Evaluating The Gulf Coast Real Estate Market

By Brooks Clark, CFP


Clark Financial Advisors

Reprinted from The Gadsden Times
June, 2007

I spent last week in the Perdido Key, Fla., area right along the Florida/Alabama line. While on the gulf coast last week, I spent some time with a Perdido Key real estate broker that I trust reviewing recent sales (there were not many) and exploring the enormous number of new listings in the area. I also spent time with a client who recently purchased a beautiful home in Gulf Breeze, Fla., which is close to Pensacola, at a 32 percent discount from the home’s asking price. And, I talked with a client who purchased a property in Apalachicola, Fla., at a 40 percent lower than the asking price. As a result of these incidents and since I am often asked for my observations about investing in gulf coast real estate, it seems appropriate to evaluate the status of real estate along the Florida Panhandle and Alabama Gulf Coast.

The small beach community of Perdido Key is a great representative of what is occurring along much of our gulf coast. For example, Perdido Key has recently seen sales price reductions of 20 percent. Nevertheless, as I drove around the area, I viewed hundreds of new “For Sale” signs. One example of the trend in the area is Lyaplya, a beautiful new condominium building built in 2002. The condominium units, before the Hurricane Ivan, were selling in the $1 million range. In the past six months, two units have sold for $800,000 and $865,000 respectively. The Perdido Key agent I visited with suggested that foreclosures in the area are appearing with a higher frequency, and I believe prices for most beachfront property could fall an additional 15 percent to 20 percent before stabilization occurs.

Speak with any real estate agent in the area, and he or she will likely say that real estate prices have reached the bottom. Agents in the area even report an increase in activity from the buyer’s side. They remind me of stockbrokers in August of 2000 when the NASDAQ climbed back to 4,000 after falling from 5,000 in March of that year to the mid-3,000’s. Stockbrokers ignored historic evaluations and tried to justify the prices of the NASDAQ only to watch the NASDAQ fall from 4,000 to 1,300 by October of 2002. I do not believe that real estate prices will fall as far as the NASDAQ did during that period, but I strongly believe it is far too early to consider a purchase.

As we watch these real estate prices decline by 15, 20, 30 or even 35 percent, I feel that is important that my clients not focus on the falling prices of real estate along the gulf coast, but the cost of operation and the possible lack of real estate appreciation for a period of time. Let’s look at the previously mentioned Lyaplya property that traded at $800,000 as an example. The association dues for the ownership of that unit for a year have swollen to $9,250. This is a result of insurance premiums exploding; these costs are being passed on to owners through association dues. While the unit, selling at $800,000, certainly looks to be a “bargain” compared to the price two years ago, one is faced with paying approximately $9,000 per year in association dues and a like amount in property taxes. That’s $18,000 per year for association dues and property taxes without making the first dollar payment toward debt service.

How many investors or individuals are going to be willing to shoulder almost $20,000 a year for the right to own a condominium that may not appreciate for years to come? I believe when investors consider the option of traveling to major resorts around the country with a “travel budget” of $20,000 per year, they may smartly opt for travel and “renting” locations as opposed to immediately purchasing real estate that may have limited upside appreciation for a few years and high occupancy cost.

Brooks Clark is a certified financial planner with Clark Financial Advisors in Birmingham, which serves clients throughout Northeast Alabama. Clark is originally from Anniston. His e-mail address is brooks@clarkfinancialadvisors.com.