The Palazzo condo building had a successful auction Saturday, August 2, 2008, with around 50 units selling. Some have heralded the event as an indication that the bottom of the condo real estate market is finally here. However, a closer analysis may have a much more sinister conclusion.
Let’s analyze the current market value of the Palazzo 2BR/2Ba units the day before the auction. The current market value defined as the highest price that would attract a buyer, given a defined marketing period.
The 2BR/2Ba Palazzo units have 1,345 SF with beach-front master bedrooms. Similar, large 2BR/2Ba units with beach-front master bedrooms over at the Calypso and Splash buildings have had recent re-sales in the high $300,000s, say around $380,000 furnished. Calypso and Splash have overall superior buyer appeal because they are established and have superior amenities.
A Majestic Beach Towers II 2BR/2Ba 1,180 SF unit with beach-front master bedroom sold recently at $340,000 furnished.
Let’s look at an inferior development, the Emerald Isle building. Emerald Isle has overall inferior appeal. The 2BR/2Ba units are smaller at 1,146 SF and have somewhat inferior interior quality. These units have been selling around $300,000 furnished.
Ignoring typical appraisal style adjustments, it is reasonable to assume that a buyer of a superior Splash/Calypso unit would pay something less than $380,000 for a Palazzo unit. It is reasonable to assume that a buyer of an inferior Emerald Isle unit would pay more than $300,000 for a Palazzo unit. That leaves us with a roughly estimated current market value for a Palazzo 2BR/2Ba unit the day before the auction somewhere between $300,000 and $380,000, say $330,000 (just a rough estimate to establish the trend).
The Palazzo 2BR/2Ba units sold at auction for $295,000 (including the 10% auctioneer’s commission). That is fully 10% less than the current market value on the day before the auction. For those who say the bottom has been established, the current market value for every Panama City Beach condo just decreased by 10%. That is not an unreasonable conclusion. However, that was the bottom as of Saturday, August 2, 2008.
Is there are large, pent-up demand by buyers that are willing and financially able and just waiting to jump into the market? The Palazzo auction indicated that there were at least 50 buyers willing to buy at a 10% discount. However, there is no evidence that there are enough qualified buyers out there willing to buy to turn the market around.
As of July 29, 2008, Bay County public records indicated 1,203 unsold developer units at Aqua, Seahaven, Shores of Panama, Tidewater, Emerald Beach, Grand Panama, Sterling Breeze, and Ocean Reef. Add the 17 remaining developer units at Palazzo for a total of 1,220 unsold developer condo units along Thomas Drive and Front Beach Road. That is not counting the 2,000 or so unsold units at new, off-beach developments (Laketown Wharf, Marina Landing, etc.).
Some have said that the developers will just keep their remaining units until the market turns around. Let’s look at the Sterling Breeze building. Sterling Breeze has a total of 145 units of which 83 remain unsold (four closings since 6/1/2008). Sterling Breeze paid off half of their $55,000,000 construction loan and extended the remaining $27,000,000 until September 30, 2008. That’s somewhere around $325,000 per remaining unit. Interest only at 7% is around $1,900 per month per unit. HOA, taxes, insurance, and utilities add another $1,000 per month per unit. The total cost to hold is around $34,800 per year per unit. That is 10% of the value of each unit. In a declining market, the sale price may go down another 10% over the next year. If the developer holds his units hoping the market will turn around, he risks losing 20% of the current market value over the next year. That’s a lot of money. The pressure to sell sooner rather than later is enormous. And that does not count the pressure from the bank (see September 30th above).
The auction process appears to be a good way to sell unsold units if a developer and his bank are willing to sell at what ever the current market value is as of the day of the auction. However, it is reasonable to assume that the current market value established by an auction will be something less than the current market value established by the previous auction. That sounds good for potential buyers but would be disastrous for would-be sellers of existing condos. The auctions would suck up most of the financially able and willing buyers that may have purchased re-sale condos.
An individual condo owner who needs to sell would be well advised to sell sooner rather than later. The caveat is that if there is a stampede to sell it will tend to accelerate the rate of price decline.
The Panama City Beach condo market will not hit bottom until most if not all of the unsold developer units are transferred to private ownership. The condo market will not hit bottom until most of the condo units whose owners are significantly upside down, with high “loan-to-purchase price” mortgages and who do not have the financial horsepower to hang on are sold at current market values.
There is no logical scenario that will stop this runaway train in the near term. That is the bad news. The good news is that most of South Florida is in worse shape than Panama City Beach.