Thinking of investing in Florida property? Think again

The US housing market has fallen on hard times. Mortgage rates have been driven up by 17 interest-rate hikes in a row, while overdevelopment means there are more properties than buyers on estate agents' books. Investment bank Goldman Sachs recently went so far as to predict that "nominal US home prices may be headed for an outright decline in 2007". The bad news for British property investors is that Florida, the US state most popular with UK holiday-home owners, looks likely to be one of the regions that suffers most.

Florida property: holiday-home rentals

According to Chris Morris in The Sunday Times, British visitors to Florida comprise the "largest single overseas nationality" in 2005, 4.3 million of the 76 million tourist visitors were from the UK. More than 150,000 were considering buying a holiday home there last year. And small wonder in the past five years, the median house price in the state has risen by 104%. But now the market is awash with too many holiday homes chasing too few tenants and "the bottom has fallen out of holiday-home rentals".

The Sarasota Herald-Tribune agrees: "The southwest Florida market for rental properties is all whacked out." The chief executive of one rental firm told the paper that he has a six-month supply of condos (apartments) on the market. "That means that if no new rental units come to market, it will take six months to rent all the units we already have."

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Florida property: rising costs

And just as oversupply is pushing rental returns down, UK holiday-home owners are facing rising costs. First, there's the impact of rising interest rates on mortgage costs. On top of that, last year's record hurricane season has pushed up insurance premiums, while annual property taxes have also been driven up by rising house prices. That makes it tougher for holiday-home owners to justify the high costs of holding onto their properties. Prices are being slashed across the state as buyers who were relying on renting their homes out for most of the year are forced to bail out.

The situation hasn't been helped by unscrupulous developers making sales by suggesting that a certain level of annual rental returns are guaranteed. As The Sunday Times notes, guaranteed' rentals are not allowed to be sold in the state.

The turmoil in the rental market means the housing market in Florida is looking to be among the least healthy in the US. The Florida Association of Realtors reported in July that sales of existing single-family homes and condos have seen double-digit falls every month for the past six months. Earlier this month, The St Joe Company, a listed property developer that owns a full 2% of Florida, warned that the market would remain slow for at least 18 to 24 months, and slashed its guidance on earnings for 2006 by a third. The company's share price has practically halved in the past 12 months. And in Palm Beach County, a well-to-do part of the state, foreclosure filings (repossession orders) rose 34% in June compared to

last year, according to the Palm Beach Post.

Florida property: investors should be patient

It's little wonder that the vultures are hovering. "I have just been contacted by five of the largest hedge funds in America, and they are all interested in the opportunity to buy distressed properties," property consultant Jack McCabe told The Sunday Times.

Yet despite the clear signs that there are simply too many homes on the market, housebuilders are still throwing up condos. Mike Shedlock of investment letter Whiskey & Gunpowder reckons that "there is ten years worth of supply coming on the market at current sales rates. Prices will drop, and in ten years, there will be new condos still coming on at reduced prices by the time rents catch up with carrying costs if they ever do those condos may be worth 50% less than they are today."

The current state of the property market means that potential investors should be patient for some time yet the bottom of the market is still a long way off.