In a previous post I stated that I heard closings at Opera Tower would begin in July. However, I confirmed today that this was inaccurate. Closings will begin in September for condo units on the first 21 floors of Opera Tower. I was told that closings on the remaining floors would begin in October. Opera Tower sent this letter to contract holders at the beginning of June. It provides important information regarding closings.
It will be interesting to see what happens there. Opera Tower has a total of 635 condo units made up of studios, one and two bedroom condos. That’s a lot of units coming onto the market given the current condition of the Miami real estate market. I think closings at Opera Tower will help reveal the true nature of the market at this time. It will act as a prologue to what will happen at other developments scheduled to begin closings in the next 12 months. It will be important to keep an eye on closings, or lack of closings, that occur at Opera Tower.
My prediction is that the developer of Opera Tower will get back a lot of units. It is a shame that the developer charges 13 percent of the sales price to contract holders who want to resell their contract. It would be in the best interest of the developer to help these contract holders, who are primarily investors, get their unit into the hands of an end-user. Many of these investors are looking to break-even or accept a small loss. With a 13 percent resale fee, however, it makes this nearly impossible. This will come back to bite the developer of Opera Tower in the ass. As of now, the best deal through the developer for an east facing unit is one priced at $509,000. It is on the 21st floor. That comes out to $485 per square foot. I think within six months we’ll see 2 bedrooms at Opera Tower priced below $400,000.
Midtown 2 was a recent large development to begin closings. Closings there began about a month and a half ago. Last week the South Florida Business Journal reported that 17 contract holders at Midtown 2, who want out of their contracts, filed a class action lawsuit against the developer. The attorney representing the plaintiffs is also planning a class action lawsuit representing contract holders of Midtown 4. This lawsuit could spell trouble for all developers if the judge rules in favor of the plaintiffs.
Where Will Prices Be 12-24 Months From Now in Brickell?
Most people would agree that as of right now Brickell and Brickell Key are the luxury neighborhoods of Miami for condominiums. This may change in the future as new luxury neighborhoods have begun to emerge, but as of right now Brickell and Brickell Key hold this title.
It is no secret that Brickell has a large number of condo units coming to market over the next 24 months. Some of these waterfront and non-waterfront preconstruction buildings in Brickell sold for prices well over $400, $500, and even $600 per square foot when sales were launched during the peak of the real estate market in 2005. Were these condo units sold too high? Where should prices be trading given that the supply far exceeds the demand over the next 24 months in Brickell? Where will prices end up for the new condo units that are coming to market over the next couple of years?
Let me try to dissect these questions. Most people would now answer yes to the first question. At the time, however, interest rates were low, prices were soaring and the market was fueled by speculators looking to profit from the buying frenzy. Two years later, the market is in a completely different state. Speculative investors are nowhere to be found, interest rates continue to climb and thousands of new condo units are set to close in the next 24 months. Earlier this week, ABCNews.com published an article entitled, “Real Estate Fool’s Gold”, which highlighted the overdevelopment problem that Miami is facing. Many investors have hired attorneys to find loopholes in their preconstruction contracts to find a way out, and in effect prevent them from losing money.
Prices will continue to go down until an equilibrium of supply and demand is reached. The question still remains though of “how far down will prices go?”. The Brickell condo index for June provided insight as to how inflated prices have become in Brickell. Some of this was due to the rampant mortgage fraud occurring throughout Brickell, but it was mainly fueled by speculators looking to flip their preconstruction condo contracts for a nice profit.
The South Beach condo index, published yesterday, revealed that prices there are almost one and a half times that of Brickell. However, prices in South Beach have far more stability due to the supply and demand relationship being much closer to equilibrium. An overdevelopment problem doesn’t exist in South Beach like we have in Brickell. This is largely due to the Historic Preservation Committee in South Beach keeping developers in check with stringent development guidelines. Demand to own South Beach property is also much higher. Less supply/more demand equals more stability and therefore less problematic pricing.
I feel that the buildings currently under construction in Brickell, set to be completed in the next 12-24 months, will have problems maintaining the price levels that units were sold for at the peak of the real estate bubble. There will be many opportunities in the months to come to buy at discounted prices in these new developments. This in turn will drive prices down throughout the overall neighborhood of Brickell. I feel that more pricing stability can be found in the buildings that have been around for over five years such as the ones found at the southern end of Brickell Avenue. These include such names as The Palace, Imperial at Brickell, Bristol Tower, Atlantis on Brickell, Santa Maria and Villa Regina.
Next week, I will reveal the second installment of the Brickell condo index. I have a feeling that prices have come down quite a bit in buildings such as Vue at Brickell, Club at Brickell Bay and Jade where much of the mortgage fraud occurred. As a result, each building now has quite a few foreclosures listings. This Miami real estate blog will continue to provide the unbiased insight that you seek.
More Than $50B in Adjustable-Rate Mortages to Reset in October 2007
An article entitled, “Mortgage Resets: Record Bill Coming Due,” was published today on the CNN.com website. It provides great insight as to how the real estate market can go from bad to worse in upcoming months. Hybrid adjustable-rate mortgages, or ARMs, were a popular financing option for homebuyers in 2004 and 2005. Many of these homeowners will see an increase in their mortgage payment of over 30 percent once those resets occur. That is a significant increase which could lead to a tidal wave of late payments and, eventually, foreclosure for a large number of homeowners.
Villa Magna Project Still a Possibility
Reports surfaced a few weeks ago that the Brickell luxury condominium project known as Villa Magna was canceled. Miami Today News reported earlier today that the project may move forward but with a significant change in the development plan. Villa Magna developer, Tibor Hollo, wants to replace 178,506 square feet of condominiums with hotel suites.
The 2.5 acre development site of the $200 million project known as Villa Magna is located at 1201 Brickell Bay Drive. It is the last bayfront parcel in Brickell. The previous plan called for 1,120 total condominium units.
The article mentions that local hospitality experts feel that competing with nearby luxury hotel brands such as the Mandarin Oriental and the Four Seasons Hotel would be a bad move by Mr. Hollo.
It will be interesting to see what becomes of this valuable parcel of land in the coming months. I will keep you posted as new information becomes available.
Flashback to 1983
Yesterday I was given the link to an interesting news article that was published in The New York Times on March 21, 1983 entitled, “Auctioneer’s Gavel Finally Moves Luxury Condominiums in Miami”. You can find that story below or by clicking the link above:
Three hundred people spent a sunny afternoon today in the shade of a big white tent listening to the patter of an auctioneer hawking luxury condominiums, many of which were sold at discounts of 30 to 45 cents on the dollar.
As the market for luxury condominiums remains soft, more developers are taking this route to dispose of their inventory to cut their losses.
About 60 units were sold for $125,000 to $190,000 in the first day of a four-day auction at Biscayne Cove, a luxury high-rise complex overlooking blue waters, nestled among other luxury dwellings in North Miami Beach.
“We decided to auction off and give the people a bargain,” said Morton Littlemen, a representative of the developers. “We want to give the people a condominium they can afford to own.”
One two-bedroom penthouse that was originally offered for $248,000 was sold for a high bid of $150,000. Condominium prices in the two-building complex range from $100,000 to $334,000.
Biscayne Cove is the fifth such auction that Martin Higgenbotham, an auctioneer, has handled in the last year for the developers, subsidiaries of Cadillac Fairview Corporation and Southeast Florida Properties. It is, Mr. Higgenbotham said, the largest single condominium auction in Florida: 225 units on the block at a value of $46 million. It is more than the total of 152 units sold at the other four complexes in Miami Beach and Hallandale.
The condominium auction business has been “heavy,” Mr. Higgenbotham said. In the last 12 months his company has sold about 1,000 condominiums at auction. Previously it handled 250 units in an average year.
The decision to auction the properties was not taken lightly, according to Lewis Goodkin, a real estate consultant whose firm conducted a marketing study for Biscayne Cove and recommended the auction for fast results. “The purpose is, let’s get out of this stuff and let’s get out of it fast,” he said. Normal advertising and deep discounting is “like a prolonged agony.”
Mr. Goodkin’s study concluded that, even under good conditions, it would take three years for the market to absorb existing inventory and that it did not pay for developers to hold onto the property. “We have in Miami today the most overbuilt luxury condominium market in the country,” Mr. Goodkin said.
He foresaw more auctions of this magnitude. “When the last recession hit us, we had a lot more inventory, but the inventory was more affordable,” he said. “A tremendous number of the public could respond. It could be absorbed. Today, our big invetory is in the luxury ranges where the market is not deep and you don’t have the response from the South American markets because their economy is weak or low.”
While the glut is most severe in Miami, it is not exclusive to this area, Mr. Goodkin said.
Is this the fate of the luxury condo units that will come to market in the next 12-24 months in Miami? 20,000! That is the number that has been thrown around for the number of new condo units that will close in 2007 and 2008. It is difficult to imagine that a supply of that magnitude can be absorbed in such a short period of time. It will be interesting to see what percentage of people walk away from deposits rather than close. If a significant portion walk then developers will likely be forced to take immediate action which could recall memories of 1983.
An Analytical Analysis of Analyzing Condominiums
People often ask me why I chose to focus on condominiums rather than single family homes when I began my career in real estate. I guess the answer is mainly attributable to my formal education and the work experience I gained after graduating college.
As mentioned in the About Me section of this site, I graduated from the University of Illinois at Champaign-Urbana with a Bachelor of Science Degree in Finance with a specialization in Investments. After graduation, I worked as an equity options trader on the floor of the Chicago Board of Options Exchange for four years.
It became second nature for me to begin to analogize most aspects of my life in investment terms. Condominiums to me had similar homogeneous characteristics as that of a financial security than single family homes.
In my opinion, it is much easier to analyze the true market value of a condominium than it is for a single family home. A price per square foot analysis of condo units in a building, and even a neighborhood, reveals more truth than the price per square foot analysis of single family homes on a particular street or in a particular neighborhood.
A 2 bedroom condo in a particular building, in many instances, will have the same characteristics of another 2 bedroom condo in that same building, such as shared common areas, amenities, year built, square footage, appliances, floor plan, maintenance fees, view, parking spaces and so on. Any differentiations in the aforementioned qualities can be easily adjusted in the value of the subject property versus comparable properties.
It is much more difficult to assess the value of a single family home. It is common to see a small, outdated home situated right down the street from a large, recently built home. Of course there are ways to appraise the values of each by making adjustments for any differentiations in each home but it just isn’t the same, in my mind. A home buyer may fall in love with one home while he or she finds the home right down the street an eyesore.
It becomes much more expensive to turn a home down the street into your dream home than it is to turn a condo down the hallway into your ideal abode. The expense of replacing or changing the floors, paint job, window treatments, light fixtures and other elements of a condo can more easily be ascertained.
These thoughts guided me into the decision of choosing to specialize in condominiums over single family homes when I began my career in real estate. As the housing bubble talk began to escalate a few years ago, I began to think of how nice it would be conceive a way to hedge real estate investments for the average home purchaser or investor in case of a bubble-popping scenario.
I guess fellow Chicagoans at the Chicago Mercantile Exchange had similar thoughts. They created a tradable home market index based upon the Case-Shiller Home Price Index, which measures home prices based on recorded changes in home values and a repeat sales methodology.
The futures and options instruments that were enacted by the CME began trading in May of 2006. The purpose was to offer jittery homeowners a way to hedge the investment in their homes against future price declines. The CME also saw a large interest from investors to directly participate in the much-talked-about housing market.
While being a giant leap in the right direction, the CME’s housing index is far from perfect. They introduced tradable securities based upon large metropolitan areas which include the following: Miami, Chicago, Boston, Las Vegas, Los Angeles, New York, San Diego, San Francisco, Denver, Washington, as well as a weighted composite index.
However, it is difficult to adequately hedge the value of a condo in a building such as The Setai in South Beach from a condo in a boutique building in Hialeah using their index.
I have decided to create my own, localized, index. This index will be based upon market data derived from major condo buildings in Miami. I will create a graphical representation of a six-month price per square foot moving average using data of closed sales and a month-to-month price per square foot analysis of units currently on the market. I may include other relevant statistics in the future to provide more in-depth information relevant to the Miami condo market. I hope you guys trading the Miami housing index at the CME appreciate the information. I’d love to hear from you.
I plan to release an index update each week. At the outset, I will rotate Miami neighborhoods for a total of four neighborhoods (South Beach, Brickell, Arts & Design District and Miami Beach minus South Beach). In the future I plan to add Downtown Miami and Park West as its own index once the nearly constructed buildings in those areas are fully built.
I’ve decided to name my index the “Miami Condo Index”, or MCI for short. Obviously my index won’t be tradable as is the Chicago Mercantile Exchange’s housing index, but I hope that it will provide more insight to localized housing markets throughout Miami’s major neighborhoods.
The Miami Condo Index will launch next week with an in-depth look at Brickell.
I urge other Realtors throughout the country to create their own localized housing indices to fully encompass their own markets and provide market transparency to home buyers like no other.
Mortgage Rates Continue to Head North
Existing home inventories are up, foreclosure rates are rising and mortgage rates continue their ascent – talk about bad medicine for the current lackluster real estate market! CNN.com reports that 30-year fixed rates have jumped to 6.53%, their highest level in 10 months. While rates, a year ago, were slightly less than they are now, the state of the real estate market was in much better condition 12 months ago. An increase in rates now only amplifies the problems that exist.
The Mortgage Bankers Association (MBA) expects 30-year rates to hit 7 percent by year’s end. The Mortgage Bankers Association (MBA) and the National Association of Realtor don’t foresee a recovery until the beginning of 2008. This foreseen recovery has been pushed back a number of times, and at one point early this year a slight increase in home prices for 2007 was predicted. In real estate markets, such as Miami, I expect this recovery timetable to continue to be pushed back until early 2009. The number of new units coming to market actually increases next year and doesn’t drop off until the following year. There’s no denying that the South Florida real estate market is a safe long-term bet as it will become one of the top retirement destinations for the millions of Baby Boomers set to retire in the next ten years, but demand has to catch up with supply. That will take some time.
Those people holding preconstruction contracts will soon seek financing to close on their condo units. For those that are questioning whether to walk away from their deposit or to close on their condo unit, the ever increasing rates will make their decision a little easier.
Super Bowl XLI – $463M Economic Impact for South Florida
Last week, it was reported that Super Bowl XLI brought $463 million to the South Florida economy in an article entitled “Super Bowl: How much is it really worth?”. Some academics disagree with this high figure, but there’s no doubt that Super Bowl XLI had a significant impact on the city of Miami. The following are some statistics from that article that I found to be interesting:
More than 112,000 fans traveled to South Florida for the game
The average visitor spent $668 per day
Nearly 10 percent of visitors arrived by private plane
Half of all local businesses saw sales increase an average of 38 percent
The really good news is that Miami will once again host the Super Bowl in 2020!