During the real estate boom, Deerfield Beach real estate consultant Jack McCabe was never shy about pointing out that escalating property values were unsustainable and that the inflated real estate market would soon be brought back to earth.

Now that the national and Florida real estate markets are in the midst of a downturn, McCabe is forecasting a tough road ahead.

What follows are excerpts from a conversations between McCabe and Herald-Tribune staff writer Michael Braga.

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Q: Is the national economy slowing? Are we headed toward recession?

A: It's difficult to tell by what's happening on Wall Street. Stock prices keep going higher and higher. But around the country, we are definitely seeing a major correction brought on by the downturn in residential real estate. We are beginning to see the effect on consumer spending, which has driven GDP growth over the last five years. Big box retailers are announcing layoffs, which is just part of the domino effect that, in my belief, will result in recessionary pressure on California and Florida within the next 12 months and will eventually trickle down to many states in between.

I think we will see a recession next year, because GDP has been driven by consumer spending, by home equity loans and by people using their homes as piggy banks. The spending over the past few years has not been normal. There was tremendous spending on plasma TVs and vacations. That was paid for by people borrowing against artificial gains in the prices of their homes. Now that the market is correcting, people will find that equity has been converted into debt.

Retail is always the first to be hit in a recession and luxury items are the first to see the declines. Plasma TVs are not rolling off the shelves like they have been. Furniture manufacturers, home decorators and anyone connected to real estate and home building are feeling the pinch.

Q: Why are you predicting recession for next year and not this year?

A: The definition of recession is two consecutive quarters of declines in GDP, and we don't have two quarters left this year. We could only have one quarter reported by the end of 2007. I think Florida and California will definitely see the pressures before other states, except perhaps places like Denver, Phoenix and Las Vegas, where real estate speculation was also rampant.

Q: Many people have argued that Florida was insulated from previous national downturns. Why is it different this time?

A: The last big downturn was in the late 1980s and early 1990s. The state was overbuilt with condos. As a result, we saw limited condo activity between 1995 and 2004. Prices did not come back for almost a decade. I would not call that insulated.

This time, the corrective downturn is already beginning to bring real estate prices more in line with the historical trend of property appreciation.

A lot of people in the market have never seen a downturn and still don't understand what's going on. They thought everything would go up and up and up. Florida has been at the forefront of this boom and bust cycle because of the amount of speculative activity that went on here. Because our prices were pushed up the highest, we will also see the largest correction.

Q: Which areas of the state and which markets in Florida are being impacted the most?

A: In South Florida, it is definitely condos. But in Naples and Fort Myers, there was more speculation in single-family homes. As a result, there are large speculative inventories. In Sarasota, it's about half and half. There is both an oversupply of condos and single-family houses. Jacksonville is probably in the best shape and will see the most percentage increase in home values over the next five to 10 years.

Q: What do you think about the governor and Legislature's efforts to ease insurance rates and property taxes?

A: Wasn't what they did a bunch of garbage? Insurance legislation did nothing to bring rates down. And the tax reform proposed will not restart growth or attract out-of-state companies to relocate or invest in Florida.

Market conditions will do what the governor and Legislature were unable to do. Falling real estate values will bring taxes and insurance prices down.

But those prices are not going to come down easily. Companies and individuals will have to fight to reduce property assessments, and that presents a great opportunity for lawyers who help them with that. I think the guys that handle that will make a fortune over the next few years.

Q: What lies ahead for Florida's real estate and home building industries?

A: We're in the survival-of-the-fittest stage. The best-capitalized builders with the best reputations will survive. Others will vanish. We'll see some of that with lenders as well. An awful lot of title companies will go down, and a lot of real estate companies will shut down or consolidate. We will continue to see real estate-related job losses.

Some Realtors were jumping for joy because of recent sales numbers. But we've got a long way to go yet. It took five years to get into this mess. It's not going to go away in a year.

http://www.heraldtribune.com/article/20070723/REALESTATE/707230324