If I had a nickel for every time I’m asked about a real estate bubble, I would have a lot of nickels. Now more then ever, investors in Southwest Florida are getting concerned that our market is due for an adjustment. Double-digit appreciation cannot continue forever, and the sky may be falling. Or is it? If we look at some of the statistics regarding Sanibel & Captiva real estate, I think we can all rest assured that owning property on these world-renowned barrier islands will always be a good long-term investment.
One of the main indicators of a real estate bubble is the abundance of investors “flipping” properties. In 2004 nationwide, 23% of all residential home sales were for investment purposes, and 13% were for second homes. These statistics were even higher in our area as investors couldn’t even wait until they closed on a property before they put it back on the market for a quick profit. Lehigh Acres was suddenly the talk of the town along with Cape Coral, North Fort Myers, and Port Charlotte. To some, it didn’t matter what the comparable sales were because the property would be resold again immediately.
On Sanibel and Captiva Islands, however, our properties are not being flipped like they are across the pond. While it is true that 50% of the properties on Sanibel change hands every five years, the new buyers are end-users buying vacation homes for themselves. With 95% of Sanibel and 99% of Captiva built out, and the strict development regulations, there is virtually no room for speculators to flip real estate.
Another good indicator of a bubble about to burst is an excess inventory of properties. The Caloosahatchee River will never be the same with 15 new high-rise condos to be constructed in the next five years. Homebuilders from all over the country have been setting up shops in Cape Coral and North Fort Myers buying up literally thousands of vacant lots. These big players have effectively set the market prices and the rest of the novice investors are just trying to keep up. Lee County is one of the fastest-growing counties in the country, but we are not growing at the same rate that the inventory is increasing. Long term, all of these properties will appreciate nicely, but not at the current rate. As these cleared lots and spec. houses sit on the market, and the interest rates creep up, sellers will begin to look at all offers to get out of the game. In most areas, this excess inventory would normally set the stage for a drastic devaluation in properties. However in Lee County, due to the large number of people moving to Southwest Florida, I think we will see a plateau rather than a decline.
Sanibel and Captiva Islands, however, do not an excess inventory of real estate. As of December 31, 2005, we have 190 houses, 174 condominiums, and 61 vacant lots on the market. These numbers represent just over six months of inventory which is only slightly higher than what we had for the last two seasons. Remember, the last two years of sales each set records for the number of transactions, total volume, and average sales price.
Economists also base their bubble bursting forecast on novice investors using risky investment vehicles. Nationwide last year, over 40% of all first-time homebuyers and 25% of all buyers made no down payment on their home purchases. Some lenders were even loaning 110% of the appraised value. Interest-only loans were not only used by developers and were being recommended to all real estate investors. We have all heard the old saying, “When the person shining your shoes gives you an investment tip, it is time to get out!”
What makes Sanibel and Captiva real estate immune from this theory is that over 50% of the investors are not borrowing money to buy these properties. Furthermore, with an average sales price of a house or condominium on Sanibel over $850,000 this year, those buyers requiring financing are typically not new to the investment game.
One factor which will affect all markets including Sanibel & Captiva Islands is the rising interest rates. In 2005, many investors were racing the clock to get into the game. The interest rates did not rise as much as predicted by most economists in early 2005. If the rates continue to go up, mortgage payments will go up and cash flow will go down for owners of investment properties. This weaker cash-flow proforma would typically eliminate some buyers and affect prices negatively. However, most educated buyers realize that coastal properties only make money when they are sold. Therefore, if we can maintain our conservative appreciation rates of 8-10% annually, a small increase in interest rates will not affect the high-end market on the islands.
It is true there's a speculative element in home buying nationwide. And it is true there are large inventories in many metropolitan markets nationwide. However, Sanibel and Captiva have nearly 20 miles of beach frontage on the Gulf of Mexico. Our beaches comprise 33% of all of Lee County’s beaches. Our shoreline will never have high-rise condominiums or more density than we currently have. The new causeway which will last another 40-50 years will still only allow one lane of traffic on the island. We are insulated from the typical real estate bubbles by three miles of warm Gulf waters. There is no place like Sanibel and Captiva Islands in the world, and if history repeats itself when the rest of the market slows down, Sanibel & Captiva Island remain strong.