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Currently, the generally accepted broad view of the U.S. housing market is that it has been forced into a recession caused by the actions of the Jerome Powell-led Federal Reserve, and his predecessors. Following the last lengthy bear market in real estate, which was caused by the massive levels of fraud related to the mortgage-backed home flipping scandals that led to the infamous Great Recession of 2008, the Fed "rode to the rescue" by manipulating the mortgage market with abnormally low interest rates.
The Fed also "bought back" massive amounts of mortgage debt by printing electronic money, holding this debt on their balance sheet to lend additional financial support to the large Wall Street investment banks. The Fed's "emergency" zero interest rate policies, in place for the better part of 12 plus years, provided the "free money" that flooded our economy with dollars and helped finance the wild spending spree on borrowed money by our elected officials in Washington, D.C. Finally, in 2022, the Fed figured out that the surging levels of out of control inflation were not "transitory" in nature, and they brought a swift end to their economic party by removing the free money punchbowl, as they jacked up interest rates at the fastest pace ever and declared their war on inflation.
Although most people ignored the Fed's warning last year that they would be "willing to break things" in the economy to regain control of inflation, they were clear that they were targeting what had been a red hot housing market by forcing mortgage interest rates higher. With home prices surging to record levels and mortgage rates more than doubling last year, homes became even more unaffordable for a larger number of potential buyers who could no longer qualify for a mortgage.
All of the above factors, along with a lot of things we are leaving out due to space limitations, gives us the anatomy of a real estate recession, albeit an abnormal looking housing market recession thus far. Expert opinions vary widely going forward from here, with some calling for a housing market debacle resembling 2008, while others think the worst is already over. So let's dig deeper into what we are seeing in our local market where the number of closed sales have experienced a significant decline throughout Southwest Florida, and prices are generally well below their record highs from last year in what we would currently describe as more of a softening in prices, and not a collapse.
As crazy as our housing market boom was from the second half of 2020 through the first quarter, or so, of 2022, there are some significant differences in these market conditions compared to the local market conditions back in 2005 through 2008, and beyond. Back in 2005 through 2008, the run-up in home prices was driven by wild speculation fueled by home flippers playing a dangerous game of highly leveraged musical chairs.
Average people on main street were able to take their shot at striking it rich by obtaining mortgage financing on second and third homes as investments through "liar loans" and their ability to qualify for a mortgage by simply "fogging a mirror." As home values increased every week, a large number of people were able to tap the equity in their primary residences to speculate on building and flipping new construction homes.
Just about everyone was sold on the idea that home prices could only go higher and that they could leverage their investments in this new "risk free" way to become wealthy overnight. It was estimated that 40 percent of all the new homes being built in Cape Coral back then were investment homes being flipped between "investors" with no end users moving into all of the vacant homes. The city even built a new water treatment plant based on the recommendation of highly paid consultants to service what turned out to be "imaginary growth." Then the music stopped, the market collapsed and there was an explosion of foreclosures that decimated the community.
What did that crash look like? Median sales prices in the overall Cape Coral single-family home market actually peaked at $285,450 in January of 2006, and pretty much moved steadily lower month after month. But lenders kept lending and people kept speculating on homes for a few more years as prices fell. Eventually, the bottom was hit in October 2010, with the overall median sales price for a single-family home in the Cape hitting $115,000 that month, for a top to bottom decline in home prices of 59.7 percent. So, there you have the anatomy of a real estate market crash.
Median home sales prices started their long recovery from the bottom in 2010, by posting a year-over-year gain of 7.1 percent in 2011, finally surpassing the old high from back in January 2006 for good in the second half of 2020. Through December 2022, we have now had 12 consecutive years of increases in our median sales prices, with outsized gains of 30 percent in 2021, and 21.8 percent in 2022. This track record would lead one to logically think it would be healthy for our market prices to flatten out and pause for a period of time, if not experience at least some level of a price correction, which is already occurring.
Median sales prices in the Cape's overall single-family home market peaked at $470,000 in April 2022, and have trended lower from there, now posting three consecutive months (from November 2022 through January of this year) at $400,000. Additionally, based on our weekly market surveys, median list prices for single-family homes in the Cape peaked at $610,000 on April 19, 2022, and have been mostly hovering around $500,000 recently. So far, this is the anatomy of a market correction in prices, which leads to the question of whether it will become a crash. We will pick up on our thoughts about that next week, along with more about whether this is a recession in the number of closed sales, or simply a return to "normal" pre-COVID market levels.
As of Tuesday, Feb. 7, there were 1,307 active single-family homes listed for sale in Cape Coral through the Multiple Listing Service at prices ranging from $275,000 to $4.5 million, with the median list price rising to $517,000. A total of 498 of these 1,307 listings, or 38 percent of our market, were priced at $450,000 and under, including 15 homes priced below $300,000. At the other end of the price spectrum, there were 182 homes listed at $1 million and above.
Just over a month ago on Jan. 3, there were 1,330 active home listings in the Cape and the median list price was $509,873. At that time, there were 151 homes listed at $1 million and above, and 531 homes listed for $450,000 and under, including 19 homes priced below $300,000. On a positive note, the number of pending home sales in Cape Coral has increased by 42.5 percent from 522 homes under contract on Jan. 3, to 744 homes under contract on Feb. 7, with 50.4 percent of these homes at $400,000 and under, including 36 homes pending below $300,000. Almost two-thirds of the homes under contract in the Cape are at $450,000 and under, while only 31 homes, or 4.2 percent of our pending sales are at $1 million and above. The differences in the price points for pending sales versus the price points for active listings indicates a continued downward pressure on sales prices compared to list prices.
The sales data for this article was obtained from the Florida Realtors Multiple Listing Service Matrix for Lee County, Fla., as of Feb. 7, 2023, unless otherwise noted. It was compiled by Bob and Geri Quinn and it includes information specifically for Cape Coral single-family homes, and does not include condominiums, short sales or foreclosures. The data and statistics are believed to be reliable, however, they could be updated and revised periodically, and are subject to change without notice. The Quinns are a husband and wife real estate team with the RE/MAX Realty Team office in Cape Coral. They have lived in Cape Coral for over 43 years. Geri has been a full-time Realtor since 2005, and Bob joined with Geri as a full-time Realtor in 2014. Their real estate practice is mainly focused on Cape Coral residential property and vacant lots.