Cash is King in the Miami Condo Market!
February 13, 2008
by: Lucas Lechuga
Two local business papers, Daily Business Review and South Florida Business Journal, published articles yesterday morning discussing the fact that some lenders have blacklisted certain condo developments in Miami.
However, a few condo developments have it worse than others in Miami. The Daily Business Review article revealed that sellers in condo buildings riddled with foreclosures find that it is nearly impossible for potential buyers to obtain financing. The article uses Vue at Brickell to illustrate the point and states that “the project is widely avoided in the lending industry”. The same holds true for other condo developments in Miami that have experienced a high number of foreclosures. The doors are now closed! Well, unless, of course, you are paying in full with the almighty greenback.
BankUnited seems to have blacklisted the entire Miami condo market with over 160 condo developments on its list that are located in Miami. I’m not even exaggerating. I went through the list and tried to find one well known condo building in Miami that wasn’t on the list. The list included everything from condo developments built in the 1980s to condo buildings that haven’t even broken ground yet, and some that probably never will. The only building that I could think of that isn’t on the list is Grovenor House. Anybody else find one? Here is the BankUnited blacklist.
Declining market value and high investor concentration are the top two reasons cited by BankUnited for various condo developments being on their list. However, the other reasons provided are actually much more interesting. How about the pending litigation concerning structural issues at The Mark on Brickell and The Palace? I’ve known about the structural issues at The Mark on Brickell for months but I hadn’t heard anything about The Palace.
The Washington Mutual blacklist was far less interesting and the Popular Mortgage blacklist had the usual suspects such as Vue at Brickell, The Club at Brickell Bay, Jade at Brickell Bay, Solaris at Brickell Bay and Emerald at Brickell.
As a contrarian investor, one might say that the best time to buy real estate is in a market where everyone is saying “Mercy! I give up”. Looks like a few banks are finally throwing in the towel on the Miami condo market. Once they all follow suit, then that’s when the real bargains in Miami will begin to enfold.
Time will tell.
However, I think that we may be in for about a decade of declining property values in Miami. I can just imagine everyone thinking I am crazy, but look if you look at the bust that follwed the 70’s and 80’s US housing booms you will see it took a long time for home prices to begin to rebound. The build up for our current boom is extremely substantial and should take longer to deflate.
With that said, I like the rental listings that either I just noticed or you recently added to your blog. It is very nice. However, the pictures for the individual units seem to display all messed up for me.
Lenders have always had restrictions on loaning money to buildings with high investor/rental units. Once lenders enforce their existing rules market will be dead for a very long time.
Good luck with the condominiums board trying to maintain a building with cash strapped people who know they cannot even sell their units.
So Lucas, at that point people actually want to close but are being prevented by stupid bank action who put restrictions across the board shouldnt they start working and reviewing and shouldnt developers slash their prices to their investors in order to avoid lawsuits and banks being loaded up with unsold condos…
whats the reasoning for this wait and see situation of banks developers and government who still dont slash taxes?
the only actual people who want to go forward are the 30% real investors who are held hostage in the situation…
Lucas, as of today what message do you want to tell all the actors of the miami condo scene ?
I have been wondering how the offers have been holding up so well in some of these buildings compared to what I expected. This is the nail in the coffin. Things will get incredibly ugly fast from here.
If you go through BankUniteds list you will find many buildings that are not condos at all but rather are Office buildings (Met2, 1450 Brickell) or Rental buidings (One Broadway). I wonder if BankUnited blacklisted those buildings because of high investor/owner ratios or too many foreclosures lol.
Sure, cash is king, but if banks won’t lend due the uncertainty of actual value, how can an all-cash buyer estimate the actual value and in turn demand a comparable sales price? Who knows what some of these condos are actually worth today or what they will be worth in 5 years.
Foreclosures + % Investors vs % Primary Owners + Bankrupt Associations + Construction Issues + Oversupply = Total Uncertainty, thus reluctance to lend $
i wondered as well why One Broadway was on the BU list….maybe b/c the base of the building is empty for commercial leases?
Are there any south beach projects on this black list?
Hello,
As I say in the article for the Daily Business Review, I am a stong believer that this is all for the best. I believe this is the time to buy there are greta deals int he market place now and the rates for qualified buyers are in the mid 5%’s which is a great deal all around. I believe the people that are really having a hard time doing business or attaining a loan are people that shoudl not be in the market place to begin with, they are part of the reason we are in this mess. Realtors, Mortgage Brokers, Lenders and Buyers who got used to the easy days in this industry and have not been able to adjust to the new market should not be here. My business has surely suffered but there is more than enough business out there if you are willing to work for it not expect to be handed it. In regards to the buyers people with descent credit and some money down should have no problem whatsoever getting loans on the other hand if you are looking for 100% financing those days are long over and rightly so. In regards to those blacklist they have always existed they have just increased the number of properties on it and the banks are not as willing to do any exceptions because of the losses thay have taken because of their lax lending practices before. This is a buyers market there are enough building not on the list at a great price and pleanty more bulding coming up soon ..
Michel Fayad
Managing Director
American Mortgage
It is a buyer’s market today, will be in December and will be throughout 2009, possibly throught 2010. No need to rush buying, the bottom is still a ways away. After all ML predicted a 15% and 10% price declines in 2008 and 2009 respectively.
My g-d. Is someone who spells decent as ‘descent’ really lending money? Maybe I should go into the business of selling apostrophes too. I think we should be told…
To Evolved Capitalist – Apogee was on one list, I think because MEI, Paradiso, etc are not closing yet, it’s probably too early to tell… (or too early to publish)
The prices for the properties should drop some more but Im not so sure about the mortgage rates. The mortgage industry as hard as it is to believe with all the new plans being implemented to stop the foreclosiures and the drops from the fed dont expect that to drop much more and eventually they will begin to go back up . There is no rush to buy now but it is a great option in my opinion.
If you buy a condo now you deserve your fait. This is falling market, in precipitous decline, and Miami condos are the absolute worst of it. I can’t imagine why anyone would want to grab this falling knife — particularly with rents so ridiculously low. When a mtg broker or realtwhore tells you “nows a great time to buy,” slap his face. He’s lying now just as he was lying then.
how do you expect thta foreigners who have businesses and a credit in us and that are ready to put more than 30% down do not find other alternative than get ARM or floating rate loans whereas us banks where they hold their account should propose them fixed rate 30 y at around 5.5 % …foreign programs give a 2% premium to those fixed rate..
Laurent,
It truly depends on what banks you are working with, but i can tell you for a fact a foreign national in this market as of today could secure a 30 yr fixed at 6.5 % or even better depending on a couple of factors which as an investment is not a bad rate at all even as a US citizen those rates for an investment property in my opinion are good enough.
In regards to moretroops comments, everyone is entitled to an opinion, some opinion are obviously more educated than others but at the end of the day they are all opinions. I do not consider my opinions lies as he puts it it is simply my point of view. It is my feeling that the shady business people such as the Realtors, Mortgage Brokers and Banks and Lenders have been steadely going out of business for that very reason and even though there is always an exception to the case most of the companies that have survived is because they are true professionals you should not write off an entire industry because of a few shady people.
We instructed all of our employees this list was a trade secret and was not to be released, esp. to those pesky reporters and bloggers; now Hollo is going to sue us. Pls disregard the list, shred any hard copies, and destroy hard drives containing digital copies.
To make things fair, pls upload the lists maintained by other banks
At least we still have our racial, religious, and national origin-based lists. “Too many ____” (fill in the blank)
Michel Fayad,
today’s loans will only go to those who don’t really need to borrow. but since you are in the mortgage business, i’m sure the same reasons you are using today to buy properties are the same reasons to buy things in 2005.
your business depends on transactions – so to hear that you think it’s a great time to buy and that there are good deals out there, doesn’t really mean much to a real buyer.
you’re not exactly an unbiased advisor. in an illiquid market where bids have basically disappeared … its not quite wise to talk people into buying unless they are going to live in it at least 10 years. other than that…a wise person would rather pay a higher price for a place once the problems have been resolved.
the federal reserve and the treasurer (ber-donkey and paulson) have NO idea what is going on. if you listened to them 6 months ago, you’d be in a terrible mess today…
there’s a HUGE amount of inventory out there and lending has come to a halt. anyone w/cash to buy should wait until inventory starts to decline – if they have a brain in their head.
Cyrus,
Like I said before I believe people who are able to get loans now are the people that should be getting them and it is totally my educated opinion. It might not be an unbiased opinion to you or any other “real buyers” as you put it and that is more than ok with me. There are more than enough people on both sides of the spectrum when in comes to this issue who have nothing to do with the local market as the following link will show.
http://articles.moneycentral.msn.com/Banking/HomeFinancing/PrimeTimeToRefinanceMortgage.aspx
Furthermore nowhere am I saying that people should buy as an investment but I do believe for qualified buyers looking for a home to live in not for a quick buck the market provides a great deal. And I am a strong believer that most of the people who cant afford to get a loan with the programs we have now should not be gettign a loan anyway if not a couple years down the line we would have the same problem again.
As to the comment that my business depends on transactions, yes you are right and so does basically any other business sector in America. As I said before my business has obviously slowed down a bit but there is still enough work out there if you are willing to look for it. Thankfully i have dedicated myself to the foreign national niche so in a sense my business hasnt been affected as much.
In regards to your comment of the smart thing to do is to wait until the inventory starts to decline! That will not happen unless more people wether it be foreign nationals or locals keep on buying properties , if everyone stops buying the properties are not going to simply disapear.
Michel Fayad
“When a mtg broker or realtwhore tells you “nows a great time to buy,” slap his face. He’s lying now just as he was lying then.”
A swift kick to the balls would be a more appropriate response.
The bottom in this market won’t occur until the excess inventory is cleared out, banks regain confidence in the market, and the economy improves. I don’t see that happening this year. The 2008 real estate market will make 2007 look like a great year.
The realtors that are saying “now is a great time to buy” are the same ones who were saying it before prices went down another 10-15%. There is no risk in waiting for the bottom. Prices won’t all of a sudden go right back up when we do hit bottom. They will go sideways – perhaps for several years.
BFG – Totally agree…..it will be years, not months before prices rise instead of fall or hold steady.
Prices will not rise until the last of the new construction is completed and closed. There are years of condos on Miami, Miami Beach and Ft Lauderdale
like i state previously, the right time will be following 3 months of decline in inventory. unless you need a house to live in now, it won’t make any sense until then….especially when rent costs 1/2 of carrying costs to own. again, if emotions are taken out of the equation, this is simple formula to follow…just some friendly advice to all.
Lucas,
If you look at Bank United really closely you will see that they are overeager to blacklist all Dade buildings. Take Brickell Key for example – 9 out of 11 buildings are on list (only Isola and St. Louis are not in list); compare that to Popular mortgage which has 0 in list & WaMu which has 6 buildings in eligible :
Brickell Key One
Brickell Key Two
Carbonell
Courts Brickell Key
Courvoisier Courts
Isola
So if the article is fully based on BU data – I think there is still hope to get mortgage in most buildings
You know the one thing that makes me excited about this market? Qualified buyers are the ones looking and making the purchases. If you don’t have a decent down payment or not paying with cash get out of the way. Deals are there for the taking. If you have cash, want to buy in bulk or buy for a principal residence then line up. As far as some banks blacklisting some buildings – that means opportunities for many other banks ready to lend to qualified buyers. Sure if your unit won’t appraise – forget about it. But most will as long as you didn’t purchase a flip. Happy buying in 2008 and 2009.
wow,
i have been doing business in south florida for 8 years and it does not surprise me.
hey did buffet invest in the condos in miami?
sorry, a little sarcasim.
but i still love un cordadito.
by the way, this is one of the best blogs i have come across.
“But most will as long as you didn’t purchase a flip”. There in lies in the problem, because most of Miami and Miami Beach is exactly that.
BTW, let’s just compare to London, where people are talking down the market (and it has slowed)
QUOTE
Allsop Residential Auction, day 1… no room for tumbleweed
Despite the scare stories circulating at the back end of last year, of residential auction houses deserted but for a couple of spectators and a handful of derelicts who’ve come in out the cold, the auctioneers kicking the tumbleweed… day one of the Allsop Residential Auction sounded like the old days. We’ve a report of a thousand people on the day, including first-time buyers, an 86% sale rate, and properties going for way above what must surely have been some conservative guide prices. Big sales included Flat 6, 21 De Vere Gardens (Kensington) which made £1.925m (guide price: £1.25m-£1.5m).
UK property auctions are far more established and very different to US ‘cattle’ property auctions. Miami’s scr*w*d.
The really really big problem that will sink this bubble is that MOST condo buyers were flippers. Professional flippers and people who purchased condos not be cause they thought it made sense versus renting but rather because they KNEW they would make a profit after costs.
Now think about it, how many people in Miami from 2001 to early 2007 paid for a condo? Easy Answer:0 Zero you ask? How can you say 0 when thousands and thousands of condos were “bought”.
Condos were not “bought”. Contracts were signed and the contract signers got the benefit of making money due to signing the contract. In no way did they ever pay for anything.
If I purchase a truck for $20,000, and next year it appraises for $25,000 and I can either sell it at $25,000 or keep it and take out $5,000 of equity and I know the year after it will appraise at $30,000 and I can sell or take out another $5,000 equity… I ask you, how much did the truck cost me or how much did I have to pay to use the truck? You guessed it. It didn’t cost me and I didn’t have to pay anything, it paid me.
Now take that analogy to condos. From 2001 to early 2007, anybody that signed their name on a contract never had to “pay” for a condo. Money got exchanged, and in the end the person who signed for the condo got more money out than they put in via appreciation and could tap out that equity appreciation whenever.
So it’s useless trying to compare “buyers” from 2001 to 2007 to real buyers the market needs now. People back then bought expecting to make money. Who cares about outrageous taxes or condo dues, as long as your unit is appreciating greater than those costs. A buyer now would be a true buyer where they need to make a purchase knowing full well they are going to have to truly pay for costs while the asset they purchase goes down in value.
This is a pretty radical shift. Don’t expect it to end pretty. There were tons of people willing to sign contracts in 2001 to 2007 as long as they were SURE they were going to net out positive. 0% of that crew will be buyers now. A buyer now will be a true buyer and will be the type of person Miami hasn’t seen in 6 years. Looking at the condo supply, we only need to find a measly 20,000 true buyers or so this year. Shouldn’t be hard to find 20,000 true buyers even though this market had never had any true buyers in the last 6 years. What’s the big deal, it shouldn’t be hard getting a guy to sign the dotted line for a condo that will depreciate $40,000 every year versus the $40,000 appreciation per year the buyer was used to seeing. That’s only a negative $80K cash flow change per year the guy has to swallow now versus the go go days… chump change. Say the market stinks for 4 years, the guy will only be netting minus 320K cash flow from what he’s used to getting after signing a contract. It’s silly to think that a measly negative $320,000 cash flow difference should keep a buyer from 2001-2007 on the sidelines. I’m sure they’re all itching to get in again so they can get clobbered over the head.this time around.
— JL
I gotta agree with you JL. The flipping is now flopped and many flippers will be flatlining soon. What makes it hard for someone who wants to buy is what is the “real” value of a property? I can afford the current prices, but just like a stock, I’m not going to pay $140 when the price should be $100 and helplessly watch it decline after buying it at $140. It would be better for everyone if sellers would price their condos at what the prices should be…but there seems to be a resistance to do so. I’m quite certain that resistance will fade as the market reality sets in. But I’d like to buy now….and simply can’t because some of the ones that I am interested in are still not realistically priced. I’m will do assume the risk of a potential 10% price decline after buying, but not a 25% price decline.
I think some of the sellers think there is a fool out there that will pay top dollar. As they hold onto that hope they will stay behind the decline curve and won’t sell. There are so many properties on the market, sellers just don’t have the luxury of unrealistic prices. The quicker they realize that the better it will be for everyone.
At least in stocks, the prices change immediately. With housing…….it will just drag out over a few years and just simply cause more and more pain as the inventory accumulates. Very very bad market for sellers.
…..and not helpful to buyers either.
true and true…first fools are developers who don’t go with the flow..then
true and true…first fools are developers who don’t go with the flow..then sellers who need to sell quickly, banks who are trying to charge 2 or 3% PREMIUM on a mortgage..and finally buyers who dont buy when the best offer is shown..but those have the actual right and duty the wait and see where the mass is trading…if most trade at 350 $ a sqfoot that where they should trade but if most trade at 250$ wait it out until you are offered that price.
Buyer Tome – when & where would you decide to buy a condo while making sure it would be a good investment
Margus – (Tome was a typo should have been Tom) I had a condo in mind, know what the right price should be, but seller not ready for that price yet even though after 2 months no one is offering more….. Oh well.
I think there is a false assumption that flipping was rampant. Some buildings did not even allow resales so they would deter this from happening. Met, Avenue, etc. Some didn’t launch a resale program until very late like now. So you have many investors that got in very early and bought at very attractive prices on waterfront buildings. A few here and there obviously overpaid but some also bought to use as primary residence and I would expect them to close so they don’t just throw away a 20% deposit. The fact of the matter is if you are a buyer today it is possible to buy at pre-construction pricing in some buildings from original buyers who never flipped the units. So what’s the point of waiting for a fliped unit to come down in value? These flipped units throw off your market data.
Quoting Samir Patel: “The fact of the matter is if you are a buyer today it is possible to buy at pre-construction pricing in some buildings from original buyers who never flipped the units.”
Perhaps you could find buyers for some units at a soon-to-be-opened Related project, in which the sellers would be willing to take a NET LOSS of 50% of their deposits??
I am not RE agent or broker nor are these listed with RCRS.
If serious, post an e-mail address and I will respond at my earliest convenience.
samir,
how long have you been in this business? no offense but i’m not sure what you are talking about….in the past 3-4 years, ‘flippers’ made up probably 80+ of these sales! they’d come in and buy 30-100 units in one shot…who was buying these you think? not to mention the shoe salespersons who were flipping multi units (at least trying to…).
maybe if you weren’t a realtor, you could see things a bit clearer, and i really mean NO offense by this – i would say most buildings that have and are going up in the past couple of years were MEANT for flippers … except the apogee, continuum II, etc.
by the way, i dont think flipped units throw off the market data…most of the data IS flipped, empty, stuck units at a time of a credit crisis. go and try to borrow 700k on a 1 mil condo in miami w/a 750+ score…see what they say.
Samir – the ‘no flip’ rules were a 2005 invention. And largely irrelevant because by 2004/2005 investors were prepared to close and re-sell as their flipping tool as the market kept going up.
Cyrus is right – I would say, even in the beachfront buildings, the majority were contracts based on appreciation and re-sale.
Since that’s a bust, people are walking away from 20% deposits! Of course they are. $1m condo, 20% deposit. Probably underwater by 10-20% in price and then holding costs, 1.75% developer closing fee, extras like floors etc. Only an idiot would close.
Wonder if Tibor Hollo is going to sue BankUnited?
Maybe BankUnited’s blacklist is so long bc it has a world of its own troubles. And other banks may be more willing to lend. But if one bank blacklists a building, why would a loan officer at any other bank lend against it? He could feel extra stupid if it defaults shortly after.
JL has it nailed. The old buying audience is dead. The buying audience during the next stage will be totally different and take a long time to build. During that time, the Miami condo market will go basically “no bid”. Except for people who get itchy trigger fingers and buy too early bc its 10% less than initial asking price, or last ask or last quote.
The first buyer (if an “investor”) will get wiped out. If he actually just lives in it, he’ll just feel real bad watching prices plummet. Second buyer as well. Maybe the third or fourth makes money / feels smart from day one.
When markets crash, they crash much faster and harder than they rose during the upmove. Remember tech stocks? People bought them all the way down!! Or look at any bank stock chart today.
By the way, there’s a famous stock analyst who’s been shorting Florida banks mercilessly. Tto great profit, including BankUnited – see stock chart of BKUNA. He’s says the ultimate conclusion of all this is the following “domino effect”.
No one will be able to sell a condo in a blacklisted building, including the developer, bc of the lack of financing. Then the developers will not be able to pay off the development loans (I’m not saying they’ll “go bankrupt”). Then banks will take over the projects in lieu of loan repayment. Then the banks will dump the units but probably won’t recover enough to avoid big writeoffs. Then the banks will have financial problems. Maybe someone(s) in this chain have some kind of solvency or liquidity issue or even “go bankrupt”.
If you own a Miami condo, one way to hedge your coming losses may be using the CME financial RE futures. They trade like stocks for 10 cities. Last data is Nov 07. Its down 15% from its hi in Dec 2006.
http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,1,1,0,0,0,0,0.html
More exciting way to hedge yourself would be shorting selected bank stocks that have hi exposure to FL. More exciting bc it can go to zero (while the CME index can’t). But it could go up in your face somehow too.
This might seem “risky” but its prob worth educating yourself. Its really no “riskier” than buying a Miami condo pre-construction w no money down and very financial ability to absorb a loss.
cyrus,
Do you expect a full 80% of people to walk away from 20% deposits? Many new buildings have been open now for over 6 months. How many bulk deals at 50 cents or 60 cents on the dollar have you heard of. Sure maybe thats a difficult one to keep track of. I know of 1 developer who received a few defaults back and actually raised the price of the premium units. As far as flipping – cyrus if you meant 80%, I think that is a grossly exagerated number. Sure some people tried to take advantage of the market and bought 2 or 3 units. I wouldn’t have expected too many people which bought early to have actually flipped units at the height of the market though. I would expect some of those early investors to have held out for more and more and never resold. I still don’t believe today they would just be willing to walk away from a 20% deposit. That would be very foolish. How many years does it take one to save up $60k or $70k? Its a very emotional thing as well. I would also like to preface the next statement by saying I in no way agree with Tibor Hollo, but I do believe this blog has created a false sense of panic for many original purchasers. Not due to Lucas’s statements but due to many of you on here expecting it seems for everyone who bought real estate between 2003-2005 to just give up and walkaway from all investments. I expect due to the anonymity of the Internet many of you are just doing the opposite of pump and dump. You are trying to facilitate panic amongst ALL buyers. Trust me, I don’t expect everyone to hold and I don’t tell everyone to hold either. I get a few calls now and then from someone just seeking advice – whether to hold or walkaway. Sometimes I tell them to just walk its not worth closing (mostly units without any views). But it always depends on the buyers financial situation and the property in question. Honestly I think there will become a division between properties with views and no views in the short term. Psf will vary widely within each building – on units with city views and units with bay views or ocean views. When you start making a list of units with the unobstructed water views in a decent size in a brand new building you will realize why I think this is the time to buy. Sure you can build more buildings in the future. But do you expect builders to price them at the same prices you can pay today? I would expect they would wait and build when they can price to acheive double the profit.
Smoking the good stuff again, eh? First, the developers will largely be on their knees, with little new appetite for NEW credit to fund new ventures. Second, building costs were linked to home prices.
Samir, there are HUNDREDS, HUNDREDS of units in brand new buildings on the beach with SE views varying between $500k and $2m. HUNDREDS.
And we’ve established you aren’t selling them to locals because they can’t afford it.
And no one using it 6x a year is going to pay 2.5% property tax anymore.
I think you vastly underestimate the investor impact with no desire to close (and the means to walk away, albeit sour, from a 20% deposit)
12 months to go before the confluence of events makes contrarian purchasing a good idea.
Seems to me a correction will have to be made to bring income in line with mortgages. Realistic people have begun to recognize that in todays environment of uncertainty, overleveraged housing is too much of a risk to take on. I for one would love to buy a house, but the prices must come down. A better than average income of say $70k cannot easily afford housing greater than $300k. My feeling is until 2B condos drop to below the $350k threshold the holding pattern will stay. The prices will not drop below $250k on a 2B, this would be the floor. I realize each building and neighborhood is unique, but this is my gut feeling on how the average American buyer will respond to the market. Question is, who is going to absorb this loss? I realize a $50k deposit is hard to walk away from, but the losses will continue to mount for several years-owners will eventually have to add that cost to the investment as well. But the future does hold bright for those of us waiting for a rational correction to unfold.
Lucas, is it possible to get a summary of the various buildings with possible issues related to them-such as structural, association failures, etc. I have heard rumors of buildings dealing with issues other than foreclosures, but nothing in an organized manner has been presented…
On another note, any comments regarding Coral Gables units? How are prices holding up or expected to hold?
Samir – I must say your outlook is a bit more rosy than presently warranted. Greed drove the prices up and fear … when it finally arrives … will drive the prices down. We saw the greed but we haven’t yet seen the full fear. Wait until hurricane season which should be just about the time when the fear of housing will fully be realized…not caused by the weather but by the full realization of the sinking housing market, property taxes, and other holding costs and the FEAR that there is nothing you can do about it. It is that helplessness that will generate the fear to bring the market to a bottom. We haven’t seen that yet….hints of it, yes, but a lot of it has been “smoothed over”. Housing prices in South Florida will fall by double digits from today before this is over with. If you say otherwise, then you are a fool. The only open question is how much in the double digits will it fall from here??? 10%, 15%, 20%, 30%??? More? I don’t know that answer but I can safely say it is in the range of 10%-50%, with the highest probability of range of 13%-18%.
Watch that NYC video from January….that lady was plain wrong, it is going to get worse even among the affluent. The three guys were right and the prof. was closest to reality. Do NOT buy with emotion in this market unless you are prepared to over pay and lose 20% or more…….. There simply is NO RUSH to buy and the rushes in the past were based on a fool’s gold.
It is what it is.
“Do you expect a full 80% of people to walk away from 20% deposits? Many new buildings have been open now for over 6 months. How many bulk deals at 50 cents or 60 cents on the dollar have you heard of.”
Because this is a real estate blog, it may seem with the daily RE conversations that we’ve been in a local condo downturn forever, but actually, we’re probably a little less than 1 year into this downturn in the Miami Mid to High-end condo market… a condo market that has been fueled by unprecedented levels of overbuilding, fraud and investor activity.
Think about it, we’re less than a year into a process that may take 5-10 years before we begin to establish a normal trend line in housing. Real puking in this market will happen at some point, but not in year 1 and probably not in year 2.
1 year into a downturn, you won’t see deals going at 50c on the dollar or 80% of condos being put up for immediate sale. However, broaden your timeline to the next 4 years, and then I would say yes to both those points. You will see condos going at 50c on the dollar and you will see 80% of the condo market changing hands at least once in that period with sellers hitting the bid.
I have to go back to my earlier point. Pre-2007, people were not “buying” real estate in any true sense. They were signing their name on a dotted line with the full expectation that doing so gave them a God Given right for their property to appreciate enough to cover their mortgage payments, condo fees and property taxes.
It was not that long ago that the common wisdom used to be “why would you rent, when you can get a mortgage and make money? You are throwing your money away renting”. Sounds familiar? Believe me. That “wisdom” was being doled out quite rampantly up to about 1 year ago. If you asked people at the Waverly why they bought when it went from rental to condo, 20% of the answers were “because I’m an investor” and 60% of the answers were “blah blah blah, yaddah yaddah yaddah, blah blah blah plus it’s a great investment”.
So who has their names signed on the dotted line? I would say on the margins you have true investors at one end and true home buyers at the other end. The middle 60% of the condo owners right now I’d put into a category of “ I could have rented, but I bought with the expectation that buying would make me money; but I wouldn’t have bought if I thought the property value would stagnate over a 5 year span”.
So how might this all play out? The investors will puke over the first 2 years because they have to, the middle 60% will puke gradually over 2-4 years as they realize that Real Estate is not fun any more. It was fun when the market paid you for signing the dotted line. A couple years ago, these owners were used to getting a free ride + profits for signing a piece of paper and moving into a condo. Paying rent made no economic sense because by renting, you were depriving yourself of making easy profits from owning South Florida RE.
The shock sets in when you take a large group of condo owners who never had to pay anything for their ownership rights, and now, they are going to have to pay –in a real sense- mortgages/HOA/and taxes which may come out to a cost that is double+ to current rental rates.
Real panic and puking sets in when a condo owner realizes any equity he might have gained over the past few years is gone and going negative while at the same time paying costs of 2x market rental rates to hold onto this negative equity generating piece of sky. That’s when the 50c on the dollar scenarios happen in earnest. Will it happen all of a sudden tomorrow? Nope, at every step of the decline from now to puking, you’ll have premature buyers stepping in the same way buyers stepped into the Nasdaq market crash at every level from 5,000 down to 1,500… that’s just how markets operate.
A final thought, I throw this 50c on the dollar term loosely, but who knows what ?cents/dollar will be the true bottom number. However, what I do know about markets is the following. They tend to overshoot fair value both ways before settling at fair value. Say you look at a condo and truly believe fair value is 70-80c on the dollar, in a bear market, it would be reasonable to predict that the price will overshoot fair value to the downside as much as this market overshot fair value to the upside. This housing market will not bounce off of fair value; it will bounce off of something distinctly lower than fair value before establishing some type of trend.
Anyway, this will all probably play out over the next 4 years so people need to get used to hearing “the End is coming” for quite a while longer.
JL
JL hit the sweet spot – the last few years (1) people weren’t buying residential real estate for all the traditional reasons, i.e., rather than a long term investment that doubled up as their residence, for many it was viewed as a short term, liquid investment and (2) banks weren’t lending money according to their traditional policies, i.e., 20% down etc.
what’s the effect (i always look at it from the securitization world )? every underlying assumption that went into pricing and assessing risk has turned out to be ridiculously wrong. i mean it’s mind boggling how “off” the so-called smart money was on this. and as the wsj pointed out last week, people are starting to act rationally in an economic sense – they are simply walking away from the properties and the banks can’t stop them. by offering a 100%/95% financing, banks effectively took on all the economic risk of a home purchase and gave the “purchaser” an option to buy as long as prices were moving in their favor.
thus, samir, why wouldn’t the investors who bought many of these contracts (after all, that’s what they were really buying) similarly walk away from their deposits if at the end of the day, they choose to close and carry, it satisfies the age old maxim of throwing good money after bad? even if you’re sitting on a contract at a 2004 price – you’re treading water at best for several years and your current downside risk far outweighs any upside. why hold for several years making making a minimal return when you can take the money you would be pumping in over that time and place it in a better yielding investment? moreover, how many of these folks can actually close? with lenders tightening the purse strings and stiffening their underwriting standards, how many of these investors are going to be able to get loans?
finally, samir, i disagree with you that there is a false assumption that flipping was rampant – it was in those buildings that allowed it. in those that tried to cut down on it either by forbidding resales or limiting unit purchases (which as somebody else pointed out, only came about in earnest in 2005, and more importantly, was a term that was insisted on by the lenders and not the developers), you still had investors making up the bulk of the purchases.
JCrimes and JL you guys are so right on.
I wrote this last night and forgot to hit to send
“Fact of the matter” is that some projects did not allow flips and started resales late because the Developers wanted to be sure they sold off their inventory first.
Developers did not use “NO FLIPPING or NO RESALES” as a deterrent for flippers, they used it as part of the sales pitch to give the buyer confidence they were buying into a project with end users. Developers welcomed every warm body that was able to sign on the bottom line and produce the 20% required for down payment. Had they really cared about a financially sound building they would have been sure those contracting had the income to support such purchases.
Flippers fueled pre-construction sales without a doubt. Buyers did not line up around blocks to put contracts on multiple units because they loved the building and wanted to live there three years into the future. They contracted because they had hopes to make an easy $100K.
Yes, buyers can pick up units at original pre-construction prices because many of those original buyers never intended to close or they will not qualify for a loan under recent credit conditions.
Expect those conditions to worsen,, yesterday Paulson proposed to tighten loan rules further.
The perfect storm is about to hit those new towers and those holding contracts.
I too am a Realtor but am very realistic about current conditions. ” best lines, great finishes and great amenities” will mean nothing when some of those properties become financially toxic. Yes, you might find a good deal now but along with that good deal could be years of the building in lawsuits and assessments to cover bad debt.
As a Realtor I want these new developments to be a success but I realize that will not happen for years, until those buildings are filled with people who can afford to live there.
Time will tell but my bet is 50% on the dollar for bulk deals is not a stretch at all.
As far as walking away from 20%. The sophisticated investor is accepting current conditions for what they are and willing to walk away from future losses. The Mom and pop speculator buyer who refinanced their home or took their life savings to use as deposit are so emotionally connected and in denial they are willing to walk into fire in hope of some return.
samir,
blaming this blog for freaking out buyers? or having ‘investors’ walking away from their deposit? …come on now…quite ridiculous.
jcrimes, JL & Mr. Waverly: great posts.
In my opinion, not only do real estate prices have to fall significantly, but so do property taxes and HOA in order to attract serious/sophisticated buyers.
Why should I purchase Miami real estate (condo) when I can rent the same for 1/2 to 1/3 the cost of owning it? Obviously I’d rather rent and use the capital to purchase downtrodden stocks of high quality REITs (with generous dividends) such as Vornado, and Apartment Investment Trust, or even closed end Real Estate ETFs that are trading at a significant discount to their NAV.
Here is an example of a NEW building directly on the beach:
Turnberry Ocean Colony – South (16051 Collins – Sunny Isles), which apparently must not allow rentals, it has 52 properties for sale with ranging in price from $1.369,000 to $5,400,000. Without adding them up…that is in the $1 BILLION to $2 BILLION range for sale in that building alone! There are only around 130 residences in each of the two buildings.
Sure looks like that is going to be a really bad situation…..
One wonders about the new Trump Towers coming online over the next 2 years. At least those will be “more modestly priced”…….
Any comments on the Turnberry project?
Oh and the HOA fee is in the $2,000 – $3,000 per month. Not bad eh? $24K-$36K per year just in HOA fees (sarcasm).
Just say a listing in the first Trump Tower at $381 per square foot……
REDUCED!!!!
TRUMP TOWER I
SUNNY ISLES – Miami
5% INCENTIVES FOR BROKERS
or $25,000 for BUYERS + Preferred Lender Incentives
Model D- Rev for $1,150,000
OVER $300,000 BELOW MARKET VALUE!!!!!
** Lowest price in building…. ***
Can you say, “you’re fired”…..
I’m sorry but did someone just say puking?
The Trump Towers unit 3/3 MLS is: D1253770
For Sunny Isles….
I would estimate there will be $3-$5 BILLION for sale in the Turnberry Colony, Trump Towers, and Solis alone over the next few years. That is Billion with a “B”.
I wish there was an easy way to see how much in dollar terms is for sale within a city or zip code….does anyone have access to that?
Oh and it could be more…there are two Turnberry Colony towers and the $1B-$2B was just for one and there are three Trump Towers and one Solis. Heck, the numbers could go to $6 Billion, who knows….AND there are a bunch more buildings in Sunny Isles…..
Oppps….calculation ERROR….divide by 10…. 🙂
Still, looks like a billion on the market in that error…. Problem with the old cut and paste!
So it should read $300-$500 MILLION and with numbers that could go up to $600 MILLION and easily top $1 BILLION for the Sunny Isles beach front condos alone…not including the non-beach front…..
The Solis will have 275 total units – about half to buy and half hotel thingy.
My bad….sorry to have that calculation error….but the number was so shocking I had to post then reviewed after scratching my head. The numbers are still shocking though…..even at $1 Billion.
Lucas, love your blog..it’s addictive!
I contracted for a 1 bdrm “Avenue” condo 3 yrs ago, but now will not be able to close. I was told I could assign my contract. I ‘d be willing to do that, at a loss, to get back part of my deposit. Are there any lists formed that I could be on. I am sure there are a lot others in my situation. Or should I just shoot myself now! Help!
unfortunately bluegirl, you are probably out of luck. assigning contracts at this point will probably be tough, even at preconstruction price. the only reason somebody would do so is to help you out, but then they will have to take on the losses. what will happen is you will be forced to walk away from your deposit, and the developer will take back the condo and sell it for preconstruction minus 20% to break even. this will be how the next wave of markdowns occurs along with the foreclosures. banks will no longer lend at even 80% of preconstruction value because the values are dropping. it will make for an ugly couple of years, but probably inevitable to correct the market to realistic terms. this is why the banks are already marking down large losses on their mortgage portfolios.
Mr. Waverly has a great quote……”As a Realtor I want these new developments to be a success but I realize that will not happen for years, until those buildings are filled with people who can afford to live there. ”
you are right on. Prices are so out of whack that people dont realize what good value is anymore. Condos that are on sale with the headline “18-20%” off are still way overpriced. I did a zillow search on a few condos in sobe (south of 5th) and most 2 bedrooms were $600K in 03-04 and are 1.5-1.8M in 06. Taking 20% off 1.6M is just a start. Even if you take 50% off, it is still 800K and still 200K above what it sold for just a few years ago.
I am looking to buy a 2 bedroom condo in sobe for weekends. I have a townhouse in the grove and would love to have a place to crash on weekends. Even though I could today afford a large 1 bedroom or a small 2 br condo (south of 5th), I am not buying. I am waiting for prices to drop a lot more.
I have done some research on the housing crash in Los Angeles in the early 90’s and have access to the headlines, but not stats. I am curious if anyone on this list knows the price drops for two type of areas:
1. prime realestate price drop during bust.
2. non=rime realestate price drop during bust.
To throw in another item to this discussion…the US$ and inflation. The dollar is depreciating big time and also inflation is high. That is definatly going to be a factor in pricing of new condos. $600K in 04 is not the smae as $600K in 08.
carbon
not sure if you’re going to see the dollar drop more in terms of the euro/canadian dollar. although i’m no currency trader, since the rate cuts, you haven’t seen these two currencies march ahead (even though that would have been the expected movement). they’re still trading near their all time highs but in general, you’re seeing a slowdown across the board or a fear of a slowdown in many global markets.
as for inflation, i’m not sure what your argument is? are you saying that in today’s dollars, you’re buying less than yesterday? i don’t know if that argument really fits here. i can buy more condo today than i could a year ago (as for four years ago, that’s another thing, but we’ll see how this plays out in the next couple of years). or are you saying that the increased cost in other goods is putting pressure on people to use funds to purchase housing? even if so, i think that has a downward pressure on sellers.
jcrimes..about inflation, I am asking the question about what the US$ value of a condo will be in the future and how do we compare it to prices in the past.
Example.
Assume fair market value of a condo is the 2004 price.
Assume inflation betwen 2004 and 2008 is 15%.
2004: Price of Condo = $600K
2008: Price of Condo = $690K ($600K + 0.15 * 600K : adjusted only for inflation).
In the above scenario, even though the 2008 price is 90K higher, it is still the same price (inflation adjusted) in 2004.
Question: How will inflation play into the prices of condos? will it be taken into account or will people just look at raw numbers from years past and be wiling to pay that amount (not adjusted for inflation)?
I think you need to differentiate between consumer price and asset price inflation.
You absolutely can’t use a CPI/RPI related deflator in an analysis of asset price inflation.
Indeed, the biggest problem in the world today (inflation wise) is a 3 year lag in producer prices coming through to rising consumer prices (especially commodity related) versus, in the West, a contraction or deflation in asset prices.
If you want to perform this “type” of analysis you should subtract nominal GDP growth from home price growth on a year by year basis and analyse that over the last 40 years. I have the numbers, but they aren’t my copyright so couldn’t post the details. Suffice to say the 2000’s look like every equity and bond bubble in the last hundred years, 3-5 years in the making and 3-5 years in the unwinding.
On past analysis we’re nearly done with year 2.
jcrimes, you’re right…since the past 2 rate cuts (a combined 125 basis pts), the euro/loonie haven’t done much…but take a look at the yen! its crushed the dollar. it has created 2 issues (besides the unwind of the carry trade) – (1) the japanese haven’t had a semi-decent economy going on almost 20 years…and the strength in their currency will only bust up there economy furthermore because they’re a huge exporting nation (mostly to US!)….their rates are still absurdly low and they still can’t get anyone to borrow. (2) the one shot we had to maintain real estate market levels was foreign (euro/canadian) purchasers…if our currency strengthens vs. those currencies…you can start to forget the “foreign buyer” also…
sadly, at this pace, we are heading in the direction of JAPAN. low low rates, without borrowing demand. and just as it happened to them…we will go from a consumption driven society to a saver’s society. unfortnately, these things are always learned the hard way.
julian,
try to explain it to the government/wall st about the CPI/PPI numbers….they only take into account the severity of levels in the CORE CPI/PPI. If you eliminate food and energy as they basically do, then there won’t be a true admittance of inflation. so, if they don’t account for CPI/PPI at the top line (INCLUDING food and energy), then they will never implement proper policie to tackle the inflation problem…they still act like there’s no inflation. a gallon of milk costs more than a gallon of gas! totally sad state of affairs…hopefully the next guy has the balls to fix some of these views….so the problems can start to be corrected (which will be painful in the short run).
Cyrus.
Yep I also think relatively low headline inflation numbers have exarcebated the real estate bust.
Reason – most human beings think in nominal terms (proven), in previous bust prevailing inflation and wage growth has been high, so a house price going flat or up 1% nominal was OK, even if in real terms it was down 10%.
People don’t see it, or feel it, as they borrow in nominal $,
This time round whatever the right and wrongs of the stats are, inflation is much lower, real terms price changes are observed in nominal changes in price of homes…and we notice that.
Gables,
I have no way of providing information on buildings with structural issues unless people email me with ones that they know have them. I will do my best to investigate them to acknowledge which ones have them but the list probably won’t be 100% accurate. That’s a job in itself and I don’t think that I’ll find the time to do that. Just being honest. There were three reporters who contacted me this past week for an interview. I didn’t have time to respond to their emails and phone calls. One of them was for TV and I never responded. I may have lost some publicity but ultimately my job is to sell real estate which is why I didn’t have the time to respond to them.
As for Coral Gables…I couldn’t tell you. My new office is in the Gables but I do hardly any business there. I’ve been hearing that prices are doing better than Brickell and Downtown Miami but I haven’t had the time to verify that.
I did find the time last weekend to meet with a Wall Street Journal reporter. Just wait until that article gets published. That should provide new insight.
JL,
Prices peaked in late 2005 to early 2006. We’re currently in at least a 2-year downturn. As for 50 cents on the dollar, it all depends from the date that you are measuring. If you are saying that there will be deals to be had at 50 cents on the dollar from early 2006 prices, then I’ll agree with you 100%. Those deals are to be had right now. However, if you are saying that there will be deals at 50 cents on the dollar from today’s prices then I’ll have to disagree with you. You may find some discounted condos from today’s prices within the next year but I doubt that you’ll find something at a 50% discount to today’s prices unless you’re willing to buy 100 units. As Samir said, I haven’t heard of one bulk sale occurring in Miami lately. I only know of one developer that is shopping around his defaulted inventory. Most developers are renting out their defaulted inventory and riding out the storm until market conditions get better. Individual condo owners aren’t going to sell at 50 cents on the dollar unless he/she has their mortgage paid full in cash. There’s a psychological dilemma with sellers. They don’t want to take a loss that extends more than if they had walked away and lost their 20% deposit. I’m not saying it’s right but those that closed are going to be much less inclined to reduce their prices more than 20% because otherwise they would have been better off walking away and not closing on their condo. Psychologically, they will feel compelled to prove themselves right. I, for one, hope that this isn’t the case but I know the mindset of sellers. This is why it takes so long to reprice a real estate market.
Lucas,
Are short sales posted to MLS? Are they included in comps when appraisers value a building?
Don’t expect all developers to price defaulted units at 80 cents on the dollar of preconstruction price. If that was done, lawsuits would be flying around everywhere. Besides that these units will need to appraise. To my knowledge a developer will have foreign buyers and cash buyers close first to help set comparables for appraisals. If he started selling his defaulted inventory at 80 cents no one would appraise. And clearly they are apprasing because people are closing. People – if you bought very early during first round of pricing in a quality waterfront development don’t panic. If you bought 3, 4, 5, 6 units and you make $30,000 a year than that was stupid. – No one is going to bail you out.
samir, you are correct that not all properties will revert to below preconstruction prices. The prime properties will hold value well. In reality though, there are only a limited number of these properties-wishful thinking by many that they actually own a prime property. ask the owners of vue about this.
lawsuits to limit the floor price by developers is an idle threat. the market will set the price and the developers will have to sell. contrary to some of the media reports, developers are not rental companies and will not tie up their limited resources in such endeavors. ultimately the prices will be set by the banks. banks will develop a “guideline” on the amount they will lend for a miami or brickell condo, and require a minimum of 20% down. the days of $100k down are gone, so do the math backward from say $50k to get a ball park on how much people are willing to pay for a condo. foreign and full cash buyers are not the salvation. a significant reassessment of leveraged purchases is now underway worldwide, and overpriced real estate is a major component.
with that being said, i want to own a home and will buy into the market when it is appropriately priced. the bottom will not fall out, as many are sitting on the sidelines like myself and will create a floor. but remember, we (the buyer) set the prices because we have the cash., not the RE industry and not the sellers. buyers have the advantage, and will set the new rules to their favor-because they can. and many of these buyers have cash because they were too conservative to buy into the pricing frenzy-and that conservatism will play into their price assessment regarding near term purchases. this will be the case over the next couple of years.
Renter in Miami,
Yes, many short-sales do appear in the MLS. However, an appraisal uses closed sales as comps (usually within the past 6 months). If a short-sale were to close it likely wouldn’t be used in a future appraisal unless there aren’t any other comps in the building.
Buyer Tom…you should indeed get a calculator and “add them up” from entry #49:
==Turnberry Ocean Colony – South (16051 Collins – Sunny Isles), which apparently must not allow rentals, it has 52 properties for sale with ranging in price from $1.369,000 to $5,400,000. Without adding them up…that is in the $1 BILLION to $2 BILLION range for sale in that building alone! ===
Even if every one of the 52 units for sale in that building was at the high end of that price window ($5.4 M) it would total $280M…hardly in the billion range. This is the type of hysteria and hyperbole that fuel the distortion of the South Florida market. It IS a very, very bad market…but the sky is not literally going to fall, these communities, cities, and markets will not simply cease to exist…and they WILL come back.
Sorry…just saw Buyer Tom’s correction posts! But still, you get my point in general.
I also think the MLS has a policy regarding advertising shortsales – there is a specific way to properly do that. I had a short sale listing a few months ago and was alerted by the MLS that I had to modify the description.
can somebody justify why a short sale or any other “low” sale is not used in comps for an assessment?
please correct me if that is not the case. it just seems to me without including such sales, assessments are overinflating the price at which properties are being sold. if one sale actually closes in a normal manner, and three sales are from foreclosure or short sales, those low sales show what the true market is willing to bear. not including them seems to be fraud in my simple mind.
Isabel — Sorry about that post! I too couldn’t quite grasp the numbers so went back to add up and discovered the 10x’s error. Mea culpa.
Still, that is a TON of very expensive units on the market for sure. With the Trump Towers (one listed under $400/s.f.) I can only expect Sunny Isles to be Gloomy Isles for quite a while. Sooo much supply, sooo many empty units, and sooo many more units to come on line in 2008/2009. If there were a lot of flippers or others who really can’t hold onto those units for any protracted time period, then a lot of pain…and price declines are on the way. Many of the buildings were chasing the very high end buyer.
I will say, between the 3 Trump Towers and the 2 Turnberry Colony towers, there could quite easily be $500 million or more on the market in 2008. That is quite a bit. If you include all the other project in Sunny Isles, a billion isn’t out of the question.
and with the Solis under construction too.
bluegirl,
Why arent you able to close on your contract? Because you dont wish to do so or because you cant find someone to give you the financing?
Carbonblackcab–if you want to read about Southern California, I highly recomend Irvine Housing Blog. There are references to SoCal in the 90s as well as today.
Be warned, they are extremely bearish and have great scorn for realtors. It’s a wonderful blog and I post there because I couldn’t find anything similar in Miami.
This blog is the best so far.
Also, if you want to have your brain cells stimulated, I highly recommend Calculated Risk.
“Prices peaked in late 2005 to early 2006. We’re currently in at least a 2-year downturn. As for 50 cents on the dollar, it all depends from the date that you are measuring. ”
Sorry, my reference point was the downturn in the SoBe condo market which came well after Brickell/Downtown/Lauderdale’s move down.
But regardless, 1 years or 2 from the top is still way too early to find true values. A value that will hold up to what you should be able to get in a couple more years. I’m not interested in buying the 1st foreclosure on a property in a Bear housing market, tell me when there’s a 2nd or 3rd foreclosure on the same property. I don’t want to buy from the first wave of “professional” RE funds that are looking for good buys now. Let me know when they wipe out their investor money in a couple years and need to unload, and then I’m interested.
I don’t see how an argument can be made that the bottom –or close to it- is now after having an unprecedented Bull Run fed by investor activity and fraud and lots of people looking the other way on mortgage applications (you know there’s something seriously wrong when the shop manager –the assistant manager and not even the head manager lol- of a $10 pizza joint on Alton road was able to get a $400K mortgage without a cosigner… yeah, I’m sure he had a nice beacon score on a no doc loan).
Anyway, my argument is more about timing. 1, 2 and 3 years off a top is too soon if you don’t need to be in the market. Years 4,5 and 6 makes more sense and possibly not ever if you don’t need to be in the market.
People make mistakes assuming that real estate transactions go to zero in a downturn, but not really. Sales should be relatively healthy in a downturn (similar to when the stock market crashed) as sellers start hitting bids and the first wave of bargain hunters enter the market. The real doldrums occur after say 4 years of straight down and the RE market goes sideways. By that time, buyers who bought because they perceived a good value are pretty much dried up.
What’s left –say 4 years from now- are potential buyers looking at the Miami Real Estate market KNOWING that if they buy anything, chances are overwhelming there will be no appreciation and more likely even some more downside for an additional 5 years
It doesn’t really matter if you take a condo that sold for $10 million in 2004 and offer it now for $1 million if you give the caveat that you need to pay taxes and HOA and the underlying equity won’t appreciate. That changes the game completely. Especially if those carrying costs are much more than an equivalent rental.
If you gave that caveat to people buying in the Waverly when it turned condo in 2003?, I can guarantee you the 20% professional investors would not have bought, the 60% casual 2nd home buyers would not have bought. The only people that would have bought are the 20% of people who had their primary residence/job in South FL.
For any type of healthy South FL RE market, everybody is in agreement you need the 2nd home crowd to buy (There is just not enough primary homeowners in the market that could absorb a meaningful amount of the supply even at any price). It was easy getting the out-of-town 2nd home owner to buy at any price when they were expecting up and up, but it’s going to be completely different now getting them to buy en masse –no matter what the price- with them expecting down and down or sideways and have carrying costs that far outstrip rental costs.
Circa 2003 at the Waverly; Me to a British journalist who was in Miami on a 6 month assignment.
Q: “Hey buddy, you’re renting a 1BR now, why’d you put a contract down on the large 2 BR facing the Bay?”
A: ‘Well, that unit was the most I could afford and I figured I’d make more money buying the biggest unit I could contract”
JL
JL
Couldn’t agree more. No matter opinions of desirability of a condo on the beach, you are correct, 2nd-homers (foreign or not) are simply not going to spend $20-$30 thousand dollars a year on taxes and HOA for that privilege (let’s not start with subsidizing locals…!). Stay a month in a hotel each year (better still convert this overbuild into hotels) if you like Miami Beach that much.
Cold light of day, on something we would have been suckered into at one time, but it simply will not happen. Think macro for a moment – what is foreign money doing at the moment in the US? Buying the banking system. Why? The stocks are liquid, but most importantly there’s little cost of carry, the dividends pay in part for that.
Why not Florida RE? Cost of carry. I am sorry but as an investor (and not a flipper – someone who buys an asset to get a yield commensurate with their cost of borrowing and gains/loses long term from capital appreciation/depreciation), why buy an asset which costs you 2.5% (taxes) and 1% (HOA) per year before you even start. HOA I can see a full time resident taking a lifestyle view on. Zero chance of that happening as an investment, or a second home.
There’s a reason half the units are Ocean 4, 1/3 of those Bath Club are for sale (I think about the consequences of these numbers in my apartment block in London and shudder at the thought if so many were up for sale). I am sure they are nice buildings. Who cares? The carrying costs are simply too high.
Mark my words – $400 a sq ft is actually $600 a sq ft by the time you capitalize the tax costs.
Give yourself a State Income tax, makes real estate taxes a fixed charge on services provided and you’ll fix your real estate market.
Other than that, I can only see more tears ahead.
JL and Julian have made some of the best posts I’ve seen on this site yet.
I think that type of straightforward, old-school analysis is the way to go when deciding if an investment makes sense in this market.
JL is right – comparing buyers of the boom era with buyers today is a mistake. A buyer in today’s market will actually have to think about how much buying will really cost them – something that buyers from 2000-2005 didn’t have to think about because the appreciation made owning essentially “free”. People never worried about the price or the holding costs because they felt that appreciation would more than cover those costs. Which it did–until the market downturn.
That is the heart of what inflated this bubble: expectations of making money on a real estate purchase. People used to think of a house mainly as a place to live. That is the type of thinking people are going to have to get back to. The game of “flipping” is dead.
The profit analysis of holding an asset was not done during the bubble years for real estate. In traditional analysis you look at your returns while holding an asset (such as rent collected in real estate) and do not count on the capital gain as the only profit. Just like the tech bubble where momentum drove up the prices and people would over pay because the price was going up so too with this recent housing bubble. The gain on selling no longer wipes out the holding costs…and now there is no gain, only a loss. Prices will continue to slide down back to the fundamentals. I look at places I can rent for $X and the price to buy should be 160 x $X but the prices are 320 x $X or more. It is out of whack and as traditional real estate investment analysis returns, prices will adjust.
The floplords (failed flippers who are now forced into becoming landlords) see the negative returns as the market continues to slide, more pain ahead…
I would add one thing, it is not unreasonable, nor unacceptable to incorporate a degree of capital gain into an investor’s analysis of a real estate purchase.
It’s been that way for hundreds of years. But the key is that, by and large, your rents cover your annual costs.
Even in VERY expensive London, rents still typically cover 80-100% of annual interest costs and property “taxes” (at current prices) (assuming 100% leverage)
From what I read here, you’d be lucky (as a non-resident or resident investor) to cover 50% of these costs. Anyone have some direct evidence in Miami/Miami Beach of this?
So
Interesting Craigslist post showing the disparity between owning vs. renting. The total monthly payment to own is $4300 while it rents for $1900.
http://miami.craigslist.org/rfs/574277868.html
Julian – I agree that a degree of capital gain is assumed, such as inflation plus 1%. Real estate is mostly a hedge against inflation, not a growth stock in most cases. The problem was the flippers thought the costs didn’t matter since the capital gains would far outweigh those carrying costs. In fact, I had read where people were advised not to rent out their units so that they could sell their flip as new for the most gain. Oh well, live and learn.
Wow – that sounds pretty convincing, I sure would like to be in the hole $2500 each month!
In fairness, I think we should compare interest only mortgage payments + tax + HOA versus rental costs.
Doubt shout – we’re trying to compare cashflows and asset and liability match here.
I don’t know what the interest rate is on the mortgage on the Craigslist property but roughly a 30 year mortgage at 6.0% would imply that mortgage is $490k…
So at original purchase price let’s call it $2500 a month interest only, plus $1300 in HOA/Taxes = $3800, versus rent at $1900, is obviously half.
Let’s say you were to pick this property up at the advertised price $399k at 5.8% (again unlikely that an investor would get that rate)
$2000 interest only + $1300 – and so it goes on.
To be fair, I think you have to take a behavioral view in that an owner occupier would see the HOA fees in a different light to an investor/rational economist, and as Buyer Tom says you can use a measure to indiciate future nominal pricing changes (which should be offset by future rent increases!) but since we are talking about these buildings becoming rentals (either through the entire building or unit by unit), it seems we have to exclude such choices.
In the UK where the buy to let market is as old as the hills (we don’t have rental buildings per se), banks will lend on amongst other criteria the annual income being 125% of the interest only servicing cost plus take HOA into consideration (not tax, that is typically paid by the tenant). Not a bad rule, but still obviously vulnerable.
Using that here, your mortgage interest and half your HOA should be about $1600-$1700 a month on a rental income stream of $1900 a month.
What does that to the price this property should be (i.e what a lender would lend at – and to be fair would be in most markets around the world)
roughly $240,000 as a base line,
But let’s be honest, even if real estate prices grew at half nominal GDP over the next 30 years there is a present value to the future value of your home in 30 years being more than the $240k you owe in 30 years time. Maybe $35k today? Maybe $70k today and so on so forth (essentially at 2% annual growth, the home is worth $433k in 30 years time (nominal), subtract your bullet repayment of $240k and discount that back at your 6% interest rate to get that assumed value today)
Also rents do rise over time.
and real estate is a positional good.
Am not taking sides here but just saying this subject is more complicated than the simple rent vs purchase maths would have you believe.
Basically real estate prices imply a growth/loss rate in value in the price – take your pick what you think that should be (over 30 years, from your purchase price)
Oh and by the way, that’s why carrying costs are so important! If your rent was $1900 a month and you had no HOA/Taxes to pay on the (and your own tax rate was 30%) and you assumed those rents would rise 2% a year for ever. Guess what $399k is what you’d pay…
Julian:
Agreed. Most traditional real estate investment analyses take into account all the things you mentioned. You’re right – you can’t just do a simple comparison of the payments.
Another thing that makes it more complicated in this market is trying to take into account the unprecedented supply the Miami condo market has, combined with the effects of the current credit markets.
Prices could dip below even their “fundamental” values because of those two factors. Price is ultimately decided by supply and demand, and in this market where you’ve got a huge growing supply combined with much lower demand and the inability of many people to get financing, prices could drop even further past the “bottom” dictated by fundamentals. Just as the forces of supply & demand caused prices to go up beyond the fundamental values during the boom, the same forces could drive prices below them during the bust.
That’s why I think that at the very least, a potential buyer should wait until the numbers make sense using traditional anaylsis. And then when they DO make sense – wait longer. Prices could very well dip even lower. At worst, they will go sideways for probably several years (look at past real estate booms/busts in Florida if you doubt this). That is when you can declare a bottom.
Like bluegirl, I also have a pre-construction contract at Avenue. Any place those of us in the situation of deciding what to do can go to? I know for sure that if there is no financing, I cannot close on mine… anyone have a site where we Avenue-ers are gathering to figure this out?
Blueboy,
Are you saying that none of the banks are willing to finance the condo for you?
to Michel Fayad…my financial situation has changed in 3 years and so I can’t close. My only hope is that the Avenue will refund me 5% of the purchase price as stated in the contract. It sounds like blueboy needs help with financing.
I will let you all know as soon as things get finalized. The first hoop was discovering that banks are insisting on $250,000 flood insurance on all units, and that current insurance bought by the developer doesn’t cover that. Of course, legally speaking the developer doesn’t need to cover any more than what he has, but it means buying separate coverage in order to float a mortgage. There is nothing in the contract about getting 5% back, and I got in on the ground floor, so bluegirl I don’t quite understand what you are hoping for…
I had to put down a deposit of 20% of the purchase price to secure an apt. I called the developer to tell him I could not close and was told that if I do not close they keep deposit of 15% and I get back the other 5%.
Julian,
I’m already seeing evidence of the spread between cost of ownership vs. rent at 50 Biscayne. Rental rates are approximately 50% of what it would cost to own or carry a unit. This gap may potentially increase in the coming months due to financial pressure on owners/developers.
** It is a great time for anyone looking to RENT a luxury condo! To say the least… you have OPTIONS! lol **
Hopefully there are enough renters out there to somewhat soften the fall and help cover condo association fees in these buildings. I just wonder how long owners will hang on to a negative cash flow position. Some may eventually have to make the tough decision and walk away.
This is slightly off topic, but an interesting article. First here is the link: http://newsweek.washingtonpost.com/postglobal/bill_emmott/2008/02/fighting_chavez_for_cuba.html
The point that article raises is what if all the cubans leave miami to go back to cuba? This is not going to happen this year, but it may happen if there is a regime change in the future.
I work with a lot of cubans who are mostly from the middle and lower middle class ranks and most of them have no interest in going back.
I personally would love to have a weekend crib in havana where I can drink authentic mojotos and smoke real cuban cigars. 🙂 I am sure Europeans and others would love to have a condo in havana with all the history, etc and I am sure gambling will be legan in the city.
I am sure Miami will suffer if Cuba opens up. Thoughts?
I remember when I bought my first condo in 1994 in NY. Chase Manhattan bank turned me down for a loan because the building had more than 20% of units not occupied by their landlords.
This is hardly anything new.
comparing the NYC mkt w/miami is absurd.
Lucas I helped with the reasearch for a couple of those articles and now that the stimulus package was passed there will be more liquidity in the market but for those who qualify. With the problems lenders are facing right now I really doubt we will see any more of these stated income, 2/28 and other forms of ARMs
And Cash will definitely be King!
CNNMoney reports that the PRE-RESET default rate for subprime loans that were originated in 2007 are TWICE the 2006 loans. That’s TWICE. Many people could not afford the payments even at the low teaser rates BEFORE any interest rate reset hike. WOW. The bust is just beginning, no need to wait and see about the resets, the defaults are already accelerating BEFORE the resets. To extrapolate then, the 2007 subprime post-reset defaults will probably be twice (or more) the 2006 rates. People, this is only going to get worse, a lot worse through 2008-2009.
blueboy,
if you are not able to get your deposit back and you are still planing on closing on this property contact me at [email protected].
Also, note the push to originate subprime loans in 2007 helped to keep the housing market from declining as much as it should have…it was a temporary and false price support for housing prices. That is gone now and we’ve seen the declines and more declines will come…. Those that got in thinking prices would hold were falsely lulled into the market. Now the real declines begin.
Since beating a dead horse is oh-so-much fun, I thought I’d add my two cents:
I’ve been flirting with buying for about a year now…reading this blog for just about that long. It’s been interesting to see how what looked like good deals popping up 6-8 months ago, now just look terrible.
Consider the following: I like a specific unit in building X, that when I started looking was selling at around $330k. There are currently three equivalent units listed at $260k. It actually looks like the right price point for me…but consider further…
In a building with 400 units, how many flippers are going to go belly up? And what effect does that have on my maintenance going forward?
What is happening with prices? Do they continue to go down? They certainly are not going up for at least 1-2 years– if not longer.
So let’s assume I can purchase that same or equivalent unit in 2 years at that same price and I just rent it right now for the market price of $1450 /mo. In two years I am “throwing away” ($1,450*24 months =) $34,800…but I have not taken on the risk of a depreciating asset or runaway maintenance costs.
Now let’s assume I pull the trigger on my dream unit as our good friend and punching bag Samir would have me do (kudos to you for attempting to calm down all the chicken littles on this site, btw– it does tend to get a bit one-sided). I put down my 20% and take on a mortgage payment that including maintenance (400) and tax (490) at current levels comes out to roughly $2,150.
Over the course of 24 months I will then have “invested” $103,600 [(24 months*$2,150) + $52,000 down payment]. Assuming a fixed rate loan at 6%, the break down of my investment is as follows:
$52,000 down payment – equity?
5,082 principal paid – equity?
46,518 Interest, maintenance, and taxes – poof
Why not just keep the 52k in a CD and bank the $700/month I am saving by renting?!! One of you gurus out there can spit out the math on how much I’d make on the CD much quicker than I can…but I reckon that I can save myself close to $20,000 by living in the apartment I want to live in—just waiting a couple of years to actually sign on the dotted line.
…and I don’t have to worry about how many people default, or whether I end up trapped in a mortgage that is upside down if I have to relocate for any reason.
Thoughts? Samir?
Here is another thought if it costs twice to own than to rent you are essentially renting for free vs buying because if you were to buy you would be loosing the equivalent to the rent a month
And this is not even taking vacancy loss and 10% a year commission to realtors…
Anyone with cash want to buy my Trump Tower unit, for a great price?And I mean great price as in taking into consideration the current market conditions so it will be for a price less then I paid for it almost 4 years ago!
BUYER TOM,
Please try to keep this blog honest and truthful! Your calculations on the sq ft price of that unit in trump towers is way off, your comments can really mislead people. Since when do you included the 4 balconies into the sq ft. price? Obviously that will greatly throw off the square foot price by artificially increasing the sq. ft of the unit.
I was one of the first to buy into that project, I had my contract with my deposit check cashed, while the sales center was still saying “Sales have not yet started” lol. So considering I got in at the lowest price and now willing to take a loss, I had to really scratch my head when I read your post. My unit is indeed the cheapest available.
RG – I took the numbers off the listing. So no, I didn’t add in the balcony s.f., it that was added in by the realtor then the listing needs to be adjusted, apologies for me not catching it. BTW, I am in the market…. what is the MLS # of the unit you’re trying to sell?
Buyer Tom- My unit is not on the MLS because I have not closed on it, I was told that it can’t be put on the MLS until after I close. It’s a C unit, the larger of the 2 C units, the one with the private elevator. I will promise you the cheapest price in the entire project, because I need out.
RG – Thought you were referring to your own listing in the earlier post. I’ll look up the C unit floorplan. What price per s.f. (not including the balcony!)?
I can go down to $420 a ft. you wont find a lower priced unit in Trump, with the private elevator and ocean view. By the way its the 19th floor.
[…] game” involving numbers such as these: the closing/default rates at various large projects; the tally of condominiums appearing on various lender “blacklists” published by the likes of BankUnited, Washington Mutual, Popular Mortgage, and others; and the […]
[…] and Arizona. When the rug was pulled out from under that financing — see, for example, the “blacklists” issued by several large banks with respect to South Florida condo projects for which they will no […]
Have a unit in 900 biscayne bay with the best views of ocean and biscayne bay that I would like to unload for the LOWEST price of $450 a sq. ft. If anyone interested. give me a buz..!!!thanks…Its located above 30th floor and measures 2700 sq ft in total.
Hello Ivar,
Not that I can afford it, but me and many others would surely like to know, if you have closed on the unit or not? Is that the preconstruction price or less or more.
thanks
[…] However, a few condo developments have it worse than others in Miami. The Daily Business Review article revealed that sellers in condo buildings riddled with foreclosures find that it is nearly impossible for potential buyers to obtain financing. The article uses Vue at Brickell to illustrate the point and states that “the project is widely avoided in the lending industry”. The same holds true for other condo developments in Miami that have experienced a high number of foreclosures. The doors are now closed! Well, unless, of course, you are paying in full with the almighty greenback. READ THE REST HERE […]