Thanks to cheap money and an influx of foreign buyers, Florida had its second condo boom in a decade.
And once again, that boom has turned to bust. Speculators seek to unload condos but find few buyers.
Please consider Miami’s Condo Frenzy Ends With Inventory Piling Up in New Towers.
Miami’s crop of new condo towers, built with big deposits from Latin American buyers and lots of marketing glitz, are opening with many owners heading for the exits.
A third of the units in some newly built high-rises are back on the market, though most are listed for more than their owners paid in the pre-construction phase. At the current sales pace, it would take 29 months to sell the 3,397 condominiums available in the downtown area, according to South Florida development tracker CraneSpotters.com.
With the U.S. dollar strong, South American investors who piled into the downtown Miami market after the real estate crash are now trying to unload their recently built condos, adding inventory to an area where 8,000 units are under construction and nine towers were completed since the end of 2013. Some are offering homes at a loss as demand cools. Condo purchases from January through April slid 25 percent from a year earlier, while the average price fell 6 percent on a per-square-foot basis, CraneSpotters data show.
“The problem is that investors are no longer buying, and now they’re going to be looking to sell,” said Jack McCabe, a housing consultant based in Deerfield Beach, Florida. “And what buyers are going to replace those other than vulture buyers looking for deals?”
After several price cuts, one Brazilian owner at Related Group’s new Icon Bay tower is offering his two-bedroom condo for $539,000, 7 percent less than he paid in July. It’s now one of 100 listings in the 299-unit building.
“The ticking time bomb is based on rental rates,” said Peter Zalewski, owner of CraneSpotters. “When some of the foreign investors sitting on the sidelines have to dig into their pockets and subsidize renters, that’s the fuse that will lead to a correction.”
Boom Turns to Bust
Yet another cheap money boom has turned to bust. More are on the way.
Mike “Mish” Shedlock
I went to Miami Beach years ago on a holiday with my parents when I was a young teenager. Around 1960, prior to Vietnam ever being heard of, although it was being pushed by the neocons even then.
I was from Florida, so had some knowledge of Miami albeit small. I thought Miami Beach was cool then. I saw the big hotels, walked on the white sand beach and saw the sexy girls even then. Never knew about South Beach but we did see it. Really cool place. Many years later, people were trying to sell “places” on South Beach, even up to almost giving them away. We were told that Miami and south beach would never come back. Told my parents to buy there but they could not afford it even with give away prices.
Years later, I saw Miami Beach around 1991 and South Beach with my sexy GF, that the muscle guys would whistle at. Julie looked really hot in her t-back bikini.
The prices then were “crazy” again. A small apartment was renting for 2000 dollars per month if you could find one.
It had come back, condos, fast cars, sexy girls and all.
It will come back again. I don’t have any idea about south beach prices now, but I do remember that they were trying to sell Versaci’s mansion right on the beach for some crazy price.
Real estate? I don’t know.
I am a Brazil nut and I write this entry as I sit there. The problem I see is Brazilians pay more for beach condos in high rises than I could ever see given their average aggregate incomes. Seriously the prices here would put off those with American level incomes. I can only imagine what the better off Brazilians paid for a Miami condo. Crazy levels from the sound of it.
It’s too much fluff of living where the “action” is. You want sexy girls? Try the internet. You can live somewhere cheaper and still ………oh crap I’m giving away my secrets. Yes by all means live in Miami and pay 10x what you should.
I think some of it is capital preservation. Brazil has had inflation rates of 1,000+% in the 70-90s. Owning real estate in Miami, which they tend to like, is a hedge. It’s hard for us to understand, but it makes sense when you see inflation at 1,000+%; a 7% loss is nothing.
In 1960, there was a up scale ihop type diner in Miami Beach called “Wolfies”. It had a large sign out front with a smiling wolf like character. I ate breakfast there, and recall they were famous for bagels ….recall they were owned by a Jewish family there. Gone now like “Julie” and those high RE prices.?
I owned a condo just a bit north of that place for about 12 years, and sold it about two years before the ’08 crash, as its value had suddenly tripled.
Wolfie’s Rascal House was the name, and there were often lines out the door. A favorite among the older set for their early-bird specials, and my father would insist that we eat early for order to receive the discount.
So South Americans trying to escape inflation at home desperately fled to another real estate bubble. Now to make the cycle complete, bankers will demand to be bailed out of the situation they printed. Again.
Stuki Moi said:
Latin American demand for Miami residences have legitimate underpinnings as well. It’s not just petty speculation and “inveeeeesting”. Even “middle class” professionals in many Latin countries needs security details to safely get their kids from a gated community to a gated school. Making Miami seem very liberating, while still having enough of a Latin community to feel almost like home.
And, having a US residence, allows for easier stashing, and easier access to, some rainy day funds further away from the reach of their own governments. As well as a place for their pregnant daughter to give birth to a kid now eligible for US citizenship. The US may be effed on a pretty fundamental level, but for most upper middle class people, it’s still a big step up from Caracas.
As idiotic, over regulated US cities go, the condo market in Miami is also reasonably efficient. It’s getting worse, as even there, there are Mickey Mouse zoning laws preventing densification into many areas where politicians live, but the whole front strip of Miami Beach north of South beach at least doesn’t suffer from zoning idiocy the way, say, most of California does.
So “speculators” at least get to perform the duty they are supposed to perform in a free society and economy: Serving as a catalyst to get stuff built in sufficient quantity, so that it, on average, ends up selling for less than it would absent speculators.
As opposed to along the coast in Cali, where investing a million in “real estate development”, means spending $500,000 on lawyers and other leeches to obtain permits, and $50,000 on a cheesy kitchen counter. Then the remaining $450,000 on more leeches, to prevent your neighbors from slapping similar grade cheese on their kitchen counters, so you can “proteeect your hoooome vaaaaalue.”
I’ve rented a couple years in SW FL,things here never got to the Miami extremes but it costs 30-40% more to own than rent. It’s OK for those who bought foreclosures but most owners are subsidizing renters, hoping & speculating is not a good investment plan.
HOA fees are deal killers,it’s basically uncontrollable expense, an annuity for the condo developer and a second mortgage for owners. Unlike a mortgage it can never be paid off,it’s there every month waiting to be fed. Those marble lobbies and spouting fountains come at a very high price!
Brokers are very evasive about HOA fees,they’ll always say “reasonable” and be vague about specifics. Buyers should also be careful about insurance, you can be paying flood insurance on the 20th floor!
“The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers’ stone to make it last.” — Ludwig von Mises (1940)
Here we go again. Florida has been going through property booms and busts since the Fed was created by incantations of witchcraft over 100 years ago.
“The four most dangerous words in investing are: ‘this time it’s different.'” – Sir John Templeton
This is of course due to Fed & gov’t. policies; mainly through the “cattle prod” of 7 years of cheap money via QE and near zero interest rates (ZIRP) encouraging speculation and malinvestment. The logical conclusion is asset bubbles, with assoc. booms (and busts). Rinse and repeat.
“What has been will be again,
what has been done will be done again;
there is nothing new under the sun.” – Ecclesiastes 1:9
I propose a modest solution: 1) End the Fed. Idiots and maladroits. 2) Restore sound money (Congress do your job). 3) Return interest rates to the market rate. 4) Get the gov’t. out of the marketplace, and out of our lives in general; laissez-faire free market capitalism. Adam Smith was onto something. 🙂
http://www.peakprosperity.com/podcast/86788/lacy-hunt-world-economys-terminal-case-debt-sclerosis “Now probably the best measure of that for the market rate of interest would be something like the Baa rate. The Baa is the lowest investment grade rate.”
Adam Price said:
Your assertions regarding the Federal Reserve are patently absurd and laughably false. The Federal Reserve does not cost taxpayers a single penny and in fact is the LARGEST SINGLE ENTITY REVENUE GENERATOR FOR THE US GOVERNMENT and rebates 94% of its annual profits to the US Treasury for the benefit of its taxpayers and has always done so for its entire existence.
The best way to ensure that the US financial system has the fewest possible real and perceived improprieties would be to scrap the immense complexity of the regulatory structure we now have with the Gramm Leach Bliley “Financial Services Modernization Act of 1999” and the Dodd-Frank Act of 2010 which span many thousands of papers, are not even fully defined as regulators never even filled in many of the blanks they were supposed to do in the Dodd-Frank Act over the past 5 years, and which are so confusing, complex, and burdensome – not to mention costly comply with – and REPLACE THAT WHOLE PILE OF PIG SLOP WITH THE STRAIGHTFORWARD, EASILY COMPREHENSIBLE, AND SIMPLE GLASS-STEAGALL ACT which is only 34 pages in length.
Essentially, what the Glass-Steagall Act did was to separate financial services into 3 categories where financial firms selected 1 category and were PRECLUDED FROM CO-MINGLING OF THOSE 3 CATEGORIES WHICH WERE:
1) commercial retail banking
2) investment banking and brokerages
3) insurance and other financial activities
That makes effective regulation far more straightforward, simple, and enforceable and precludes commercial retail banks with customer deposits as liabilities from engaging in investment banking, brokerage, insurance, and other financial activities which guarantees that customer deposits are NOT PLACED AT RISK BY ANY OF THOSE ACTIVITIES.
There have been a number of efforts to reinstate the Glass-Steagall Act including bills that are currently pending but tabled in Congress, and what has astounded me is that while people want to rail against and criticize the banks PEOPLE IN THE US HAVE NOT SUPPORTED AN EFFORT TO GET THE JOB OF DEBATING AND GETTING THE GLASS STEAGALL ACT PASSED BACK INTO LAW over the past 8 years.
So eyeballing the chart, looks like about a 70% price increase over 5 years, followed by a 5% decline. That is a small correction and potentially the beginning of another bust, but not a bust. Will prices drop another 25-50%?
Definitely. There is tremendous leverage on a speculative asset, that is seeing liquidity dry up fast. 50% off won’t be low enough. Try P.O.D. (pennies on dollars).
FL RE has a very high beta, 5% is a hiccup. The Fed has keptint rates (esp mort rates) abnormally low to allow their TBTF owners time to unload their bad mortgages. The Fed won’t have to do that for the current bag holders who have the banks bad mortgage paper and overpriced Miami condos. Foreign owners being squeezed out by bad exchange rates (like Canada, eh) will lite a very big fuse
Stuki Moi said:
As another commenter noted, in high zoot condo buildings, high HOA fees realistically add considerably to the effective “leverage,” as they are an outlay that won’t drop much even with dropping transaction prices.
Things get really pear shaped, once owners start being delinquent on those, as maintenance will then suffer. Then, if it gets really bad, contractors who feel they are due payment by the HOA, starts boosting AC units, copper wire and/or vandalizing the place, leading to further deterioration. leading to further transaction price drops.
Then, the last remaining solvent owners, who will generally have other opportunities, bolt for greener pastures, in an accelerating downward spiral. Until a formerly “nice” tower becomes just a shell housing a shantytown. Something owners from Latin countries should have some experience with.
Adam Price said:
The Federal Reserve only sets 3 interests rates and none of those interests have have anything at all to do with mortgage interest rates which are keyed off the benchmark 10 year US Treasuries and that has always been the case.
section 8 said:
easy fix,gov’t workers and dope gangs, all those retired gov’t workers from up north with their fat gov’t pension will pick up the slack or the boys from Medellin or cali cartel will start buying entire building like the old days
You just need to be patient. There needs to be some satisfaction that the prices are no longer growing. The larger question at hand is the backside of the bubble going to be symmetrical or will it be a long slide downwards just like Japan’s 20 year property value decline. My recommendation is to get some popcorn and enjoy the show.
Adam Price said:
Feds To Track Secret Buyers of Luxury Real Estate…
Concerned about illicit money flowing into luxury real estate, the Treasury Department said Wednesday that it would begin identifying and tracking secret buyers of high-end properties.
The initiative will start in two of the nation’s major destinations for global wealth: Manhattan and Miami-Dade County. It will shine a light on the darkest corner of the real estate market: all-cash purchases made by shell companies that often shield purchasers’ identities.
It is the first time the federal government has required real estate companies to disclose names behind all-cash transactions, and it is likely to send shudders through the real estate industry, which has benefited enormously in recent years from a building boom increasingly dependent on wealthy, secretive buyers.
The initiative is part of a broader federal effort to increase the focus on money laundering in real estate.
The department will focus on sales that are both paid for all in cash and conducted using shell companies. The government is requiring title insurance companies, which are involved in virtually all sales, to discover the identities of buyers and submit the information to the Treasury. The government will put the information into a database for law enforcement.
The Treasury’s program will affect billions of dollars in real estate transactions. In Manhattan, the initiative requires buyers in sales of more than $3 million to be reported; in Miami-Dade County, it requires reporting on sales of more than $1 million.
Real estate professionals, especially in the luxury market, often know little about buyers, and until now, they have not been legally required to. In its investigation, The Times found that nearly half of homes nationwide worth at least $5 million are purchased using shell companies. In Manhattan and Los Angeles, the figure is higher.
You are tapping into quite an important topic at the moment in South Florida. We very well could be entering another boom / bust cycle for downtown Miami condos (for Miami Beach it’s a little different because we have much, much fewer newly constructed condos hitting the market).
The difference between this cycle and the last is that the amount of buyer deposits put down in this cycle has averaged to be considerably more than the last cycle. Back in 2005, developers were universally taking 10% of the contract amount upon the signing of Purchase Agreement and another 10% down at groundbreaking. In some instances, a small deposit was taken upon the signing of a reservation agreement, but that was it…basically a cap of 20% down. That figure proved to not be nearly enough to keep buyers from walking away at the time of closing when the 80% of the purchase price was due.
In this current cycle, developers have learned from mistakes of the past and required more money down paid at the topping off of the building and during other intervals. Will the new deposit structure make a difference? Only time will tell.
An additional difference between cycles is that lenders got wise to speculators buying multiple units in the same building. If the banks providing the construction loans saw the same buyers buying multiple units, their totals would not be counted towards the developers threshold of pre-sales needed to obtain financing. Now there will always be the people out there trying to bend the rules, but for the most part, this type of improved underwriting helps to cushion a condo bust to some extent.
I agree with the comments above that the early buyers/ investors are necessary to getting these new condo towers built. They take the early risk and have the longest hold periods. So, in turn, they are generally promised that their entry points are the lowest in the building and that they should see nice appreciation. This usually does happen, as the development sales teams raise prices as they progress further and further towards the sell-out.
It’s interesting to see how the cycles play out downtown. Take for example a really nice downtown Miami building http://www.skyfiveproperties.com/condos/Downtown-Miami/Marquis/. If a 3 bedroom condo buyer in the project was able to keep their condo from the opening of the building until now without having to sell during the great recession, they’d be up close to 30%. For the people out there that have bought new construction in downtown Miami and are legit end-users that would like to live in their new units, don’t freak out. If you ride he wave, you should be fine in the long run. Don’t run and panic sell. Do your job, pay your mortgage and enjoy your home.
Thanks for the thought-provoking article Mish!