September 24, 2017

The Red-Alerts Of A Distressed Market

A report from Barron’s on Florida. “To grasp the buying opportunities emerging in Miami’s condo market, it pays to study the prices obtained this year for two remarkably similar apartments next door to each other on the main drag of Brickell, the residential high-rise district in downtown Miami where the sky is filled with cranes and half-constructed buildings. First up is 1060 Brickell Ave., a fashionable building erected in 2008. Apartment #1815, a 945-square-foot one-bedroom, sold in mid-March for $285,000, or $302 per square foot. Right next door stands 1080 Brickell Ave., an elegant building erected just last year. Apartment #2508, a two-bedroom, 1,217-sq.-ft. apartment, sold for $620,000, or $509 per square foot.”

“That’s 69% more per square foot than the slightly older apartment next door that sold just a few weeks earlier. And here’s the thing: Even at that higher price, the condo flipper, who bought the just-built apartment seven months earlier, had to take a $160,100 bath (net of 6% commission) to quickly rid himself of the place.”

“Why the speculator at 1080 Brickell would take such a big hit to get out—and why the resell price of the older apartment at 1060 seems so low—becomes apparent when you look at the chart below, provided by StatFunding, which outlines the rising overhang of condos hitting the Miami market. Peter Zalewski, founder of counts 47,692 new condos in projects east of Interstate 95 in the three South Florida counties of Miami-Dade, Broward, and Palm Beach. The majority of those units are in Miami-Dade County, with the latest wave of projects built mostly around Fort Lauderdale.”

“Of those, 22% have been built and delivered since 2011, with another 24% currently under construction. The remaining units are in early planning phases or actively seeking planning permission. That means the South Florida market is growing by ‘at least 22,000 units—even if they turn off the spigot today—based on what’s been delivered or what’s under construction,’ he says.”

“Let’s put those 22,000 new units in perspective. Zalewski figures 71% of the new supply is in Miami-Dade County. According to Miami Realtors, 1,323 condos and townhouses in Miami-Dade sold in June 2017. That isn’t much of a dent in the inventory of 15,067 condos, almost entirely made of older stock, that are currently for sale. There is already some 14 months of supply in the Miami market, a 20.4% increase in just one year. To that supply, you have to add the wave of new construction coming on-line.”

“No surprise that the red-alerts of a distressed market can be seen everywhere. ‘We’re in the beginning of the downfall. No one wants to catch a falling knife’ Zalewski warns. He notes savvy developers are ‘building with one foot on the brake,’ trying to time when their projects come to market.”

From the Los Angeles Times. “Question: I’ve been the treasurer of our 30-unit self-managed condominium association for more than 20 years and until recently the handling of buyer and refinance escrows and other paperwork for property transactions was a breeze. This year, though, mortgage lenders started asking for a fidelity bond for coverage of the association’s working cash balance — something totally unrelated to the transaction’s escrow account — with losses payable to the lender.”

“We are finding that in order for a person’s loan or refinance application to be completed to a lender’s satisfaction, the lenders are imposing additional requirements that boards must be answerable for. Even beyond the fidelity bond, lenders are sending us complicated forms with many questions about the financial health of our association. And they want the signatures of two board members certifying the truth of the answers. All this is making board directors skittish and apprehensive about completing the paperwork.”

“Answer: It appears lenders are getting more skittish about issuing mortgages to buyers of condominium units as the real estate market recovers from the housing bust, a time when lenders experienced a spate of foreclosures. Now, with prices once again reaching record levels, banks and other mortgage lenders look to be taking steps to protect themselves.”

From Xinhua Net on California. “With unique geographical advantages and natural conditions, U.S. western coast state of California always attracts a great mount of people for investing, sightseeing and residing. However, its stubbornly high housing price also deterred many people who attempt to move in, and many are even considering about leaving the Golden State due to the skyrocketed housing cost.”

“‘We have been renting an apartment for over 10 years, and still cannot buy our own house, as the renting price increases every year. The American dream is about a house and a green card. But here in California it’s not easy to let your American dream come true. Therefore, we decided to move to Texas, it happened to have a good job opportunity for me,’ Yunqi Li, a local resident of Los Angeles, told Xinhua.”

“A research result, released this week by University of California Berkeley’s Institute of Governmental Studies, showed that 56 percent of California residents are considering moving, both the renters and homeowners. For Los Angeles area, 59 percent people are mulling this matter. The housing affordability crisis, happened in every large city of California, like San Francisco, San Jose, Los Angeles, San Diego and Sacramento, resulted in more and more homeless people living at public area.”

“According to a report released by University of California Los Angeles (UCLA) earlier this year, the poverty rate in the whole Los Angeles area had increased from 15 percent to 17 percent between the year of 2011 and 2015. The main reasons causing the poverty are unemployment and unaffordable housing price.”

“There are still many people who think the housing price in Los Angeles is acceptable. Susan Park and her husband moved from the Bay Area of San Francisco to Los Angeles two years ago, and said the housing is affardable here in LA. ‘The house in the Bay Area were very expensive, we could not afford it. We rent a one-bedroom apartment was about 3,000 U.S dollars. Compare with Bay Area, I think the housing price in Los Angeles is affordable and reasonable,’ Susan said to Xinhua.”

“‘The real estate of California is like this. I think it’s hard to lower down the housing price. If some people move out, others would move in, since we have more job opportunities and competitive economy here. The housing price would not easily go down in a short time from my anticipation,’ Jason Gu, a real estate agent of Southern California, told Xinhua.”

From Reuters on Texas. “Addressing a real estate conference in flood-ravaged Houston this month, longtime investor Ray Sasser detailed his strategy: buy up to 50 flooded homes at deep discounts, then fix and flip them for a hefty profit. Sasser first followed that game plan after Tropical Storm Allison flooded the city in 2001. He bought homes for 30 to 40 percent of their pre-storm value, spent another 15 percent on repairs, and sold many a year later - at full value.”

“The quick recovery surprised him, he said. ‘This can’t be true,’ he recalled thinking at the time.”

“Tara Waggoner, the Houston market manager for brokerage and online listings firm Redfin, said the firm’s local agents were getting about four times the number of calls they usually get from investors. ‘You have people with millions of dollars to work with,’ she said. ‘They want to go in, pay cash, get the discount and fix it up to sell.’”

“At the Realty Investment Club of Houston - or RICH, for short, Linda Muscarello - who calls herself the Queen of Foreclosure - spoke of the ’subtle psychology’ of negotiating with struggling homeowners. Waving a bedazzled scepter at her audience, Muscarello advised investors to listen and nod when talking to owners of distressed properties, who can often have unrealistic notions of their ability to afford continued mortgage payments. Many homeowners hit by Harvey did not have flood insurance and may not have the money to rebuild.”

“Muscarello advised investors to talk to homeowners as if there is a chance they can avoid selling – even if the investor’s interest is buying them out. When discussing finances with homeowners unable to afford payments, Muscarello advised asking, ‘How short are you?’ ‘It’s very important you say it that way,’ she explained. ‘It’s as if you’re still considering helping them to keep their house.’”

“While approaching a distressed homeowner can feel predatory if poorly handled, selling can help homeowners in some situations, especially if the home’s damage is coupled with job loss or damage to a business. The big question for homeowners is whether they expect to have steady, long-term income that will let them ride out repairs that may or may not be covered by insurance. If not, said economist and University of Houston professor Bill Gilmer, ‘you might just want to give the keys to someone else.’”