that stands out is the average days on the market for condos was shorter than for single-family homes in Naples in January, notes Shelton Weeks, professor of real estate finance at Florida Gulf Coast University in Fort Myers.

This suggests condos have become the entry-level housing for people. Weeks told a group of money managers in Naples recently that this trend also reflects underlying market strength because condo sales usually lag those in the single-family home market.

Ross McIntosh, a Naples broker who helps new-home builders buy land, cautions that the price recovery is uneven. “Prices have been firming at the low end, but prices continue to erode at the high end,” he says.

“We get a lot of contradictory evidence,” McIntosh warns. “The data could be completely at odds with reality on the ground.”

The shadow market

Many people talk about a shadow market of homes. These are foreclosures that have been held back by the banks' documentation problems as wells as people who are waiting for better conditions to put their homes on the market for sale.

No one tracks the shadow market, creating uncertainty. “There's almost no way to get your arms around how big that shadow inventory is,” says Weeks.

The government's effort to slow foreclosures has hampered the clearing of the market faster and more efficiently. Now, Yun says, there is a move in Congress to trim or eliminate the mortgage-expense deduction. “If the mortgage-interest deduction is taken away on second homes, it will affect this area,” he warns.

Another concern is a wave of adjustable-rate mortgages banks made during the boom years of 2005 and 2006 that are going to readjust to new rates. Yun of the NAR says interest rates could rise faster, especially if inflation picks up. He forecasts higher-than-anticipated inflation this summer will lead to short-term interest rates increase of 0.75% by the end of the year.

But Wood says many of the adjustable-rate mortgages made during the boom will reset to lower rates, which would stave off another wave of foreclosures. “It's not going to be a mass flood,” Wood says. “If we get a price increase, that'll hold off the banks.”