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getting back to Normal (continued)

THE CURRENT MARKET

The current market has returned to normalcy-for the inexperienced-stopped in relation to the FP. A correction was inevitable. It is impossible to sustain both the price increases and sales volumes experienced during the FP. The value increases that were expected over a five to seven year period occurred in approximately two years and in some cases--two months. Experienced bankers, investors and developers agree this correction is essential to the health and future of the market.

Normal Timeline

Unfortunately too many likened an overnight sell-out of 200 units as the norm (it should be pointed out that such projects were marketed in a whisper campaign months prior to the launch, further skewing people's perception of a normal sales cycle). The graph below illustrates the normal timeline for preconstruction sales prior to Frenzied Period (FP).

The Overnight Sell-out Myth

The Construction Lender may not require the building be sold-out prior to construction and typically requires sales to cover a set amount above the construction loan based on criteria specific to the project and building type. Lender's look at the broader market conditions and experience of the full development team including Design, Construction and Sales when making decisions. The decision of how many preconstruction sales to require is a way to mitigate risk for all parties and create a base of expectations that can be monitored. Another way to help stabilize expectations is to require certain deposits at contract ranging up to 20% of the purchase price. Historically sales continue during the construction phase and in many cases, before and after completion of the building both Developer units and resales were available. This appeared to have no effect on the project's success or reputation as values continued to increase after closing. Post FP, the inexperienced began incorrectly stigmatizing a project that was not "oversold" as a flop or unsuccessful. Will Hart of AmSouth Bank, one of the area's leading construction lenders for high-rise developments stated, "At this time we are seeing a lot less speculation in the market and a return to a normal market where it takes a normal time period to market, and sell-out buildings and that is where we are now." AmSouth does not have an expectation that a product must sell-out overnight. AmSouth will continue to loan to developers that meet their lending requirements which includes the limitation of multiple purchasers not making up more than 10% of the presale requirement. Mr. Hart stated, "For sales to one entity over two units AmSouth may choose not to count the sales over two towards the construction loan. If they need them, then financial statements and tax returns may be required by the bank. They may also require a letter from purchasers' bankers stating they will extend conventional mortgage financing for the customer at closing."

Multiple Purchasers

The multiple purchasers became more prevalent during the FP as did the perception that only a select group could participate in the purchase of a "new release." The whisper campaigns encouraged buyers that had relationships with long-standing Realtors® with experience to abandon those relationships and hurriedly put down their deposits to get on the list for the drawing before they lost out. Decisions were made to reserve quickly for fear of losing the opportunity. In some cases brochures were not provided, just sketchy floor plans and schematics with no specifics available and there was an absence of marketing which builds value and name recognition for the end product. New condo names were popping up that the most experienced investors and Realtors® had only heard of through the grapevine. Detailed information was provided at contract rather than during the eight month reservation sales period as information is disseminated. This actually shortened the pre-construction sales cycle thus creating a significant number of new units coming on line 2005/2006 of which you can expect to see 10% to 20% available for resale prior to closing if allowed by the Developer.

If the condominiums had been marketed through traditional means a broader group of buyers would have been given the opportunity to purchase. The effects of the "advantage and preferred programs" drove prices up quickly giving the perception that only a select group could participate and they stood to make a substantial return flipping to those outside the group. Thus, people bought product that was not truly sold on an open market and paid whatever price was presented and created a false sense of limited supply to those outside the group. This is evidenced by the varied prices in similar product prices differing by as much as 200+ dollars per square foot.

A Few Words Concerning Price

Almost everyone in the local Real Estate industry is familiar with the September 21, 2005 Wall Street Journal article by June Flecher and Amir Efrati referencing price changes in the market stating that people are "making offers as much as 30% below asking prices" and that "[s]ellers are lowering prices". Again, there was not a reference point other than asking price and not market price-the price people are willing to pay for a product. If we look at the 40% price increase after Ivan, on top o the 50%-100% price increase in the previous year - we are looking at prices that are 90%-140% higher than the year prior to Ivan. If buyers are offering 30% less than list or sellers are lowering their prices by the same amount-we are still 60% to 110% higher than two years ago. We are not sure where all the concern is other than the novice real estate investor will not realize the 50% annual gains that they had hoped for.

This is exemplified when our company sold a house that originally listed for $4,200,000 for $3,000,000. This house is located in a planned beachfront community that sits five blocks from the beach. According to Walton County Public Records, the original owner had closed on the property approximately 18 months previously for $1,370,000. Though the $3,000,000 sales price was almost 29% less than original asking price, the sales price represents a total of 119% increase in price over 18 months or a 79% increase per year-if Emerald Coast Realtors, Investors, and second home buyers think that a 79% annual increase in price-even after the 29% reduction in price-is cause for alarm, then investment goals are unrealistic. In the late 1990s real estate appreciated on the Gulf coast between 3% and 18% annually. It is imperative to look at the history of the transaction and the property before assuming the Seller lost money or discounted the property for a quick sale. In the November 02, 2005 presentation to the National Association of Realtors (NAR) convention in San Francisco "Condominiums Lead Housing Downturn; Ernst & Young Housing Authority 'Says Market Experiencing Normal Cyclical Slowdown, Not a ''Pop'' in Housing Bubble" states that houses are remaining on the market longer; buyer incentives are returning; and more real estate agents are suggesting buyers reduce initial asking prices." In this presentation, Ernst & Young's national director of housing Steve Friedman states that "[d]espite such warning signs, Friedman said he does not expect any bubble in the housing market to pop. "There's no national housing bubble, only 'bubblettes' in markets like Las Vegas,"

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